How do you secure French inheritance tax?

In the Netherlands, it is quite common for parents to owe debts to their children, on paper or otherwise. Think, for example, of gifts on paper, a common way to save inheritance tax: by making debts to your children and paying interest on them, you create a nice deduction for inheritance tax. Here I want to talk about debts to children due to the death of a parent, the so-called 'father's or mother's part'.

In the Netherlands, these parts are deductible for inheritance tax at the death of the surviving parent. Often, interest, whether compounded or not, is also added to this annually, on paper. Without bothering the surviving partner, a substantial deduction is saved up. But what about these debts from parents to children in France? Quite differently, as the following example shows.

Holiday house in Auvergne

Frank and Ellen have been married for many years and have three children. They are also the proud owners of a holiday home in Auvergne, refurbished by themselves with blood, sweat and tears. Their dream is to live there permanently after retirement, as far as they are concerned until the end of days.

Unfortunately, Ellen dies on the threshold of emigration from cardiac arrest. She leaves Frank and the children devastated. Ellen had not made a will, because "in the Netherlands everything is for the survivor anyway". Frank thus becomes the owner of the entire estate and, under Dutch inheritance law, owes the children a debt equal to their share of the estate.

Within the deadline for the inheritance tax return, a compound interest rate of six per cent is still chosen, because that ticks nicely on Frank's death. "You'll pay a bit more now, but you'll definitely earn that back," was the wise advice. Frank keeps a copy of the return, "so that later it can always be proved that the debt with interest exists".

Carefully preserved copy

Frank decides to pursue the shared dream alone and emigrates to France, where he dies 12 years later. The children turn to a French notary to arrange the inheritance and the declaration for French inheritance tax. They have the carefully preserved copy of the inheritance tax return in hand.

To their surprise, the French notary brushes the copy aside and disregards it for declaration purposes. Result: the children pay French inheritance tax on the total assets, including the claims they had on their father. They then turned to me and unfortunately I had to disappoint them. They paid more twice, at the first death by choosing the highest interest rate and at the second death because France did not take the claims into account.

Fictitious debt

How about that? In France, there is the pesky article 773, 2 CGI, which considers debts owed by the deceased to his heirs as fictitious. Therefore, they cannot be deducted as debts of the deceased in his estate. This therefore means no possibility of deduction in the inheritance of the surviving parent for Dutch 'fathers or mothers part'.

Fortunately, contrary evidence is possible, but it can only be introduced if the debts follow from a notarial deed drawn up before the date of death.

Want certainty about the deductibility of debts to children? Have them officially established in a notarial deed. As long as you, the surviving partner, have not yet died, you can always do so, even some time after the death of your partner. This not only saves a lot of aggravation, but -perhaps most importantly- also a lot of French inheritance tax.