As life expectancy increases and people live longer, adult children may inherit from their parents at a point when they have already built up their own wealth and assets. Often, they no longer really need their parents’ entire estate. The grandchildren, on the other hand, may well have needs in the here and now (to fund university studies or buy their primary residence, for example). How can you help the younger generations? And what steps can you take to maintain family harmony and peace?

This article is intended for French tax residents.

Planning to pass on wealth to your grandchildren during your lifetime is not only possible but necessary, especially since grandchildren have no default inheritance rights. But what obstacles might you meet? What strategies are available and what are the tax implications? Read on for all you need to know about why and how to pass on wealth to your grandchildren under French law.

1. Are there barriers to passing on wealth to your grandchildren?

Yes, but they can be overcome – at least in part – through careful preparation and planning.

First, French civil law protects the children by stipulating that a minimum proportion of the estate, known as the “hereditary reserve”, must go to them. Children cannot be disinherited under French law. They must receive at least this minimum share. Some might view this legal requirement as encroaching on their freedom to decide what to do with their own assets, while others will see it as a necessary protection to avoid frustration and maintain peace in the family.

This hereditary reserve is calculated based on the number of children with inheritance rights:

• 1 child: the hereditary reserve is half the estate;
• 2 children: two-thirds of the estate;
• 3 or more children: the hereditary reserve is three-quarters of the estate.

After calculating the reserve, it is easy to work out the share of the estate that can be freely disposed of through a gift or a will.

Inheritance tax is the second consideration in planning to provide for your grandchildren. While the children are entitled to a tax allowance of €100,000 on the inheritance from each of their parents, the grandchildren are not. But there are solutions.

The third obstacle only concerns gifts, regardless of who the beneficiary is (grandchild, child or third party). A gift is irrevocable. So it’s important to make sure you don’t compromise your future quality of life (in circumstances where you might need long-term care, for example) by disposing of too much of your estate.

2. How to use gifts to pass on wealth to grandchildren during your lifetime

Gifts meet a need to pass on wealth in the here and now to help your grandchildren financially when they need it.

First and foremost, grandparents can gift cash outright to their grandchildren. And you are not required to divide a gift equally between your grandchildren, insofar as the amount you are gifting necessarily comes from the portion of your estate you are free to dispose of as you wish (the available portion).

→ Manual gift of a sum of money
This is the simplest form of gift: a sum of money is given to the donee (the person receiving the gift), usually by bank transfer, without any particular formalities.

However, there are risks to this absence of formalities. We generally advise clients to draw up an agreement with a number of clauses to secure the transaction. But it’s important to ensure the agreement is appropriately drafted to avoid the gift becoming null and void.

From a tax point of view, gifts of money from grandparents to grandchildren can qualify for a double tax allowance in some cases:

• If grandparents are aged under 80 and the grandchildren are 18 on the date of the gift, a special “helping hand” (coup-de-pouce) tax allowance of €31,865 applies. The allowance is calculated for each grandchild based on the gift they receive from each grandparent² (Article 790 G of the French General Tax Code).
• In addition, the allowance under common law (€31,865) for gifts from grandparents to grandchildren applies.³

Both these allowances are granted every 15 years. Over and above this amount, the capital transfer tax scale applies (5% to 45%).

Remember that whatever form the gift takes, grandparents can pay the gift tax on behalf of their grandchildren, without this being considered as an additional taxable gift.

→ Notarised gift
A notarised gift is obligatory if you are not making a manual gift. However, we recommend using a notary in all cases, no matter what type of asset your are passing on (including for gifts of money). A notary will assess the consequences of the gift, especially if you plan to hand over a substantial share of your estate to your grandchildren. A notarised gift is also required when the asset is real estate.

Using the services of a notary has the benefit of registering the gift and creating certainty as to the date of the gift, which is particularly important for dealings with the tax authorities. It also ensures that all gifts made during the donor's lifetime are recorded against the estate, which is necessary to ensure that the children receive their minimum legal share (the hereditary reserve).

But, when it comes to taxation, the form of the gift has no impact whatsoever on its tax treatment: the same tax allowances are available and the same tax rates apply above those thresholds.

→ An “intergenerational shared gift” (donation-partage transgénérationnelle) – a sophisticated option for transferring your assets
In France, an intergenerational shared gift allows you to distribute a greater share of your estate to your grandchildren than the available portion after the hereditary reserve. In this type of gift, your children agree to share their hereditary reserve with their own children.

There are many benefits to choosing this intergenerational shared gift strategy:

• you, the grandparents, decide how to distribute your assets between your children and grandchildren;
• you can make gifts to both children and grandchildren, or just your grandchildren (in which case, the children must still be involved in the deed), not necessarily in equal shares;
• this option also allows you to include previous gifts;
• it helps maintain good family relations, since the gift is irrevocable and the children consent in advance to their hereditary reserve being used for distributions to your grandchildren.

3. How to guard against the risk the money will be spent too soon

Although you may want to help your grandchildren in the here and now, you might still legitimately ask yourself whether the assets will be used wisely.

Here again, preparation is key. Under civil law you can attach conditions or reservations to a gift. For example, you can gift a sum of money to your grandchildren provided they use it for the purpose it was intended for. And if the gift of cash is not earmarked for a particular purpose by your grandchildren, you can still have some control by stipulating in the official deed that the sum must be deposited in a particular financial product with a fixed maturity (a three-year term deposit, for example).

If you plan to give a clearly identified asset (e.g. real estate), you can include a provision prohibiting the sale of the asset for a specified period (until your grandchild’s 25th birthday for example).

Another option is to give only part of the asset property (bare ownership) and keep the other part (usufruct). Keeping the usufruct serves a number of purposes:

• protecting the standard of living of the donor and their spouse by retaining use of the asset or the income from the asset until their death;
• keeping some control over the asset: the full property can only be disposed of with the consent of the usufructuaries (the donor grandparents) AND the bare owners (grandchildren who receive the bare ownership of the property);
• controlling the tax burden on the gift: in this scenario, the gift tax is calculated solely on the value of the bare ownership. And this bare ownership value is calculated according to a tax scale that takes into account the donor's age at the date of the gift. The bare owner takes full ownership of the asset on the death of the usufructuary and is exempt from paying inheritance tax on it.

Combined with an intergenerational shared gift, reserving usufruct is a very efficient estate planning strategy to provide for your grandchildren.

4. How to use a will as a means of passing on wealth to grandchildren

The advantage of a will is that you can amend it or revoke it any time. It only takes effect at the time of death. From a taxation point of view, the same tax scale applies to what you bequeath in a will as to gifts, but at €31,865, the tax-free allowance is far greater than the €1594 for a disposition upon death.

But, a will has restrictions: you cannot bequeath your grandchildren more than the available portion (after the hereditary reserve): the children could contest the will to claim their share of the hereditary reserve the will deprived them of (which would reduce the value of the legacy⁴), unless they renounce their claim to your estate.

5. Life insurance as an alternative strategy to a gift or will

Another succession strategy is to take out a life insurance policy to pass on wealth to your grandchildren. From a civil point of view, life insurance policies are a good option since they are outside succession law. In other words, the capital paid out at death is not subject to the rules on inheritance. As grandparents, you can pass on the death benefit to beneficiaries who are not your children, without being hindered by the hereditary reserve restrictions.⁵

A life insurance policy is also efficient in terms of inheritance tax: if you take out the policy before age 70, the first €152,500 payable under the policy to each beneficiary is tax free. The balance (up to €700,000) is taxed at 20% and then 31.25% after that.

Here are the main points you need to know about using a life insurance policy to transfer assets between grandparents and grandchildren.

• The grandparents invest the sums in the policy and can withdraw them at any time if necessary. Only the amounts invested in the policy at the time of the policyholder’s death are passed on to the nominated beneficiaries.
• It is not the right strategy for funding grandchildren's immediate needs, since proceeds only pass to the beneficiary (the grandchildren) on the death of the insured subscriber (the grandparents).
• The grandparents can change the beneficiaries in the event of death at any time.
• When nominating their beneficiaries, grandparents can get around the succession rules, at least to an extent.

¹ Except if you are predeceased by one of your children. In this case, your grandchildren would inherit as representatives of their deceased parent.

² Note that parents can also avail of this allowance, provided the conditions are met.

³ This allowance applies regardless of the purpose of the gift (money or other), with no age requirement for either the donor or donee.

⁴ Grandchildren who receive too large a share will have to pay compensation to the reserved heirs (their parents).

⁵ We advise caution however. If the deceased knowingly used the life insurance policy to disinherit an heir, or to considerably reduce their share of the inheritance, the injured party would no doubt challenge the will on the grounds of the subscriber’s intention.