how the ultra-rich avoid estate taxes

When it comes to taxes, savvy taxpayers know you shouldn’t stop at appearances. The adage applies all the more to inheritance tax, the rate of which in theory rises to 45%, for example above the 1.9 million euros that is transferred to a child. But the reality is far from the legal scale: according to estimates by the Economic Analysis Council (CAE) published in December, the most favored pay 0.1% of heirs, who spend an average of just over 14 million euros in their lifetime. make money, only the state… 10% of this amount! This gap is due to a series of tax loopholes that allow the wealthiest to avoid taxing much of their legacy. Illustration with a typical example.

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Take the case of a descendant who receives 15 million euros upon the death of his parents. In our first situation, the latter send out about a third of their jackpot when the father dies, and the rest when it is the mother’s turn. Applying the legal scale, their heir then has to pay 6 million euros in tax: 2.2 million euros for the first payment, then 3.8 million euros for the second.

Tax goose game

Another scenario: this time, the couple anticipates and takes advantage of several exemptions, in order to significantly reduce the amount funneled into the public treasury. This requires several steps. At the age of 20, the lucky descendant first collects 1.6 million euros in financial assets, and then pays 284,000 euros in direct debits. Of the amount transferred, 260,000 euros is exempt and is therefore not included in the calculation of the tax, thanks to discounts that apply every 15 years.

Indeed, provided that this term is respected, the law allows an heir to receive 100,000 euros from a parent without having to pay taxes. And if the donation takes the form of a sum of money, the exempt amount can be up to 30,000 euros extra. Result: since these discounts apply separately to the mother and father, a descendant can receive 260,000 euros from his parents every 15 years, without having to pay even one euro to the State.

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In our typical case, the legatee then acquires the family business, worth 7 million euros. A mechanism called the “Dutreil Pact” then allows him to reduce the taxable value by 75%, provided he keeps the company for 4 years and exercises its management for 3 years. The icing on the cake: Since his parents are under 70, the rules of the ‘pact’ further halve the tax due, ultimately amounting to just 175,000 euros. This tax niche, created in the late 1990s to promote the stability of family businesses, was originally much less advantageous: it merely allowed a 50% reduction in the taxable amount and required detention for eight years after the passing away . It mainly benefited very wealthy households and, according to calculations by the CAE, cost the State two to three billion euros per year in 2018 and 2019.

Pocket knives in the redistribution

Five years later, our heir picks up 4 million euros of real estate and then has to pay 774,000 euros to the state. Here, the leverage of the “usufruct reserve” makes it possible to divide the taxable amount of this wealth by two, in exchange for which the descendant cannot derive any income from it before the death of his parents. This mechanism is also known as “property mutilation”: the legatee only receives the “bare ownership” of the property, which reduces its value and prevents him from disposing of it as he pleases. The age of the climbers then determines the amount of the discount, which is greater the younger the donor. The CAE estimates the cost of this exemption at between 2 and 3 billion euros per year.

Finally, on the death of each of his parents, our legatee raises 1.2 million euros in financial assets and pays a total of 352,000 euros in taxes. Part of the amount inherited this time was accumulated on life insurance policies: this investment makes it possible to designate a series of beneficiaries and transfer to each of them up to 150,000 euros tax-free upon the death of the saver. According to the CAE, this exemption costs between 4 and 5 billion euros per year on public finances.

In total, thanks to the foresight of his parents, our descendant paid only 1.6 million euros to the state on his heritage purchases. Thus, the tax to be paid is divided by nearly four, compared to the pure and simple application of the scale. Suffice it to say that the existing rules leave ample scope for wealthy heirs to reduce their slate well below theoretical amounts.

In any case, this is the case in the direct line, that is, whether the transmission comes from the father or the mother. Because in other situations, the painful settlement increases much faster as the amount received increases: for example, a person who receives 40,000 euros will have to pay an average of 28% in tax, according to a report published in 2017 by France strategy. Result: A bequest from a middle-class aunt will be taxed much more heavily than an inheritance from very wealthy parents. Based on this observation, France Stratégie pointed out two shortcomings of the current system, which “is not very redistributive” and ” [une forte charge] to persons without children, with very high rates, including for low-value transmissions”. And concluded: “It is desirable to think about a structural reform of this tax”.

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