Investing for your children in France
How can you invest for your children from an early age? The principles
Here are the principles to follow to invest successfully over the long term:
invest a fixed monthly amount that you'll barely notice - between 100 and 1000 euros/francs depending on your situation (or the equivalent amount annually).
on an investment account in a single "accumulating" equity ETF (All-World, developed countries or US)
don't touch anything else! - never stop investing and never sell anything until the end
If you follow these principles, you can expect a net annual return over 40 years of around 5% (9% gross - 2% inflation - 1% fees - 1% tax). So if you contribute from birth, when he's 40 he'll have in today's money about
150k - for a monthly contribution of 100 euros
and 1.5 million - for a contribution of 1,000 euros
>> If you want to know more about the principles and why, please check my dedicated article
To apply these principles in France
your monthly contribution will be limited by your salary if you want to avoid paying gift tax (or using your gift allowance): each additional 50k of annual income can justify an additional 100 euros per month
choose a simple securities account with a low-cost broker instead of life insurance: this will optimize your total costs (account fees plus tax)
The French tax framework
You are a French tax resident. Inheritance and gift tax (the rules for which can be found here) restrict you:
don't invest in your own name and then make a gift to your children: if you invest in your own name for 40 years and build up a capital (in today's money) of 450k euros, you'll have to pay at least 68k in gift tax.
and if you invest in your child's name but make large contributions, for example by putting in 100k euros when he or she turns 10, you will use your allowance for the next 15 years, and any further donations will generate high costs.
It makes much more fiscal sense to spread your contributions over time with 300 euros per month for 40 years - instead of 450k at age 40 or 100k at age 10. Investing gradually also reduces the risk for the same expected return: you are no longer dependent on the market situation at the time of contribution.
You can therefore open an account in your child's name directly and contribute to it with amounts that are low enough to be considered a customary present and not be subject to gift tax. The maximum is about 2.5% of your income: every 50k euros of additional annual income can justify an additional 100 euros per month. If you want to contribute 300 euros a month, you'll need to earn at least 150k a year.
Fortuneo: a good securities account for minors
If you choose to invest for your child in a simple securities account, you'll have access to all the ETFs available on Euronext at minimal cost. The total cost of the account will be around 0.2% a year.
For example, Fortuneo allows you to open a securities account for minors. With the "optimum" tariff, management costs are reduced to around 0.4% purchase fees (one-off) and 0.2% sales fees (also one-off), which, amortized over 20 years is...less than 0.1%. When you reach 50.000 euros on your account, the fees become 0 with the "0 Brokerage" tariff.
On top you have to pay the ETF's TER, which is usually less than 0.15% annually.
Which ETFs should I choose for my Fortuneo contract?
A life insurance account: often a bad idea
In France, there's another important tax factor: taxation of financial gains with the flat-rate withholding tax of 30%.
If you invest in a standard securities account:
you have to pay this every year on your dividends (but you don't with an accumulating ETF)
every time you sell, you have to pay this on the capital gain (but with buy & hold, this won't happen until after 40 years)
At the age of 40, your child will give 30% of your earnings, i.e. 30%*2/3=20% of the final capital to the tax authorities.
Sounds like a lot. It is. It's a cost equivalent to around 0.8% a year.
This justifies looking at which types of account are more tax-efficient, and where you can invest in U.S. or global equity ETFs in the name of a minor. They're not a dime a dozen, the main answer is: a life insurance account.
As far as taxation is concerned, you may be able to avoid the 12.8% income tax (albeit with many constraints) if your child withdraws gradually (less than €4,600 a year for a single person, or €9,200 a year for a couple). Otherwise, the income tax will be between 0% and 12.8%, depending on the amount withdrawn and the amount invested. See detailed rules.
But you won't escape the 17.2% social security deductions.
If you invest via a life insurance policy, your tax liability will drop from 30% to 17.2% in the best case, but your annual account costs will rise from 0.2% to 0.8%. Regardless of the annual yield (from 0% to 7%) and the effective holding period (between 10 and 40 years), choosing life insurance will give you lower capital in the end.
So it only makes sense to take out life insurance for another purpose, such as planning your child's inheritance. You can get a deduction of 152,500 for each of his or her children - but this only makes sense when he or she has a family of his or her own. See the rules at the bottom of this page.
You got me: in most cases, if you follow the above principles, a simple securities account is the best choice.
MeilleurTaux Liberté Vie: a good life insurance policy
If you do decide to open a life insurance account, you need to be very careful to choose a low-cost one.
It's easy to end up with a contract with 2% entry costs, a 1% annual management fee, and the option of investing only in funds with 1-2% annual fees and not in ETFs.
In 2023, low-cost life insurance contracts all have management fees of around 0.6% (in addition to the TER of ETFs), leading to a total annual cost of around 0.8%.
Examples of low-cost life insurance contracts: MeilleurTaux Liberté Vie (insurer: Generali), Linxea Spirit 2 (insurer: Spirica), Lucya Cardif (insurer: Cardif).
Which ETF should I choose for my MeilleurTaux Liberté Vie contract?
The simplest choice - and therefore best choice - is an ETF for developed countries,MWRD (TER: 0.18%).
If you really want to invest worldwide or just in the US, you'll have to make some compromises:
unfortunately, end 2023, there are no worldwide ETFs, so you have to combine the developed-country ETF with a developing-country ETF, for example with a 85/15 ratio.
whether you choose a US ETF or an ETF for developing countries, there are limitations: either you agree to limit yourself to ESG companies (if this matches your beliefs this can even be an advantage), or you invest without restrictions, but with a swap-based ETF and not a full-replication ETF (less recommended)
Which ETF for the US? 500 (TER: 0.15%, swap-based) or USRI (TER: 0.18%, ESG-only)
Which ETF for developing countries? AEEM (TER: 0.20%, swap-based) or EMSRI (TER: 0.25%, ESG-only)
About the author
Hello, you can call me Margot.
I'm a French expatriate living in Switzerland. I've been investing for 15 years.
With assets in the low millions, I'll probably never have a family office, so I have to stay in the driving seat. How can I grow my assets further and pass them on to my children?
AskMargot is my testimonial, that of a peer, to go further in wealth management.
You'll find unique content, more advanced than what you'll find on beginner investment blogs or in the wealth reports of French or Swiss asset managers.
Don't hesitate to contact me if you'd like to discuss your wealth strategy with a peer.
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