Making your minor child a partner in a family SCI: issues and consequences

"We are planning to buy a property through an SCI with our minor children.

What do you think?"

In principle, nothing prevents minors from being partners in a société civile immobilière (SCI, a property company).

However, you need to think about the purpose of the SCI and how it will be managed in practice when minor children are involved.

What is an SCI for?

An SCI can be an effective tool for passing on and managing your wealth.
For example, it avoids the children holding property in joint ownership (indivision) after their parents' death. It can also make it easier to take decisions by majority vote, or make management smoother through the appointment of a manager (gérant).

An SCI can also optimise the taxation of a transfer from parents to children.
SCI shares are passed on at their net value or, if that value is nil or negative, at the value of the share capital. The gift may be made in full ownership, but making it in bare ownership (nue-propriété) is more advantageous in terms of optimisation.

In particular, where the SCI holds a rental investment, the children who received the shares will see the value passed on to them increase automatically as the loan is repaid out of the rents. They will also benefit from the likely growth in the value of the property held by the SCI, all without any additional tax on death.
However, tax should not be the only goal. If the main purpose of the transaction is to reduce tax, it could be treated as an abuse of tax law (abus de droit fiscal).

On the other hand, if the SCI holds, for example, your main residence or a second home, giving SCI shares is much less useful from a tax point of view. Indeed, partners' current accounts, that is, all the debt owed by the company to partners who have advanced expenses and various costs, would then be taxed on death.

In any case, from an administrative point of view, bear in mind that an SCI must complete certain accounting, reporting and general meeting formalities. Otherwise, it could be considered fictitious and lose all its usefulness.

How can a minor become a partner in an SCI?

For a minor to become a partner in an SCI, they must make a contribution to the company.

If the contribution is in cash (sums of money), the law does not require the authorisation of the guardianship judge (juge des tutelles). The consent of both parents is then sufficient.

However, a child who becomes a partner in an SCI has unlimited liability for the company's debts in proportion to their share of the capital. It may therefore be advisable to obtain the authorisation of the guardianship judge, who will assess the risks on a case-by-case basis.

In addition, where the minor contributes a property to the SCI (received, for example, by gift or inheritance), the guardianship judge's authorisation is mandatory.

And by way of gift?

As mentioned above, your minor children could also become partners in the SCI by way of a gift.

First of all, if a loan was taken out to acquire the shares you wish to give, the bank's consent will probably be required, as a gift is generally a ground for early repayment of the loan.

Furthermore, if the SCI finances the purchase of the property with a loan, it may be wiser to make the gift after the purchase and the loan rather than before, to avoid difficulties when seeking finance (see the next section). At the very least, the bank should be consulted to decide on the order to follow.

In any event, under current case law, a gift of SCI shares is treated as a gift without conditions. It therefore does not require the guardianship judge's consent, even if the SCI owes a loan or has liabilities towards its partners.

Will the SCI be able to take out a loan?

An SCI can take out a bank loan even if one of its partners is a minor.
However, the minor partner cannot act as guarantor without the guardianship judge's authorisation.
And the bank has a duty to protect the interests of minors.

Lenders may therefore be less willing to grant credit to an SCI with minor partners.
They could require the guardianship judge's authorisation where the loan amount and/or the minors' share of the capital are very large.

To protect the minor from creditors, it is therefore advisable:

• on the one hand, to include clauses in the articles of association limiting the minor's liability. Your notaire will assist you in drafting or amending the articles;
• and, on the other hand, to obtain from the bank a waiver of its right to pursue the minors. In practice, such a waiver can sometimes be very difficult to obtain.

Will the SCI be able to sell the property?

In this case, it is important to check the wording of the articles of association and the manager's powers.

In the event of a sale, the parents will probably be able to represent the minor partner without the guardianship judge's authorisation. This is subject to the essential condition that the sale price is kept within the SCI and reinvested.

Conversely, if the sale price is distributed to the partners, which is common in practice, the guardianship judge's authorisation will be required.

In practice, you will need to make sure there is no conflict of interest between the parents and the children. Otherwise, it is strongly recommended to ask the guardianship judge to appoint an administrateur ad hoc (an independent representative), who will take decisions on behalf and in the interest of the minor.

In conclusion

Setting up an SCI with minors, or later giving them shares in the SCI, is a transfer tool to be studied case by case.

You will need to take into account the management you want, the transfer objective sought, the very purpose of the SCI, the related administrative procedures and the likely need to go before the guardianship judge for the company's major decisions. The guardianship judge checks that each decision is taken in the child's interest, and will not authorise acts that represent a risk to the minor's assets.

We invite you to contact your notaire to assess whether an SCI is relevant to your particular situation.

For David Notaires – Aix en Provence, Elodie Letouche and Pauline Cezanne