Estate Planning September 19 2019 STEP Mid Atlantic branch Hitomi Sakai Counsel CityYuwa Partners Tokyo Japan TEP STEP Hong Kong Branch Contents Japanese Inheritance Law Basic ID: 830163
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Slide1
Milestone
for US-Japan Estate Planning
September 19, 2019STEP Mid Atlantic branchHitomi Sakai Counsel, City-Yuwa Partners, Tokyo Japan(TEP, STEP Hong Kong Branch)
Slide2Contents
Japanese Inheritance Law BasicJapanese Tax Law BasicLearn from the ExperienceQuestion Time2
Slide3Japanese Inheritance Law Basic
No probate in JapanNo estate administration by the court in Japan.The decedent’s properties title are vested immediately in the heirs or beneficiary upon the decedent’s death.3
Slide4Japanese Inheritance Law Basic
Conflict of Law in Japan (Governing law issue)Under Japanese conflict of law, the law of decedent’s nationality will govern the inheritance.Japanese conflict of law adopts doctrine of renvoi.If the decedent is the US and he/she has domicile or real estate in Japan, Japanese law might apply-Forced heirship issue!4
Slide5Japanese Inheritance Law Basic
Forced HeirshipJapan protects forced heirship rights (legally secured portion, Iryubun).1/3 to 1/2 of the decedent’s assets are reserved for eligible heirs.Eligible heirs: Spouse, children and parents, but not siblings.Forced heirship beats the Will.Major issues in the inheritance area in Japan
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Slide6Japanese Inheritance Law Basic
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SpouseStatutory sharesBlood relativesPriority Kind Statutory share
Spouse1/2First Direct descendants1/2
2/3
Second
Direct ascendants
1/3
3/4
Third
Siblings (or their children per stipes)
1/4
Intestacy Distribution Rules in Japan (when there is a spouse)
Slide7Japanese Inheritance Law Basic
Forced Heirship Shares7
Survived by Reserved Share in total Allocation SpouseBlood Relatives
Spouse only 1/21/2NoneDescendants only
1/2
None
1/2
Ascendants only
1/3
None
1/3
Siblings only
None
None
None
Spouse and descendants
1/2
1/4
1/4
Spouse and ascendants
1/2
1/3
1/6
Spouse and siblings
1/2
1/2
None
Slide8Japanese Inheritance Law Basic
Dead Hand Control is defeated by Estate Distribution AgreementTestator’s intention can be disregarded if testator infringes forced heirship rights and an infringed eligible heir claim his/her right.Testator’s will can be fully disregarded if all the beneficiaries so agree by the “Estate Distribution Agreement”. 8
Slide9Japanese Inheritance Law Basic
Trust in JapanJapan is civil law country but has adopted trust system. Trust is useful for the assets management but not as tax planning devices in Japan.A U.S. trust should be recognized in Japan in theory, but practically unclear (many hurdles).Consultation with Japanese professional is necessary when you use US trust which covers Japanese assets.
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Slide10Japanese Inheritance Law Basic
US Will v.Japanese WillStrongly recommend making separate Wills for the assets between US and Japan.Especially do not include Japanese assets into “pour-over Will” which the estate goes to the Trust. 10
Slide11Japanese Inheritance Law Basic
Will & Trust v. Intestate Japan is behind regarding estate planning.Estate planning business is expanding rapidly due to aging population.Inheritance disputes rapidly increasing.Estate Distribution Agreement defeat Will under Japanese law.
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Slide12Japanese Inheritance Law Basic
Power of Attorney v. Guardian Japanese guardian system is so rigid.No durable power of attorney.Using trust for flexible asset management for incapacity.12
Slide13Japanese Inheritance/Gift Tax
General Information Very expensive up to 55%Imposed on heirs and beneficiary, not on the estate.Inheritance tax deadline: 10 months after the death.Law basic exclusion “Jusho” is critical to determine the scope of inheritance/gift taxes
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Slide14Japanese Inheritance/Gift Tax
14Inheritance Tax
Slide15Japanese Inheritance/Gift Tax
15Gift Tax
Slide16Japanese Inheritance/Gift Tax
Basic exclusionJPY 30M + (JPY 6M x number of statutory legal heirs under Japanese law)For example Husband dies survived a wife and 3 children: Basic Deduction: JPY 30M+(JPY 6M×4)=JPY 54M
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Slide17Japanese Inheritance/Gift Tax
Spousal Credit The spousal credit in Japan is limited.No Japanese inheritance will be imposed on the amounts that the spouse receives up to:(i) the spouse’s statutory share of the total taxable assets (ii) JPY 160 M, which is greater.
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Slide18Japanese Inheritance/Gift Tax
What is Jusho?Principal place of living under Japanese Civil CodeDetermined based on an individuals (objective facts and circumstances) Main factors to decide Jusho: -Location of where one resides; -Location of the person’s spouse and other family members; -Period of time resides; -Person’s occupations -Person’s assets and property, etc.
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Slide19Japanese Inheritance/Gift Tax
Impact of 2017 Tax ReformJapanese HNW individual tried to avoid Japanese inheritance/gift tax by transferring assts to outside Japan.This estate planning trend was blocked by the tax reforms (2000, 2013 and 2017) which has expanded the scope of the tax offshore assets. 19
Slide20Japanese Inheritance/Gift Tax
2017 Tax Reform Japanese tax authorities released “Total Plan for International Tax Strategy” in October 2016. The 2017 Tax reform of the Japanese inheritance/gift tax system has various implications for US citizens living in Japan. Short-term visa resident-Partially relief Long-term visa resident-More exposure20
Slide2121
Chart
Scope to Japanese Inheritance and Gift Taxation
Slide22Japanese Inheritance/Gift Tax
Footnote section *1 Foreign short-term resident: any resident (i) who had a residence status under Table 1 of the Immigration Control and Refugee Act, such as work visa at the time of inheritance/gift; and (ii) whose total period having Jusho in Japan is 10 years or less within the past 15 years prior to inheritance/gift.*2 Foreign short-term resident: foreign person (i) having no Jusho in Japan at the time of inheritance/gift; and (ii) who had Jusho in Japan within past 10 years prior of the inheritance/gift; and (iii) whose total period having Jusho in Japan is 10 years or less within the past 15 years prior to inheritance/gift.*3 Taxed on the assets in Japan only for category *3. This transitional measure will apply to inheritance/gift by foreign non-resident during the period from April 1, 2017 through March 31, 2022.
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Slide23Taxes on trust
Basic Principle “Beneficiary-Taxed Trust” A beneficiary treated as if he/she owns all of the trust property for the tax purposes.At the time of transfer of assets, the beneficiary is deemed to receive that trust property even if he does not receive the actual benefit. The beneficiary must prepare for the funds for gift tax even if he does not receive the actual benefit.
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Slide24Exit Tax
Income tax will be imposed on unrealized profit of financial assets at the time of leaving as if they were disposed. Covered assets:Securities;National and municipal bondsCorporate bonds;Unsettled credit transactions and unsettled derivative transactions, etc.
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Slide25Exit Tax
Income tax will be imposed on unrealized profit of financial assets at the time of leaving as if they were disposed. Covered persons:Having covered assets of JPY 100M or more at the time of leaving;Having stayed in Japan for more than 5 years in the 10 years prior to the time of leavingThere is a grace period for foreigners25
Slide26US-Japan Estate, Inheritance Gift Tax Treaty
Japan has an Estate, Inheritance Gift Tax treaty only with the USRules of situs of certain classes of assets.Pro-rata Portion of Applicable Credit Amount.26
Slide27Learn from the Experience
Making separate Wills for the assets in each country!Do not include Japanese assets (especially real property) in the US pour-over Will which leads assets into the Trust. Reason 1: Japanese Real Property Register Office does not like offshore trustReason 2: Surprising Japanese tax exposure by transfer through the trust.27
Slide28Learn from the Experience
Be aware when your client or you intend to include Japanese assets into the US trust!Japanese assets are subject to Japanese inheritance/gift tax.Legal Affairs Bureau is suspicious about foreign trust. Substantial time and cost is necessary.
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Slide29Learn from the Experience
Be aware of Japanese forced heirship rights when US citizen client has domicile in Japan or real property in Japan. Japanese assets are subject to Japanese inheritance/gift tax.Legal Affairs Bureau is suspicious about foreign trust. Substantial time and cost is necessary.
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Slide30Learn from the Experience
For close discussion is necessary between local estate planning professionals. Belt and suspenders approach is necessary.Confirmation the effect of your estate planning with Japanese professionals. If your client and his/her beneficiary lives in Japan, confirm Japanese legal and tax consequence before you make complicated scheme in the US.30
Slide31Thank you!Hitomi SakaiCounsel, City-Yuwa PartnersMarunouchi Mitsui Bldg. 2-2-2 MarunouchiChiyoda-ku 100-0005 Tokyo, JapanE: hitomi.sakai@city-yuwa.com T: 81-3-6212-5582F: 81-3-6212-570031