Milestone for US-Japan - PowerPoint Presentation

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Milestone

for US-Japan Estate Planning

September 19, 2019STEP Mid Atlantic branchHitomi Sakai Counsel, City-Yuwa Partners, Tokyo Japan(TEP, STEP Hong Kong Branch)

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Contents

Japanese Inheritance Law BasicJapanese Tax Law BasicLearn from the ExperienceQuestion Time2

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Japanese 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

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Japanese 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

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Japanese 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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Japanese 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)

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Japanese 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

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Japanese 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

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Japanese 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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Japanese 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

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Japanese 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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Japanese 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

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Japanese 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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Japanese Inheritance/Gift Tax

14Inheritance Tax

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Japanese Inheritance/Gift Tax

15Gift Tax

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Japanese 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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Japanese 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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Japanese 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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Japanese 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

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Japanese 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

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Chart

Scope to Japanese Inheritance and Gift Taxation

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Japanese 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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Taxes 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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Exit 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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Exit 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

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US－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

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Learn 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

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Learn 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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Learn 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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Learn 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

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Thank 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