Hi all! First time poster, please be kind if I do something wrong because reddit is a mystery to me but I have burning inheritance questions and I need help!
Here is my situation: being home for the holidays has put in perspective that my beloved elder family members are not getting any younger, and they are eager for me to understand their various wills/trusts so I have an idea of what to expect when the worst case scenario happens. This has caused me to spiral out into a deep well of anxiety as I try to reconcile the looming reality of the imminent passing of the most important people in my life in combination with Japanese laws.
I have been living in Japan for 7 years now and have PR status. I am on the line to inherit both from my parents and another family member. Inheritance will include a variety of things including property, stock investments, savings accounts, etc. All property I inherit will be located in the US at the decedent's passing. I will inherit a sizable set of assets. As far as I understand my family has set up the inheritance so that I will pay a minimum on those assets in taxes. This is helped by the fact that my family is from California, which has no inheritance tax, in addition to the various trusts they are using to protect assets. I'll be honest, I don't fully understand how it all works, but that's what I've been told.
I've spoken to a tax specialist in Japan who tells me that there is a 30 million + 6 million yen deduction on inheritance, after which the remaining assets will be taxed by Japan. To avoid paying taxes in Japan he recommended completely 100% leaving the country. That is to say: give up PR, close all accounts, leave my ward as a tax paying citizen, etc. His exact words were "when one parent dies, I'd recommend leaving the country".
My question/ preoccupation is this: my father, and a few other articles online, insists the US-Japan Estate Tax Treaty protects US citizens living in Japan in some inheritance cases. The Japanese tax specialist does not agree. As far as I understand it, since all assets I will inherit are located in the US, the US has the primary right of taxation. But since the assets I inherit will fall below the taxation threshold, I won't be taxed/ will be nominally taxed.
However (and this is what the tax specialist and articles online have been very unclear about) am I correct in assuming that the ordeal wouldn't stop there? Since Japan has such a high taxation rate, will the US just basically say to Japan that I didn't owe any taxes in America, which will then allow Japan to tax me to the full extent of the Japanese law?
I would also like to raise a hypothetical. Presuming the answers to my above questions are a "yes" and I must 100% leave the country to protect inherited assets…let's say that one of my relatives dies very unexpectedly, and I can't leave before they pass. I know that Japan's inheritance laws go into effect on the date of death, but I also know that it is my duty to report my inheritance assets to Japan. What are the chances inheritance laws will be enforced if I drop everything/ rescind my PR/ fully leave Japan to move back to the US and DON'T report the inheritance myself?
I am very aware that I will be lucky to inherit anything from my family and that this is a champagne problem, but it's causing me a lot of distress. I love Japan and have a wonderful life here and happily pay taxes and pay into the pension system. But, in the (hopefully) distant future, my relatives will rise from their graves to kill me themselves if I have to pay a bunch of taxes on the money they worked so hard to protect. I don't want to break any laws, but I'm (perhaps unreasonably?) paranoid something terrible will randomly happen while I'm here and I'll have no time to exit gracefully. I just want to be super duper crystal clear on how this works so I can plan accordingly.
Sorry for such a long post. I hope that all made sense. I feel like a mad person with the way I'm furiously hunched over my laptop typing this all out.
by Vegetable_Rooster925
16 comments
I am not sure about the law in Japan, but if you are able to give up your PR here and then switch to a working visa etc, you can avoid the inheritance tax abroad. As Japan only taxes you on your inheritance abroad after living in Japan for more than 10 out of 15 years if you are on a table 1 visa ( which working visa falls under). That might give you still 3 years.
Also do not know regarding the gift tax in California, but gifting you the assets before the 10 years are up would also be a viable option then.
Tell your parents to add a clause to the trust saying that you can liquidate assets and/or withdraw cash to pay Japanese inheritance tax immediately.
If they get hit by a bus while you’re planning your great escape it will save you tons of headache.
Japanese inheritance tax will not respect your parent’s wishes. So even if your parent’s trust says “Leave them $100 million but only pay it out $1 million per month for 100 months.” Japan will not wait 100 months.
Japanese inheritance tax will be assessed on the $100 million, and you will owe it within 10 months of the death.
(This is an over-simplification to give you the gist of why it’s a big deal to avoid time-delayed trust schemes)
TLDR- inheritance taxes start in the US well after $10M USD. In Japan they start at well below $1M. And in the US there are a lot of ways to create legal structures to protect wealth- these are essentially not possible in Japan.
If you don’t want to pay inheritance taxes, you should leave Japan before your parents pass on.
Fundamentally, the inheritance taxes in Japan are designed to drain any family fortune by the 3rd generation. This is one of the reasons why Japan is a more egalitarian society than (in this comparison) the US.
Don’t forget about your capital gains tax liability when you decide to sell said assets. There’s no step-up rule so you need to calculate the cost basis using the price from the original date(s) of purchase converted to yen w/ the exchange rate from that day.
you dont’ have to give up PR. You can just break tax residence and leave. The second you are on that plane Japanese inheritance tax can’t touch you.
Now the trick is to not go back for some time so it doesn’t look like you left just to avoid the tax.
Once you leave, you can be made the executor/beneficiary of the trust which gives you ownership in Japanese eyes so when you come back to japan it’s already yours so no inheritence tax.
Note that this doesn’t work for your spouse and kids who have japanese citzenship as there is a 10-year tail for them after breaking tax residency.
You should plan on being away for at least two years before returning to avoid the NTA assuming you left to avoid taxation and assessing the tax and fines accordingly.
Also don’t forget to consider your exit tax liability if it applies in your situation.
Your situation is very common.
Unfortunately I only see two possibilities: stay in Japan and pay the inheritance tax in Japan as per Japan rules or leave Japan before your parents/relatives pass away.
If your parents pass and you live in Japan when they pass then you will owe Japanese inheritance taxes. Leaving Japan *after* your parents pass in order to avoid paying taxes is tax evasion. Whether you get caught or not, no one can really say.
If you don’t want to pay Japanese inheritance taxes, you need to leave before they pass. Obviously this isn’t completely possible to time, because no one can predict exactly when someone will die. So if you don’t want to pay taxes, your safest bet would be to leave sooner rather than later.
This is part of the trade off of living in a country with a lot less inequality compared to the US.
I hope that doesn’t sound harsh because it’s not meant to be at all, just trying to simplify your thinking about the situation. Many posts about Japanese inheritance tax sound quite optimistic in thinking there must be ways to get around the high inheritance tax. Unfortunately for most people there really isn’t.
I was in almost the exact same position as you a few years ago. I never even thought about inheritance taxes, because to me my parents aren’t rich and in the US you need north of $10m USD to pay inheritance taxes. Once I realized the difference in tax rates I was overcome with anxiety about thinking what to do.
I think the hardest part of Japanese inheritance tax is not that it limits your life in Japan, but that it makes it much harder to return to the US.
Living in Japan, paying inheritance taxes on US assets, and then deciding later in life to move back to the US is one of the worst financial decisions you can probably make. Japanese inheritance taxes dont really take this scenario into account (and it’s not necessarily wrong that they don’t, as much as I dislike it), but it’s the result of cost of living being so different between the two countries.
This is my thinking about this topic… I would say think about what your long term goal is. Do you ever plan to return to the US? How much do you earn?
My personal thoughts about different scenarios:
1. If you plan to return to the US someday, don’t tempt fate by staying in Japan, especially if you are a low earner here in Japan. If you are a high earner however, then I think staying in Japan or returning to the US can both be viable options.
2. If you plan to stay in Japan forever, then just accept the fact that you’ll need to pay Japanese inheritance taxes and stop worrying about it. This goes for whether you are a low or high earner. If you are paying inheritance taxes and staying in Japan, you’re still better off than most people here. If you’re saving monthly for retirement then you’re actually probably *drastically* better off than most people here in Japan. Also one more way to think about it… even if you lose 50% of the entire inheritance and stick it all in an index fund, it’ll likely be back up to the full inheritance amount in 7-10 years because it will have doubled.
Hope that helps some. I know the pressure that comes with basically feeling like you have to decide the path of your life immediately!
Your accountant is correct, your father isn’t. The way the tax treaties work is to avoid double taxation by determining which country gets first dibs and then allowing for tax credits. So on a given estate E based in US, the taxes are evaluated at X for US and Y for Japan. You pay X first to the IRS and then you tell the NTA “hey, I already paid X so now I will only pay you Y – X”. If X is $0, you still have to pay the full Y.
Now I’d recommend you run the numbers and estimate how much you’d owe in Japan for each estate. Based on your relationship to the deceased and the number of statutory heirs, the numbers usually end up quite lower than the scary 55% tax people love to quote. I have a calculator for this which has been validated by the most erudite members of this community: https://japanfinance.tools/inheritance-tax-calculator
Then ponder that number and especially how much would be left after paying it. It’s a very personal question, but do these numbers justify uprooting your life and moving countries to avoid the tax? Are you single, renting and have a highly mobile job? Are you settled with a family and a house? This will change how you view this and nobody here can be in your shoes and tell you what is the correct answer.
You mention that your parents would be livid if you had to pay taxes on their inheritance. But remember that they’ll be dead, so it’s really none of their business.
One thing to keep in mind also is how liquid the estate is. If it’s almost all real estate, it can put you in a bind as the NTA doesn’t care how complicated it is to sell properties that might be divided between your siblings. They will want the taxes to be paid within 10 months of the passing regardless. So, if at all possible, liquid assets should be assigned to you in priority in the will.
That will also help with the capital gains tax issue as you will have to pay inheritance tax on the market price of any asset at the time of death, but when you (or the estate executor) sell the asset subsequently, you will also be liable for capital gains made between the purchase time and the sale, i.e. it could be 30 years of appreciation on the family home that falls on you to pay for.
You haven’t said how much you stand to inherit, but let me give you my own situation and thoughts.
I will inherit about $5M after my parents pass (in late 80s now). That means I owe 0 to the US, but will pay about 37-40% of that total to Japan in taxes. Sure that’s huge, but I’ll still have $3M after tax.
My sibling in the US will inherit the same $5M and pay no taxes.
However, for that $2M, I get to live in the country I love, with the people I know and love, enjoying a safe society that will provide me healthcare etc.
If my sibling develops some illness etc, that could wipe out his inheritance.
I look at it as paying upfront for a comfortable life, instead of nothing at first, but uncertainty ahead.
Besides, how much money does someone need to live on? I’m quite satisfied with $3M, and I’m not going to be happier uprooting myself for $2M more.
Just something to consider…
And your father is wrong
Not sure if you have siblings, but I’ve always wondered if just renouncing any kind of inheritance and having it go to a sibling and then sorting it out later is a valid strategy?
This is not a popular point of view, but to illustrate, imagine you inherit a million dollars and pay 50% of it for inheritance tax (IT)–leaving $500,000. If you turn around and invest that $500k for 10yrs at 7.2%, you’ll be back up to a million dollars. That leaves aside any tax on the capital gains you might later incur, but some of it could be shielded by maxing Nisa/iDeCo.
Yes, of course I know you’d be far better off if there was no IT and you had started with a million, but the point here is that tho the IT hurts, it’s nowhere near a fatal blow–instead kind of like 10 years in the penalty box. And if you’re younger, your investment horizon might be 20 years or more.
Just curious, how would the Japanese government know the inheritance taxes you have in the US?
I have a couple of real estate properties back in my home country but just wondering how they even find that out once you profit of of them. (Ie: when you sell)
Not sure about japan, but in most countries you dont owe tax when someone dies. You owe tax when you inherit the money. If a parent dies and the executor is managing the estate, you can leave the country and then receive the inheritance. It took me 2 years to get my inheritance. Obviously I didn’t owe taxes the day my dad died. I owed them when I received the inheritance.
Sorry I’m hijacking this thread a bit but I had a few questions about inheritance tax:
1. The 10 out of 15 years, is that number of calendar years you had residence in Japan or is it actual length of your residency?
2. Are you liable to pay inheritance tax after residency is “ten years or more” or “more than ten years (ex. liability starts at year 11)”? I’ve seen both mentioned.
3. If you leave Japan before the liability threshold and break your residency, how long before you can come back to Japan? Does the counter totally reset after residency is broken?
One idea is if you are in Japan when a parent passes away, you can file paperwork in both Japan and the US to deny the inheritance. That would lower your inheritance taxes to zero.
Comments are closed.