Death and Taxes in Japan

Now that I have a daughter and a flat, I decided it would be a good idea to look into wills and inheritance. Since, at the moment, we’re all in Japan, I had to look into the Japanese law. Fortunately, there are books available on the topic, so I bought one.

The system is very different from England and the US.

Let’s start with the will. There are three basic kinds of will in Japan, and a number of special ones for use in emergencies.

The basic one must be written by you, by hand, and signed and sealed. That’s it. It doesn’t need any witnesses. However, you must write the whole thing by hand; no typing or using a word processor. You can put the will in an envelope and not have anyone look at it until you’ve died.

There’s also a “secret will”. Here, there are two witnesses and a public notary involved, and they testify to the existence of the will, but know nothing about its content. One reason for this is that you can recognise illegitimate children in your will, and they then become legal heirs, although at a lesser level than legitimate children. The illegitimate child is then recorded on your family record, so you might not want to do that while you’re still alive and your wife can see…

Finally, there’s a notarised will, where you tell a notary what you want to do, he writes it down, reads it out, and you and two witnesses sign to say that it’s right. This is very expensive.

And then there are the rules for inheritance. The law defines your legal heirs. These are your spouse and children, in the first instance. If they don’t exist, your parents and grandparents. If they’re all dead, your brothers and sisters. Your lineal descendants inherit the status of legal heir if your children die first, as do nephews and nieces, and you can make them into heirs in your will. You cannot make anyone else an heir, although you can leave posthumous gifts to anyone you like.

There are limits on that, however. First, your legal heirs can claim a portion (typically half) of the amount that they would inherit if there were no will, no matter what the will says. That means that, if you have legal heirs, you cannot leave more than half your estate away from them, and get away with it. There’s an exception to this. If a legal heir uses violence against you, is “terribly disrespectful”, or is engaged in a course of life that everyone would agree was really bad, you can disinherit them. You have to make a will that does so, and the family court has to agree that your reasons are good. This is much more restrictive than the UK, where you can disinherit anyone you want.

Second, someone who isn’t a legal heir has to pay more inheritance tax than someone who is.

Ah yes, inheritance tax. This is ridiculously complicated. First, add up the whole estate. Then subtract the allowance. The allowance is 50,000,000 yen plus 10,000,000 yen for every legal heir you have, excluding grandchildren you might have added (but they don’t have to pay additional tax). (You can adopt people to make them legal heirs, but, if you have actual children, only one of them counts towards the allowance. If you don’t, only two of them count. This rule was introduced because rich people actually were adopting armies of people to reduce the inheritance tax, apparently.) The remaining estate is then split, according to the law in the case of no wills, between all the legal heirs, and the inheritance tax (which is graduated) calculated on the basis of how much they would each inherit in that case. Then the tax is split between the actual beneficiaries in proportion to how much they receive, with extra tax for beneficiaries who are not legal heirs.

The effect of this, of course, is that there is no way to change the tax payable by changing the details of the will.

There are a few exceptions. Gifts made while alive are not among them, however. Gifts you make while alive are taxable, the exemptions are lower, and the tax bands are narrower. The top rate (50%) is still the same, however.

There are a few other exemptions, for your spouse, for gifts to legal heirs during your life (they can count against the inheritance, at the value at the time of the gift, which is good for things that will go up in value), and for land below a certain size or with rented property built on it.

Trusts, in so far as they are recognised in law, seem to be catastrophically bad for tax planning. It looks like the money counts as a gift from a corporate entity, which means they count as income. The allowances on income are much lower, and the tax bands are much tighter. (Depending on the trust, it might count as a gift from an individual, I guess, but then the trustees would have to pay gift tax when the trust was created.)

Basically, then, it looks like you can’t indulge in effective inheritance tax planning in Japan; the most tax efficient thing to do is, almost always, to simply hang on to things until you die, and then just leave them to your heirs. That fits with the general opinion, which is that a family can only be rich for three generations; by the end of that, inheritance tax will have made them ordinary.

Still, the upshot is that Mayuki is unlikely to have to pay any inheritance tax, unless my writing suddenly starts selling a lot better than it is now.

Posted in Japan.

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