This question started as an argument with a co-worker (a fellow US citizen/longtime Japanese resident) and now I’m genuinely curious myself.
Her elderly mother is wealthy — multi-million US dollars, and my friend has no siblings. I asked how she plans to avoid paying Japanese inheritance taxes someday, because as far as I know, there are only two options for this:
1. Don’t tell the Japanese government about the inheritance and don’t bring any of the funds to Japan, or
2. Give up residence in Japan for at least 10 of the 15 years before her mother passes away.
She says she’s not worried because her mother put her assets in a trust to avoid all inheritance taxes. I said this would help her avoid US taxes, but if she wanted to bring any of the funds to Japan, she needed to pay taxes within 10 months of her mother’s death. She claims this isn’t true, and that there are some forms of trusts that can protect her from Japanese taxes.
My own parents aren’t multimillionaires and they’re still relatively young, so I’ve only begun to look into this myself. But I do plan to stay in Japan, and as far as I can tell, there isn’t any kind of trust that can be set up in any US state (not even the ones with generational “dynasty trusts” to protect family wealth for generations) that would allow me or my friend to be able to avoid the Japanese Tax Man from taking his hefty cut of our inheritance someday.
So my question is this: is there any way to set up any kind of US trust so that your heirs in Japan can avoid Japanese inheritance taxes? (From my limited research on this, I don’t believe there is — I hope I’m wrong, but I think I’m right.)
(Edited to fix typo)
by No_Carob2670
3 comments
If your friend is a Japanese tax resident at the time of her mother’s passing, a trust will not save her from owing Japanese inheritance tax. Also, you still owe the tax even if you don’t bring the funds to Japan. Keeping them in the US does not remove the need to pay inheritance taxes.
She could leave Japan before her mother dies (not an easy thing to know ahead of time, because one can always die randomly in a car accident or something), and then not come back for a while, but otherwise… she will owe inheritance tax to Japan. She wouldn’t need to leave for 10 of 15 years though, just before her mother actually dies. The tail requirements were changed a few years ago I believe.
Personally, I’ve just accepted I’ll owe inheritance taxes to Japan when that time comes and that it’s part of the deal of living in Japan.
[deleted]
There are plenty of online resources which might help to open your friend’s eyes and maybe convince her to get a consultation with a Japanese estate lawyer.
Here’s one example: [Navigating United States–Japan Estate Planning](https://www.foster.com/assets/htmldocuments/pdfs/Navigating%20United%20States%20-%20Japan%20Estate%20Planning_Suzuki.pdf). I copied a relevant excerpt below, but it’s worth reading the entire article.
>Taxation of trusts. Trusts don’t create any tax advantages under the Japanese inheritance and gift tax laws. The trust is essentially ignored for tax purposes, and the trust beneficiary is taxed as if he received the assets outright, even if he never gains unfettered access to the principal. If the trust has multiple discretionary benefi- ciaries, the situation is problematic because the tax laws aren’t clear on how the tax will be allocated. There’s no “sheltering” of the decedent’s inheritance tax exemption (as in the typical spousal trust planning in the United States) because when the income beneficiary dies, the trust assets are treated as passing from the income beneficiary to the remainder beneficiary. Thus, the trust assets received by the remainder beneficiary are, once again, subject to the inheritance tax.
>In fact, in a blended family situation, the trust can actually increase the tax burden because of the 20 percent surcharge mentioned above. Suppose Harry leaves everything in trust for his wife Wendy’s lifetime, with the remainder to pass to Harry’s child from a prior marriage. When Wendy dies, the trust assets are considered to pass from Wendy to the stepchild. Because there’s no blood relationship between Wendy and the stepchild, the 20 percent surcharge applies. In contrast, if the assets pass directly from Harry to his child, the surcharge doesn’t apply.
I’m still learning about this stuff myself, so I probably can’t answer specific questions about this article. But feel free to ask anyway and hopefully others can answer.