Milestone for US-Japan Estate Planning

1. MilestoneforUS-JapanEstatePlanning September 19, 2019 STEP Mid Atlantic branch Hitomi Sakai Counsel, City-Yuwa Partners, Tokyo Japan (TEP, STEP Hong Kong Branch)

2. Contents • Japanese Inheritance Law Basic • Japanese Tax Law Basic • Learn from the Experience • Question Time

3. Japanese Inheritance Law Basic • No probate in Japan • No 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.

4. 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!

5. Japanese Inheritance Law Basic • Forced Heirship • Japan 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

6. Japanese Inheritance Law Basic Intestacy Distribution Rules in Japan (when there is a spouse)

7. Japanese Inheritance Law Basic Forced Heirship Shares

8. Japanese Inheritance Law Basic • Dead Hand Control is defeated by Estate Distribution Agreement • Testator’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”.

9. Japanese Inheritance Law Basic • Trust in Japan • Japan 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.

10. Japanese Inheritance Law Basic • US Will v.Japanese Will • Strongly 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.

11. 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.

12. 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.

13. 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

14. Japanese Inheritance/Gift Tax Inheritance Tax

15. Japanese Inheritance/Gift Tax GiftTax

16. Japanese Inheritance/Gift Tax • Basicexclusion • JPY30M + (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)=JPY54M

17. 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.

18. Japanese Inheritance/Gift Tax • What is Jusho? • Principal place of living under Japanese Civil Code • Determined 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.

19. Japanese Inheritance/Gift Tax • Impact of 2017 Tax Reform • Japanese 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.

20. 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 exposure

21. Chart Scope to Japanese Inheritance and Gift Taxation

22. 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.

23. 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.

24. 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 bonds • Corporate bonds; • Unsettled credit transactions and unsettled derivative transactions, etc.

25. 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 leaving • There is a grace period for foreigners

26. US－JapanEstate, Inheritance Gift Tax Treaty • Japan has an Estate, Inheritance Gift Tax treaty only with the US • Rules of situs of certain classes of assets. • Pro-rata Portion of Applicable Credit Amount.

27. 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 trust • Reason 2: Surprising Japanese tax exposure by transfer through the trust.

28. Learn from the Experience • Be aware when your client or you intend to include Japanese assets into the US trust! • JapaneseassetsaresubjecttoJapaneseinheritance/gifttax. • Legal Affairs Bureau is suspicious about foreign trust. Substantial time and cost is necessary.

29. Learn from the Experience • Be aware of Japanese forced heirship rights when US citizen client has domicile in Japan or real property in Japan. • JapaneseassetsaresubjecttoJapaneseinheritance/gifttax. • Legal Affairs Bureau is suspicious about foreign trust. Substantial time and cost is necessary.

30. 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.

31. Thank you! Hitomi Sakai Counsel, City-Yuwa Partners Marunouchi Mitsui Bldg. 2-2-2 Marunouchi Chiyoda-ku 100-0005 Tokyo, Japan E: hitomi.sakai@city-yuwa.com T: 81-3-6212-5582 F: 81-3-6212-5700