Japanese Inheritance Tax vs. US Estate Tax (2011 Update)

BRIEF OVERVIEW OF
JAPANESE INHERITANCE AND GIFT TAXES
vs.
AMERICAN ESTATE AND GIFT TAXES

(2011 Update)

NOTE: This information has been updated. The new post can be found at: http://willstrustsestates.blogspot.com/2014/08/japanese-inheritance-tax-vs-us-estate.html

I. Estate Taxes

A. America

1. Citizens and Permanent Residents

a. Tax on Worldwide property (credit for taxes paid to foreign countries)
b. Exemption of $5,000,000 in 2011 and 2012 (theoretically back to $1,000,000 in 2013 if no change to Federal Estate Tax). For married couples, the exemption amount is $10,000,000 as a result of portability.
c. Tax of 35% on amount over $5,000,000
d. Unlimited Marital Deduction for Surviving Spouse if Surviving Spouse is a citizen

2. Non-Citizens/Non-Permanent Residents

a. Tax only on Real Property and business interests in the United States (Cash in foreign banks and foreign stocks are not taxed)
b. Exemption of $13,000
c. Tax of between 18%-35% on amount over $13,000
d. Unlimited Marital deduction if Surviving Spouse a citizen

B. Japan (Actually an Inheritance tax, not an estate tax)

1. Japanese Citizens and Permanent Residents

a. Exemption of ¥50,000,000 + (¥10,000,000 for each statutory heir); Possible additional exemption for insurance money, retirement savings, and money left to handicapped individuals
b. Additional exemption for life insurance received of ¥5,000,000 multiplied by the number of statutory heirs
c. Tax between 10%-50% for statutory heirs; Tax between 30% to 70% for everyone other else (except charities);
d. For property outside of Japan, a beneficiary that acquires property will be subject to Japanese inheritance tax if the beneficiary is a Japanese national and the beneficiary was domiciled in Japan at any time during the five years preceding the receipt of the inheritance.
e. A surviving spouse is entitled to a tax deduction. This is a complex formula based upon who is living at the time of the Decedent's death and where the money goes. Generally, a surviving spouse can deduct about 1/2 to 2/3 of the tax.

2. Non-Citizens/Non-Permanent Residents

a. If beneficiary is not Japanese and not living in Japan and property is not in Japan, appears Country where property located will tax such property.
b. If there is a tax, it appears a surviving spouse is entitled to the same marital tax deduction as for Japanese citizens.

II. Gift Taxes

A. America

1. Citizens and Permanent Residents

a. Tax on all gift transfers of Worldwide property
b. Annual exemption of $13,000 per person/per donee (unlimited gifts for donees if different donors)
c. An annual gift to a non-citizen, permanent resident spouse, of $136,000 is available.
d. Lifetime exemption of $5,000,000 (for years 2011 and 2012)
e. Gifts may be split with spouse
f. Tax rate of 35% if lifetime gifts exceed $5,000,000

2. Non-Citizens/Non-Permanent Residents

a. Tax on all gift transfers of US Property (including Cash and Stocks in US companies)
b. Annual exemption of $13,000 per person/per donee (unlimited gifts for donees if different donors)
c. No Lifetime exemption
d. Gifts may be split with spouse
e. Tax rate of 18%-35% if lifetime gifts exceed $13,000

B. Japan (Rates between 10%-50%)

1. Citizens and Permanent Residents of Japan

a. Annual exemption of ¥1,100,000 for each beneficiary (beneficiary taxed after this)
b. One time spouse exemption of ¥20,000,000
c. For property outside of Japan, a donee that acquires property will be subject to Japanese gift tax if the donee is a Japanese national and the donee was domiciled in Japan at any time during the five years preceding the receipt of the gift.

2. Non-Citizens/Non-Permanent Residents

a. Annual exemption of ¥1,100,000 for each beneficiary(unclear – enforcement is almost impossible)

III. Generation Skipping Taxes (Taxes on gifts or bequests to grandchildren)

A. America

1. Exemption of $5,000,000 in 2011 and 2012 (theoretically a return to a $1,000,000 exemption in 2013, but indexed for inflation)
2. Tax of 35% on rest

B. Japan

1. None

For more information on Japanese taxes, the Japanese government has a nice website in English with some helpful facts. This is a link directly to the inheritance tax information:
http://www.mof.go.jp/english/tax_policy/publication/taxes2010e/taxes2010e_d.pdf
It is worthwhile reading the Japanese publication if you have business interests in Japan or if one of other special circumstances (like a handicapped heir) as there are many credits available.

Income Tax Consequences of Expatration

In this down economy, many companies are laying off employees. While this could be deeply troubling for those who get laid off, imagine if you were also subject to a huge income tax penalty as a result. This could be happening to you now if you are a permanent resident alien who decides to leave America after losing your job.

In 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act. This ironically named Act was designed to prevent wealthy people from leaving the United States before paying what Uncle Sam thinks they owed.

The Heart Act applies to citizens and permanent resident aliens who meet certain income and asset requirements. These individuals are known as "Covered Expatriates". To see who exactly Covered Expatriates are, read here.

The Heart Act created Section 877A of the Code. Section 877A takes a snapshot of your assets the day before you expatriate. Then, on the day you expatriate, you are then immediately taxed on the net built in gain which is in excess of $600,000 (indexed for inflation - so this amount is $627,000 in 2010). So, if you are a Covered Expatriate and own several real estate properties with built in gain of $1,000,000, there would be a deemed gain of $363,000, and you would have to pay a tax on that gain.

In the case of an IRA, but not most other retirement accounts, expatriates are also deemed to have received a distribution equal to their entire interest. Luckily, there is no early distribution penalty unless you actually do take the money out early. For most qualified and non-qualified retirement accounts, the IRS will continue their existing practice of requiring the employer to withhold 30% when the money is actually distributed from the account.

Perhaps the only positive feature of this law for those affected is that it does allow certain taxpayers to defer making payments on their tax obligations.

Note: There is an open question about whether Section 121 of the Code, which allows a capital gains tax exclusion on sale of primary residence, still applies to Covered Expatriates. It would probably be advisable to sell your primary residence before expatriating to avoid this issue and also to avoid having to obtain a valuation report for the property.

Is there a Federal Inheritance Tax?

It's true. Most people think that the United States only has a federal estate tax (and yes, I know that technically there is no federal estate tax this year). However, the United States also has an inheritance tax that taxes certain inheritances that are received by United States citizens and permanent resident aliens if the inheritance came from a "Covered Expatriate". To see who exactly a Covered Expatriate is, see my article here.

Moreover, the inheritance tax can be an extremely expensive tax as it is taxed at the highest federal gift or estate tax rate. Currently the highest rate is 35%, but this could potentially go as high as 50% after 2010. Unlike the estate tax, which has a large exemption amount (i.e. you can pass on a lot of money before the tax hits), the inheritance tax exemption amount is minimal. You can only pass on an amount equal to the maximum amount that a person can gift annually under Section 2503(b) of the Internal Revenue Code, currently $13,000.

The federal inheritance tax became law when the Heart Act was passed in 2008. The Heart Act created Section 2801 of the Internal Revenue Code to try to collect a tax on the inheritance that United States persons received from wealthy relatives who had fled the United States for tax avoidance reasons.

Since this is an inheritance tax, the tax is paid by the recipient, not the estate. This was done for jurisdictional reasons. It should be noted, however, that the recipient of the inheritance can receive a credit if an estate or inheritance tax was paid in another jurisdiction.

Spouses and charities are specifically exempt from paying this tax, so this tax is mainly going to apply to the children of wealthy parents who have expatriated from America. Due to the number of permanent resident aliens who are returning to their native country in this economy, and leaving adult children in America, it may actually affect a lot of people.

It should be noted that you can not simply get around this tax by giving money to a trust (foreign or domestic). Moreover, indirect gifts and bequests will also be taxed. It is a far reaching act that can also have massive income tax repercussions. To see more about this, read Income Tax Consequences of Expatriation.

If you are thinking about expatriating from the United States, there is some planning that can be done to avoid being treated as a Covered Person. At a minimum, there is planning that you can do to lessen the tax burden.