Japanese Inheritance Tax vs. US Estate Tax (2014 Update)

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

(2014 Update)

I. Estate Taxes

A. America

1. If the Decedent is a Citizen or Permanent Resident

a. Tax on Worldwide property (credit for taxes paid to foreign countries)

b. Exemption of $5,340,000 in 2014 (indexed for inflation). For married couples, the exemption amount is $10,680,000 as a result of portability.

c. Federal Estate Tax of 40% on amount over $5,340,000

d. Unlimited Marital Deduction for Surviving Spouse if Surviving Spouse is a citizen

2. If the Decedent is a Non-Citizen/Non-Permanent Resident

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 $60,000 for US based Assets

c. Tax of between 18%-40% on amount over $60,000

d. Unlimited Marital deduction if Surviving Spouse a citizen
e. Tax on bequest to surviving spouse can be delayed by creating a Qualified Domestic Trust

3. If the Decedent is not a United States Citizen or permanent resident alien, assets outside of the US can pass to a US person with no US estate tax.

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

1. Japanese Citizens and Permanent Residents

a. Tax on Worldwide property (credit for taxes paid to foreign countries) - [NOTE - this is new for 2013, previously Japan did not tax worldwide assets] 
b.  Exemption of ¥30,000,000 + (¥6,000,000 for each statutory heir); Possible additional exemption for insurance money, retirement savings, and money left to handicapped individuals [NOTE - this is a reduction from the previous exemption of ¥50,000,000 and ¥10,000,000 per statutory heir.]

c. Additional exemption for life insurance received of ¥5,000,000 multiplied by the number of statutory heirs

c. Until December 31, the highest tax rate is 50%.  Effective January 1, 2015, tax between 10%-55% for statutory heirs (spouse, children and parents) after you go over the exemption amount;

• Up to ¥10 million 10%
• Above ¥10 million up to ¥30 million 15%
• Above ¥30 million up to ¥50 million 20%
• Above ¥50 million up to ¥100 million 30%
• Above ¥100 million up to ¥200 million 40%
• Above ¥200 million up to ¥300 million 45%
• Above ¥300 million up to ¥600 million 50%
• Over ¥600 million 55% 

d. An additional 20% surcharge for everyone other else other than charities (this does include a surcharge on gifts to grandchildren);

e. For property outside of Japan, a beneficiary that acquires property will be subject to Japanese inheritance tax. (THIS IS A MAJOR CHANGE, prior to April 1, 2013, Japan did not tax gifts or inheritance of property outside of Japan received by non-Japanese nationals.)

f. 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. I'm currently double checking to see if the Beneficiary is a Japanese Domiciliary whether Japan CAN tax inheritance regardless of where Decedent lived and regardless of where assets are located (subject to tax treaties)

c. If there is a tax, it appears a surviving spouse is entitled to the same marital tax deduction as for Japanese citizens.

3. Real estate acquisition tax is exempt if passing by bequest.  There is a registration and license tax at the rate of 0.4% of the assessed value of the land and building. (currently reduced?)

II. Gift Taxes

A. America

1. Citizens and Permanent Residents

a. Tax on all gift transfers of Worldwide property

b. Annual exemption of $14,000 per person/per donee (unlimited gifts for donees if different donors)

c. An annual gift to a non-citizen, permanent resident spouse, of $145,000 is available.

d. Lifetime exemption of $5,340,000

e. Gifts may be split with spouse

f. Tax rate of 40% if lifetime gifts exceed $5,340,000

2. Non-Citizens/Non-Permanent Residents

a. Tax on all gift transfers of US Property (including real estate and Stocks in US companies)

b. Annual exemption of $14,000 per person/per donee (unlimited gifts for donees if different donors)

c. Annual gift tax exemption if gift to a spouse of $145,000 (Note that a person can gift more to a spouse than they can bequest to a spouse)

c. No Lifetime exemption

d. Gifts may not be split with spouse

e. Tax rate of 18%-40% if gifts exceed $14,000

B. Japan (Rates between 10%-55%)

1. Citizens and Permanent Residents of Japan

a. Tax on gifts of property Worldwide (credit for taxes paid to foreign countries) - [NOTE - this is new for 2013, previously Japan did not tax gifts worldwide assets to certain people] 

a. Annual exemption of ¥1,100,000 for each beneficiary (beneficiary taxed after this)

b. One time spouse exemption of ¥20,000,000

c. Effective January 1, 2015, tax between 10%-55% for statutory heirs (spouse, children and parents) after you go over the exemption amount;

• Up to ¥2 million 10%
• Above ¥2 million up to ¥4 million 15%
• Above ¥4 million up to ¥6 million 20%
• Above ¥6 million up to ¥10 million 30%
• Above ¥10 million up to ¥15 million 40%
• Above ¥15 million up to ¥30 million 45%
• Above ¥30 million up to ¥45 million 50%
• Over ¥45 million 55% 
• The threshold is lower for gifts to other individuals.

d. For property outside of Japan, a donee that acquires property will be subject to Japanese gift tax.  (THIS IS A MAJOR CHANGE, prior to April 1, 2013, Japan did not tax gifts or inheritance of property outside of Japan received by non-Japanese national.)

2. Non-Citizens/Non-Permanent Residents

a. Annual exemption of ¥1,100,000 for each beneficiary(unclear – enforcement is almost impossible)
b. Japan will tax donees who live in Japan.

3. Special real estate acquisition tax of 4% (currently reduced?) in addition to a registration and license tax at the rate of 2% of the assessed value of the land and building.

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

A. America

1. Exemption of $5,340,000 (indexed for inflation)
2. Tax of 40% on rest

B. Japan

1. None

Remember, there is an estate and inheritance treaty between the United States and Japan to minimize double taxation of assets on death if you own assets in both countries or are a resident of one living in the other country

For more information on Japanese taxes, the Japanese government has a website in English with some helpful facts, but it is now very outdated. 

I am not licensed to practice in Japan, this is just my understanding of Japanese gift and inheritance tax law that I can gather from sources which are written in English.

NOTE- Major rewrite on 9/12/14 to address changes in rates and fact that assets outside of Japan are now subject to Japanese inheritance and gift tax.

Who exactly is a Covered Expatriate?

In 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act. One of the major provisions of the Heart Act was to collect substantial taxes from certain United States taxpayers (whether a citizen or a permanent resident alien) who expatriated from the United States after June 16, 2008. The individuals that this law applies to are known as "Covered Expatriates."

There can be harsh federal income tax and federal inheritance tax consequences if you are deemed to be a Covered Expatriate.

A person is considered a Covered Expatriate if he or she:
1) is a US citizen who renounced his or her citizenship OR a permanent resident alien who relinquishes his or her status after being a permanent resident alien for 8 of the last 15 years; AND
2) has had an average annual net income tax of more than $124,000 ($136,000 adjusted for inflation) in the preceding five years OR has a net worth equal to or more than $2,000,000 OR such person fails to certify, under penalty of perjury, that he or she has met the income and asset requirements.

Additionally, this statute does not apply to dual citizens who became a citizen of the United States by birth, but have never had substantial contacts with the United States. A person is considered to have substantial contact with the United States if he or she was ever a resident of the United States, ever held a passport OR was present in the United States for more than 30 days during any calendar year 10 years prior to the person giving up their United States citizenship. There is a slight variation on this rule for dual citizens who give up their US citizenship prior to age 18 and 1/2.

To learn more about who is a Covered Expatriate, wee Internal Revenue Code Section 2801 and Section 877A(g)(1).

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.

Gifting to US residents - who pays the gift tax?

I am frequently asked some variation of this question: "My father is a citizen of country X, and wants to make a gift to me. Is there any tax?"

I then get to give a lawyer's favorite answer. It depends.

It depends:

1. Where is the person making the gift (the "Donor") domiciled?
2. What is the citizenship of the donor?
3. Is the donor a permanent resident alien of the US?
4. Where is the person receiving the gift (the "Donee") domiciled?
5. What is the citizenship of the donee?
6. How much is being transferred?
7. Is it being transferred all at once, or over time?

Is it real estate, stock or some other type of property?

If it is real estate or stock, where is it located?

As a general rule: If the donor is a US citizen or a permanent resident alien, then the gift is subject to US tax laws. It will then be considered a taxable gift if it exceeds the annual exclusion amount. As of 2009, this is $13,000. If the donor is neither a US citizen nor a permanent resident alien, and the gift is being made from assets outside of the US, then US tax law will not apply. In such a case, we must look to the citizenship and domicile of the donor and donee plus we must look where the property is located to determine which tax law applies.

There is a special rule for real estate and stock. This is a three step process:

1. If the real estate or stock is located in America, it is subject to US gift tax regardless of where the donor or donee live.
2. If the real estate or stock is not located in America, we must then determine the whether there is a gift tax treaty with the country where the property is located and the Donor and/or the Donee. If there is a treaty, gifts of real property are usually governed by the law of the country where the property is located, regardless of the citizenship of the donor or donee.
3. However, if the property is located outside of the US, and there is no treaty, or if the treaty is silent regarding taxing rights, then it gets to be much trickier and no rule can suffice. A knowledgeable attorney and tax adviser must look at the laws relevant to the donors, donees and property to determine which country's tax laws apply. Keep in mind, more than one country might have the right to tax this transaction.

For example, let's say a Japanese national wishes to make a cash gift ¥11,100,000 (or about $110,000) to her daughter who lives in America, then Japan has a right to tax this gift. Under Japanese law, a person receiving the property (the donee) will be taxed on the transfer. (Note: I am assuming the daughter is still a Japanese citizen) A gift of this amount would be entitled to a tax exemption of ¥1,100,000 and the remaining ¥10,000,000 would be subject to a tax of ¥2,750,000 (or about $27,000).

Another example would be where a citizen of India makes a gift of US real estate to their child in America. Since the property is in the US, and there is no gift tax treaty between the US and India, the United States has the sole right to tax this gift. If the house was worth $263,000, then $13,000 of the gift would be tax free. The remaining $250,000 will be subject to a US gift tax of over $70,000. See Section 2511 of the Internal Revenue Code. (In this case, although a donor is normally responsible for the tax, the donee will become responsible as the US does not have the right to collect from a citizen of India. However, if the donee does pay the tax, it will be considered another taxable gift.)

The bigger the gift, the harder it is to completely eliminate the tax. However, regardless of which country has the legal authority to tax the gift, most gifts can be structured in ways to reduce or eliminate the taxes with proper planning.

Gift planning can be especially valuable if the donor is over the estate or inheritance tax threshold in the United States or the donor's home country. By making planned gifts, this reduces the overall tax and could save anywhere from 5 cents on the dollar to 55 cents on the dollar.

Most of the planning can be done with little cost or no cost. Feel free to contact us if you would like more information.

Estate Planning for Americans with Assets in India

New Jersey is a fairly diverse state, and I find that more and more of my clients are of Indian heritage. So, as with many of the items I write on this blog, I thought I would share some of the advice that I regularly give clients on this topic:

1) India does not have an estate or an inheritance tax;

2) There is no treaty with respect to the US and India on Estate and Inheritance Taxes;

3) As a US citizen, all of your assets, worldwide, will be subject to an estate tax;

4) If you are also a NJ domiciliary; all of your assets in NJ will be subject to both NJ Estate and Inheritance taxes.  Note, New Jersey also has the right to tax some worldwide assets for estate and inheritance tax purposes);

5) There IS a treaty between the US and India with respect to income taxes (see: http://www.unclefed.com/ForTaxProfs/Treaties/india.pdf) Tax returns need to be coordinated and you will receive a deduction for income taxes paid in India. This may still result in higher taxes as you must report income on worldwide profits.

6) You can do planning to minimize the estate tax burden.

Japanese Inheritance Tax vs. US Estate Tax

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

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 $2,000,000 in 2006; $3,500,000 in 2009; unlimited in 2010; and back to $1,000,000 in 2011)
c. Tax between 18%-46%
d. Unlimited Marital Deduction for Surviving Spouse if a citizen

2. Non-Citizens/Non-Permanent Residents

a. Tax only on Property in the United States (Cash in foreign banks and foreign stocks are not taxed)
b. Exemption of $13,000
c. Tax of between 18%-49% on rest
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. Tax between (10%-50%)
c. 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.
d. 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 (18%-46%)

1. Citizens and Permanent Residents

a. Tax on all gift transfers of Worldwide property
b. Annual exemption of $12,000 per person/per donee (unlimited gifts for donees if different donors)
c. An annual gift to a non-citizen, permanent resident spouse, of $120,000 is available.
d. Lifetime exemption of $1,000,000
e. Gifts may be split with spouse

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 $12,000 per person/per donee (unlimited gifts for donees if different donors)
c. No Lifetime exemption
d. Gifts may be split with spouse

B. Japan (10%-50%)

1. Citizens and Permanent Residents

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. Approximately $2,000,000 in 2006 is exempt; $3,500,000 in 2009 is exempt; there is no GST tax in 2010; $1,000,000 exemption in 2011 (but indexed for inflation)
2. Tax of 55% 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/taxes2006e_d.pdf

(Revised on 2/2/09 to correct Japanese tax rates)