U.S. Estate Tax and Estate Tax Treaties

U.S. Federal Estate Tax

If a Japanese national domiciled in Japan and a Japanese citizen dies leaving property in the U.S., U.S. federal estate tax and state estate tax may be imposed.

U.S. Federal Estate Tax Basis

The U.S. federal estate tax exemption for non-U.S. citizens is currently $60,000. Therefore, as a general rule, if you have property in excess of $60,000 (total value of apartments, deposits, stocks, cars, etc.), you are liable for estate tax. In addition to deposits and other assets deposited in U.S. banks, shares issued by U.S. companies and interests in funds organized in the U.S. are also considered property in the U.S. This does not differ even if the bank passbook, stock certificates, or deeds were kept in Japan.

Application of Inheritance Tax Treaties

Currently, the United States has concluded estate tax treaties with 17 countries. Japan is one of these countries, so Japanese citizens are treated in the same manner as U.S. citizens when they die. As a result, Japanese citizens are entitled to the same $11.4 million tax deduction for federal estate tax as U.S. citizens (as of 2019). $11.4 million is not a deduction of $11.4 million from the assessed value of the estate, but a deduction of $11.4 million from the amount of estate tax imposed on property located in the United States.

U.S.-Japan Estate Tax Treaty Article 4

However, for U.S. citizens, the $11.4 million deduction is allowed from the amount of estate tax assessed on all property subject to inheritance, whereas for Japanese nationals with property in the U.S., the federal estate tax is assessed only on the property located in the U.S. Therefore, if the entire $11.4 million deduction were allowed from the federal estate tax on U.S. property owned by Japanese nationals, the deduction for Japanese nationals would be too much larger than that for U.S. citizens. Therefore, the deduction from the U.S. federal estate tax is calculated by multiplying $11.4 million by the ratio of property located in the U.S. to property located throughout the world. In other words, it is calculated by $11.4 million x (the value of the estate located in the U.S.) / (the value of the estate located worldwide). For example, if the estate in the U.S. is 100 million yen and the value of the estate worldwide (including the estate in the U.S.) is 1 billion yen, the amount of tax to be deducted would be $11.4 million x 100 million yen / 1 billion yen = $1.14 million. Since the property in the U.S. is 100 million yen, even if the estate tax were 40% (40 million yen) of the value of the property in the U.S., it would still be less than the tax credit amount of $1.14 million, so the tax payable in the U.S. would be zero.

Federal Estate Tax Filing Requirements

If you wish to take the $11.4 million credit for federal estate tax in the U.S., you must file a federal estate tax return within 9 months of the decedent’s death. In doing so, you must report not only estates located in the U.S., but also estates located throughout the world. Not filing a return does not automatically entitle you to the $11.4 million deduction. Many Japanese individuals may not be allowed this special deduction without filing a return.

State Estate Tax Filing Requirements

As with federal estate tax, state estate tax returns must be filed. However, since each state has its own basic exemption amount for state estate tax, the tax is imposed only if the estate in excess of that amount is located in that state. Therefore, it is necessary to determine the assessed value of the property in each state and to check the basic exemption amount in each state. In addition, with respect to state estate taxes, savings, stocks, and investments (investment securities) may not be considered located in a state and therefore not subject to state estate taxes.

Possibility of Double Taxation

Japanese nationals domiciled in Japan are considered unlimited taxpayers, so they are required to file an estate tax return for property located in Japan as well as for property located abroad. On the other hand, in the U.S., if the decedent is neither a U.S. citizen nor a resident of the U.S., only property located in the U.S. is subject to U.S. estate tax. Thus, if a Japanese resident in Japan dies leaving property in the U.S. and has heirs in Japan, the property located in the U.S. will be subject to double taxation in Japan and the U.S. Similar situations may arise in other countries as well.

Article 20-2 of the Estate Tax Law

Article 20-2 of the Japanese Estate Tax Law provides for the avoidance of double taxation. Article 20-2 of the Japanese Estate Tax Law provides as follows:
In the case where a person has acquired property outside the place of enforcement of this Act by inheritance or bequest, and a tax equivalent to Estate tax has been imposed on the property under the laws of the place of acquisition, the person who has acquired the property shall be taxed on the amount calculated pursuant to Article 15 through the preceding Article less an amount equivalent to the amount of tax so imposed.

Credit for estate tax paid in the U.S.

Accordingly, the estate tax paid in the U.S. will be deducted from the amount of Estate tax payable in Japan. However, Article 20-2 of the Estate Tax Act only provides for a credit for estate tax paid in the U.S. This does not mean that a tax return may not be filed in the U.S. It only means that once the estate tax is paid in the U.S., the amount can be deducted from the Japanese tax.