Inheritance in California
California Inheritance Procedures
When a Japanese person domiciled in Japan dies leaving property (condominium, bank deposits, etc.) in California, the estate cannot be freely divided among the heirs alone, even if the heirs or decedents are Japanese. If a relative dies in Japan and in the process of inheriting his/her estate, it is discovered that the deceased had bank deposits or real estate in California, it is necessary to confirm whether it is necessary to take probate procedures (a method of appointing an executor or administrator of the estate and having them administer and dispose of the inherited property). In addition, there are differences in the scope of heirs and the legal portion of inheritance between California law and Japanese law. The conclusion will differ depending on whether Japanese law or California law is applicable.
Determination of Governing Law
With regard to inheritance in California, it is necessary to consider which country’s law will apply to real estate (land and buildings), personal property, bank deposits, and securities. This is the issue of determining the governing law.
Governing law based on domicile
Under Japanese private international law, the governing law regarding inheritance is the law of the decedent’s home country (Article 36 of the Act on General Rules for Application of Laws). Therefore, Japanese law is applicable to inheritance in the case of the death of a Japanese national. Japanese law refers to the Japanese Civil Code, and based on Japanese private international law, the provisions of the Japanese Civil Code will apply to who the heirs will be, what the share of inheritance will be, waiver of inheritance, and intestate succession. In contrast, California private international law focuses on the domicile of the decedent, and the law of the country where the domicile is located is the governing law and jurisdiction for the administration and succession of the decedent’s property. A domicile is a place of permanent residence with the intent to reside. A US citizen who resides in Japan with the intent to reside in Japan is considered to have a domicile in Japan. In addition, Japanese nationals residing in Japan will have domicile in Japan. Therefore, for Japanese nationals residing in Japan and U.S. citizens residing in Japan, the domicile is in Japan, and Japanese law will apply. On the other hand, Japanese nationals residing in California, even if they are Japanese nationals, are considered to have domicile in California, and the laws of California may apply to their inheritance.
Inheritance Division Principle
Under Japanese private international law, if the decedent’s domicile law is Japan, Japanese law is the governing law for all inheritances (unification principle of inheritance). In contrast, California private international law takes the division of inheritance principle, which means that for real estate (land, buildings, apartments, condominiums), the law of the location of the property is applicable, regardless of the domicile of the decedent. As a result, if a Japanese person owned real estate in California, the inheritance laws of California would apply to the inheritance of said real estate. Conversely, if an American living in California owned real estate in Japan, Japanese inheritance law would apply to the inheritance of the real estate located in Japan. In contrast, for personal property and liquid assets (deposits, cash, stocks, and personal possessions), the inheritance laws of the domicile the individual held at the time of death will apply. If the decedent is a Japanese national residing in Japan, the domicile is located in Japan, so the inheritance laws of Japan will apply. As a result, if a Japanese individual residing in Japan dies leaving a condominium and a bank deposit in California, California law will apply to the scope of heirs and the portion of inheritance with respect to the condominium, whereas Japanese law will apply to the scope of heirs and the portion of inheritance with respect to the bank deposit.
When an agreement of partition of the estate has been made
If a Japanese national residing in Japan dies leaving property in Japan and California, according to the Japanese common law, Japanese law, the law of the decedent’s home country, will apply to all inheritances. On the other hand, as mentioned above, under California Private International Law, the law of California is the governing law for real estate located in California, while the law of the place where the decedent’s domicile is located is applicable to movable property and liquid assets. So, because of the different approach to governing law regarding inheritance, the question arises as to which law will ultimately apply. First, with regard to real property located in California, even if the heirs wanted to go to California to conduct the sale process, they would not be able to prove that they have the authority to administer and dispose of the inherited property, so they would ultimately have to file a petition for probate in a California court and the estate will need to appoint an administrator of the estate. Therefore, it will need to file a petition for administration of the estate with the California courts but in this case, the California courts will apply California private international law. As a result, the issue of who the heirs are and each heir’s legal share of the inheritance of this condominium will be determined by the laws of the State of California. However, if all of the heirs have signed a written agreement to divide the estate and stipulate the method of division, the California court is likely to recognize the inheritance by the written agreement. As a result, if an agreement on the division of the estate has been reached among all the heirs, whether the governing law will be California or Japanese law will not be a major issue. On the other hand, if there is a dispute among heirs regarding inheritance, California courts will be forced to apply California law.
Heirs and Division of Inheritance under California Law
If the decedent left a will, the estate will be divided according to the terms of the will. California law does not have a system of intestate succession. If the decedent did not leave a will, the legal heirs under California law will inherit in accordance with the inheritance shares set forth in California law (Probate Code). The legal share of inheritance will differ if the decedent has a surviving spouse or not.
(1) If the decedent has a spouse (Probate Code § 6401)
(i) If the decedent has neither children nor parents
The decedent’s spouse inherits 100%.
(ii) If the decedent has one child
Community property is wholly acquired by the spouse. The spouse gets one-half of the separate property, and the children get the remaining one-half.
(iii) If the decedent has two or more children
Community property is acquired entirely by the spouse. The spouse gets one-third of the separate property, and the children equally get the remaining two-thirds.
(iv) If the decedent has no children but has parents.
Community property is acquired entirely by the spouses. The spouse gets one-half of the separate property, and the parents get the remaining one-half.
(v) If the decedent has neither children nor parents, but has siblings
Community property is acquired entirely by the spouse. The spouse gets one-half of the separate property, and the siblings get the remaining one-half.
*Community property is property acquired during the marriage or common-law relationship. Everything owned by spouses or common-law partners together usually qualifies as community property. This includes debts. However, property acquired by one spouse by gift or inheritance during the marriage or common-law relationship is not included. Community property, including debts, is shared in half by the husband and wife (or common-law partner).
*In contrast, separate property (pecuniary property) is property that was acquired prior to the marriage or common-law relationship. Inherited or gifted property that accrued to a spouse or common-law partner during the marriage or common-law relationship is separate property. Debts, profits, and other monies derived from separate property are also separate property. Separate property is the personal property of the acquirer.
(2) If the decedent has no spouse (Probate Code Article 6402)
(i) If the decedent has children.
The decedent’s children inherit.
(ii) If the decedent has no children and has parents
The decedent’s parents inherit.
(iii) When the decedent has neither children nor parents
The decedent’s brothers and sisters inherit.
(iv) When the decedent has no children, parents, or siblings
The grandparents of the decedent shall inherit.
(v) If the decedent has no children, parents, siblings, or grandparents
Lineal descendants of the decedent’s grandparents inherit.
California Probate Procedure
The probate procedure for a Japanese person domiciled in Japan who dies leaving property (condominium, condominium, bank deposits, etc.) in California differs depending on whether the decedent has a will or no will. If the decedent had a will, the petitioner files a petition with the court for the appointment of an executor through the Probate process, and the court makes a decision to appoint an executor in response to the petition. The decision to appoint an executor is called Grant of Probate. If the decedent did not leave a will, the estate administration procedure is where the petitioner petitions the court to appoint an administrator of the estate, and the court issues a decision to appoint an administrator. The decision to appoint an administrator is called Grant of Letters of administration. The court’s decision, Grant of Probate and Letters of administration, are sometimes combined and referred to as the Grant of Representation. Once this decision is issued, the executor or administrator has formal authority over the administration and disposition of the estate.
Role of the Court in Probate Proceedings
In probate proceedings, the court (i) determines the existence and validity of the will, (ii) ascertains the heirs and beneficiaries of the estate at the time of inheritance, (iii) ascertains the value of the decedent’s property, and (iv) performs the procedures for distributing the decedent’s property to the heirs and successors. The executor or administrator of the estate, under the supervision of the court, carries out the procedures for collecting the decedent’s property, paying debts and expenses, and distributing the remaining property to the heirs and beneficiaries as the personal representative of the decedent. It can take from 9 months to 18 months, and sometimes longer, for the probate to be completed and the property to pass to the heirs. When carrying out the probate procedure, it is necessary to attach an apostille or English translation to the notarized will, family register, or other documents prepared in Japan in accordance with the court’s instructions. These procedures are quite complicated, so please contact our office for more details.
Application of the IAEA (the Independent Administration of Estates Act)
Court-provided probate procedures are time-consuming. In California, the IAEA (the Independent Administration of Estates Act) allows for the disposition of property without prior court approval. In order to be covered by the IAEA, the executor or administrator of the estate must file a petition expressly requesting that the IAEA apply to the estate. Once granted, the executor or administrator of the estate may sell property, pay taxes, and approve or deny creditor claims without the need to obtain permission or supervision from the Probate Court.
Spousal property petition
The estate of a surviving spouse or domestic registered partner may be confirmed and passed on to the spouse by filing a “spousal property petition” with the court. A spousal property petition must be filed with the probate court, but usually requires only one court hearing and is simpler and faster than the usual probate process. There is also no limit to the amount of property that can be transferred to a spouse or registered partner through this method.
Special Provisions for Small Amounts of Property
In California, the provate procedure can be skipped if the amount of property subject to the Provate is small. There are two ways to avoid the normal probate process for small amounts: Affidavit of Probate and Simplified Probate Procedures.
If the estate is $166,250 or less (including real property valued at $55,425 or less) The heirs may file an Affidavit of Probate instead of a Probate. The heirs execute an affidavit stating that they are eligible to succeed to the property. Upon receipt of the affidavit and a copy of the death certificate, the individual or bank or other financial institution holding the decedent’s assets releases the assets held. This program is not available for 40 days after the decedent’s death.
Simplified Probate Procedures
If the value of the estate is $166,250 or less, the “Simplified Probate Procedures” may be used in addition to the affidavit procedure. This procedure is also called summary probate. The heirs and beneficiaries file a written petition for simplified procedures with the court in the decedent’s domicile or the state in which the decedent’s estate is located, together with a copy of the will and the written consent of the executor. $166,250 of the estate is divided among the estate’s out-of-state California real property, joint tenancy property, property passing to the surviving spouse, life insurance, death benefits, and property not subject to probate passing to named beneficiaries, multiple party bank accounts and death benefit bank accounts, trailer homes, registered vessels, registered automobiles, up to $16,625 in salary, living trusts, including trusts, are deductible. There is also a 40-day waiting period for this process.
Real estate layaway
If the value of the decedent’s real and personal property is less than $20,000, the spouse or minor children may ask the court to “layaway” the property. This is much easier than a probate proceeding.
Joint Tenancy and Living Trusts
If the decedent owned property in the form of a joint tenancy, spousal co-ownership, or living trust, there is no need to go through probate for these estates. By proving joint tenancy, beneficial ownership of the trust, etc., a local attorney can be retained to immediately change the registered title of the property.
For California taxes, you will be required to file income tax and estate tax returns for personal income up to the date of death. If you are not a California resident, you do not have to pay California taxes on income from stocks, bonds, bills, and intangible personal property. If you receive income from the sale or purchase of real estate during the course of probate, this income is not included in your personal income until the date of your death, but you must file a separate estate income tax return and pay estate taxes. A separate taxpayer identification number will be obtained for the estate and used in lieu of the decedent’s Social Security number.
Filing an Estate Tax Return in Japan
In Japan, heirs are required to file an inheritance tax return within 10 months of the date of inheritance. According to Japanese law, the inheritance tax is imposed on the heirs upon the death of the decedent, who in principle inherits the decedent’s property in a comprehensive manner. If the decedent had a condominium or bank deposits in California, these condominiums and bank deposits must also be declared as part of the inherited property and an inheritance tax return must be filed in Japan. The Japanese heirs are unlimited taxpayers, so the condominium and bank deposits in California are also subject to Japanese inheritance tax.
U.S. Federal Estate Tax
On the other hand, two types of estate taxes must be paid on property located in the U.S.: federal estate taxes payable to the federal government and state estate taxes payable under state law. The Japanese and U.S. systems differ in that the U.S. estate tax is imposed on the estate, unlike the Japanese inheritance tax, which is imposed on the heirs.
U.S. Federal Estate Tax Subjects
For U.S. federal tax purposes, it does not matter whether the decedent or heir was a Japanese citizen or not, or whether the decedent or heir had a domicile in Japan at the time of death. Property located in the U.S. is subject to estate tax regardless of the nationality or address of the heir or decedent. If tangible property such as real estate (houses, apartments, condominiums) or personal property (cars, furniture, artwork) is physically located in the U.S., it is considered property in the U.S. In addition, securities such as bank deposits in U.S. financial institutions, shares issued by U.S. companies, and units in U.S. investment partnerships are considered property located in the U.S. for federal estate tax purposes and are subject to taxation. In contrast, whether state estate taxes are imposed varies from state to state. The deadline for filing a federal estate tax return is nine months.
Federal Estate Tax Deductions
For U.S. persons, the federal estate tax is deductible until the amount of tax due reaches $11.7 million (for 2021) if the return is properly filed by the due date. On the other hand, the basic federal estate tax credit for aliens is $60,000, so if the fair market value of property in the U.S. (and the value of property gifted during your lifetime) exceeds $60,000, you will be subject to a federal estate tax of approximately 40% on the portion of your estate in excess of $60,000. Thus, estate taxes in the U.S. can be extremely high. In addition, state estate taxes are also imposed, so the total tax amount can be extremely high (close to 50% of the estate’s market value).
United States Estate Tax Treaties
As mentioned above, if a foreign national dies leaving property in the United States, extremely high federal and state estate taxes may be imposed. In contrast, citizens of countries that have an estate tax treaty with the United States are treated the same as U.S. citizens, resulting in an $11.7 million credit against federal estate taxes (in 2021). Thus, for nationals of countries covered by the estate tax treaties, no federal estate tax will be due in most cases. However, there is no special deduction for state taxes. The United States currently has estate tax treaties with 17 countries. Japan has also concluded the Japan-United States: Transfer Tax Agreement (1954) with the United States, and Article 4 of the agreement provides that if the United States intends to impose inheritance tax on property because it is located in the United States The treaty requires the U.S. to deduct a certain amount of inheritance tax in the event that the U.S. imposes an inheritance tax on the property because it is located in the U.S. The purpose of this Article is to ensure equality between U.S. and Japanese nationals with respect to inheritance tax by providing that if a U.S. person is entitled to a credit for inheritance tax, a Japanese person is also entitled to the same credit. Therefore, Japanese nationals filing a return under the Inheritance Tax Treaty will be treated as if they were U.S. citizens who died in the United States. On the other hand, if you fail to file a return in the U.S., you may not be entitled to the benefits of the estate tax treaty, so please be careful.
Filing a Federal Estate Tax Return
When an alien who does not have U.S. citizenship or domicile dies leaving an estate in the U.S., a U.S. Federal Estate Tax Return must be filed with the Internal Revenue Service (IRS) within nine months of the date of death. The federal tax return must be filed on Form 706-NA. The filing period in the U.S. can be extended for six months by filing a Form 4768. In order for Japanese nationals to qualify for the U.S. federal estate tax credit under the U.S.-Japan tax treaty, they must file Form 706-NA, an estate tax (and intergenerational wealth transfer tax) return for estates in the United States of persons who are not U.S. citizens and do not have a habitual residence in the United States, i.e., the above estates and related to which a disclosure report is to be filed in accordance with the prescribed IRS forms, stating that the estate enjoys the benefits of the tax treaty exemption provided for in Sections 6114 and 7701(b) of the U.S. federal tax code. At that time, the deceased’s Japanese inheritance tax return and other documents must be submitted as attachments for the purpose of showing the status of the deceased’s estate. Our firm also provides support for such tax filing.