As stated in the article “What is the ’10-Year Rule’ for Inheritance Tax? Criteria for Taxation That Overseas Residents Should Be Aware Of” (Sōzoku Kaigi, June 25, 2025), if both the heir and the decedent resided in Japan within 10 years prior to the commencement of inheritance, there is a high possibility that inheritance tax will be imposed not only on domestic assets but also on overseas assets.
In this context, we will consider whether a trust established in the United States by a U.S. citizen decedent would be included in the taxable estate for Japanese inheritance tax purposes.
When both the decedent (the person who passed away) and the heir (beneficiary) have resided in Japan within 10 years prior to the commencement of inheritance, Japan’s Inheritance Tax Law classifies the heir as a “unlimited tax liability person”, which means that inheritance tax may be imposed not only on domestic assets but also on assets located overseas.
If the deceased was a U.S. citizen and had established a trust in the United States, the question arises as to whether the property in the trust is subject to Japanese inheritance tax. This depends on several legal and tax principles, which we will examine below.
1. Scope of Taxable Assets under Japanese Inheritance Tax Law
(1) Unlimited vs. Limited Tax Liability
Under Japanese Inheritance Tax Law, a person is considered to have unlimited tax liability if either the heir or the decedent had a domicile in Japan at any time within the 10 years prior to the commencement of inheritance. In this case, the heir is taxed on all inherited assets, regardless of their location (i.e., worldwide assets).
In the situation described—where both the decedent and the heir resided in Japan within the 10-year window—the heir is an unlimited tax liability person, and foreign assets such as those held in a U.S. trust may be subject to Japanese inheritance tax.
2. Understanding Trusts in the U.S. Context
In the U.S., a trust is a legal arrangement where a person (the settlor) places assets under the control of a trustee for the benefit of a third party (the beneficiary). Although the trustee holds legal title, the economic benefits belong to the beneficiary.
A commonly used vehicle is the revocable living trust, in which the settlor often retains control and beneficial interest during their lifetime, and upon death, the trust assets are distributed to designated beneficiaries.
3. How Japanese Inheritance Tax Treats Trusts
(1) Applicable Legal Provisions
Japanese tax law—specifically Articles 3-2 and 9 of the Inheritance Tax Act—sets forth the taxation of trust-related assets. Trust assets may be included in the taxable estate under any of the following conditions:
- Transfer of Beneficial Interest upon Death:
If the decedent held a beneficial interest in the trust and that interest is transferred to another person upon death, that transfer is treated as an inheritance, and subject to tax. - Termination of the Trust upon Death:
If the trust ends upon the settlor’s death and the trust assets are distributed to heirs, this distribution is subject to inheritance tax. - Trust Where the Decedent Was the Beneficiary:
If the decedent was the beneficiary of a trust and received economic benefits during life, and those benefits transfer to others upon death, that transfer is taxable.
(2) Practical Example
Suppose a U.S. citizen created a revocable trust during their lifetime, remained the sole beneficiary until death, and the trust is set to distribute its assets to family members upon death. Under Japanese law, the value of the trust assets—despite being legally held by a trustee—would likely be treated as part of the taxable estate, as the decedent had control and received economic benefits.
4. Cross-Border Taxation and Substance Over Form
Even though U.S. trust law is different from Japanese law, Japanese tax authorities will focus on the economic substance rather than the legal form. If the decedent had economic control over the trust or if the trust was designed to distribute assets to beneficiaries upon death, then those assets are considered part of the inheritance for Japanese tax purposes.
Japan also emphasizes “substance over form” and adheres to OECD principles, so even if the trust structure is legally complex, taxation will be based on who effectively controls or benefits from the assets.
5. Practical Considerations
- Disclosure and Tax Audit Risk: Overseas trusts are closely scrutinized by Japanese tax authorities, especially in cases involving large or opaque asset structures. Full disclosure is crucial during tax filing.
- Nature of the Trust: Whether the trust is revocable, irrevocable, self-settled, or discretionary—all these features affect how it is treated under Japanese tax law.
- Potential for Double Taxation: There is no specific inheritance tax treaty between Japan and the U.S., so the same assets may be subject to estate tax in the U.S. and inheritance tax in Japan. However, foreign tax credits may apply to mitigate this issue.
6. Conclusion
Even if the deceased was a U.S. citizen and created a U.S.-based trust, if both the decedent and heir resided in Japan within the 10 years before inheritance, the heir is considered an unlimited taxpayer, and trust assets may be subject to Japanese inheritance tax.
If the trust confers economic benefit to the heir or terminates upon the settlor’s death, transferring assets to the heir, Japanese inheritance tax is highly likely to apply. A thorough legal and tax analysis—possibly involving experts from both Japan and the U.S.—is strongly advised to ensure compliance and avoid tax risks.