Guest Post: What happens to iDeCo if you die?

I had no idea the system was this user unfriendly

This is a guest post by the Reddit legend u/starkimpossibility. It was originally a thread on the excellent r/JapanFinance forum, which is a great resource for information and questions about investing, taxes, and general Japan finance information.

I reached out to Stark to ask permission to post this here on the blog too, as I feel the information is really important and everyone with an iDeCo account or company DC pension needs to know this and take action. They were extremely gracious and allowed me to repost their content here.

It is a long and detailed post, but definitely worth reading and processing.

Basically iDeCo and other DC pension accounts are NOT treated like other assets when someone dies. You probably need to designate a beneficiary, and this is not normally part of the account opening process, nor it is easy to do.

You can see the original thread here, and that is probably the best place to ask questions.

The information in this post is based on a variety of sources, but among the most useful are this iDeCo inheritance summary by Monex, this iDeCo inheritance article by a financial planner, this iDeCo inheritance article by a different financial planner, and this page about the taxation of retirement allowances from the National Tax Agency (NTA).

Who will inherit your DC pension assets?

Upon your death, the beneficiary of your DC pension account will acquire the right to receive the proceeds of the sale of all assets in the account (known as a “lump-sum death benefit”, 死亡一時金).

A beneficiary exercises this right by (1) notifying the record-keeping institution handling the account that the account-holder has died (by submitting National Pension Fund Association form K-014, 加入者等死亡届) and (2) requesting the proceeds of the sale of the assets in the account be transferred to the beneficiary’s bank account (by submitting NPFA form K-017, 死亡一時金裁定請求書).

The beneficiary cannot control the timing of the sale of the assets, except to the extent that they can delay submitting the forms identified above. If the beneficiary delays claiming a lump-sum death benefit, there is a chance that the assets will increase or decrease in value in the meantime. But note that the right to claim a lump-sum death benefit expires five years after the date of death.

If you have no beneficiary, or no beneficiary exercises their rights within five years of the death, the assets in the account will be sold and the proceeds transferred to the Legal Affairs Bureau, where they will be treated as an unclaimed inheritance. In that case, your heirs under the law applicable to your death (the law of your country of citizenship, if you are a foreigner) can potentially claim the funds from the Legal Affairs Bureau, but that is widely characterized as a difficult and complex process.

Who is the beneficiary of a DC pension account?

If the account-holder designated a beneficiary prior to their death, the beneficiary will be the person designated by the account-holder. Note that this designation cannot be overturned by a will. (For example, if you designated Child A as the beneficiary, but your will says that Children A and B should receive the funds in equal share, Child B cannot use the will to become a beneficiary.)

Under Article 41 of the DC Pension Law, the only people who can be designated as beneficiaries are the deceased’s spouse, children, parents, grandchildren, grandparents, and siblings.

Unlike under the Civil Code, “spouse” in this context includes people who are not officially married but live “as if they were a married couple” and are recognized by society as “equivalent to” a married couple (事実上婚姻関係と同様の事情). Incidentally, whether same-sex partners can be “equivalent to” spouses under this law is basically an unresolved question at the moment, and different financial institutions may have different views.

If the account-holder didn’t designate a beneficiary prior to death, the beneficiary will be determined by the hierarchy of beneficiaries prescribed by Article 41 of the DC Pension Law, which looks like this:

The highest-ranking person (or persons) in this list will be deemed to be the beneficiary (or beneficiaries) of the deceased’s DC pension account. If there are multiple people of the same rank, they must share the proceeds of the account equally between them. (In practice, the record-keeping institution responsible for the account will require that the beneficiaries select one “representative beneficiary” to receive the funds, who will then be obliged to distribute them equally.)

Regarding the concept of “primary support” (主としてその収入によって生計を維持する), it appears that record-keeping institutions provide a variety of ways for a person to prove that they were being primarily supported by the deceased, including a health insurance card showing that they were a dependent for health insurance purposes, a tax return showing that they were a dependent for tax purposes, or even a history of purchases corresponding to the dependent’s living expenses.

And before everyone asks: yes, there is an exception to the beneficiary rules for anyone who caused the death of the account-holder by way of an intentional criminal act. Such people are barred from qualifying as beneficiaries.

How do I designate a beneficiary?

Good question. If the record-keeping institution handling your DC pension account is Sompo Japan DC Securities, you can download a beneficiary designation form here (PDF). But as far as I can tell, if your account is handled by any of the other three record-keeping institutions (Nippon Record Keeping Network, Japan Investor Solutions & Technologies, or SBI Benefit Systems), the only way to get a copy of the form is to call them and ask for one. Depending on the brokerage handling your account, it may also be possible for you to ask the brokerage to request a form on your behalf.

I have been able to confirm that NRK, JIS&T, and SBI will all display your designated beneficiary if you are logged in to your account. (I assume SJDC would also do so.) So if you are curious about whether you have designated a beneficiary already (it may have been an option on the account-opening paperwork), you should be able to check that online.

In case you decide to contact the record-keeping institution handling your DC pension account, the name of the form you would need to designate a beneficiary is “死亡一時金受取人指定申込書”. It appears from SJDC’s site that the NPFA’s code for this form is K-101.

Be aware that there is a similar form available, called “死亡一時金受取人代表者届” and having NPFA code K-106, but this form cannot be used to designate a beneficiary prior to death. Instead, K-106 is the form that beneficiaries under the DC Pension Law use after a death has occurred to nominate a “representative beneficiary” who will receive the funds on behalf of all beneficiaries.

Finally, people who have a DC pension account through their employer will likely find it easier to ask their employer for the form needed to designate a beneficiary, instead of asking the record-keeping institution directly.

How will the lump-sum death benefit be taxed?

A DC pension lump-sum death benefit received within three years of a death will be considered a “retirement allowance, etc.” (退職手当金等) for inheritance tax purposes. This means it must be included in the deceased’s estate for the purpose of calculating the heirs’ inheritance tax liability.

However, if a retirement allowance is received by a statutory heir, it is eligible to be combined with other retirement allowances received by statutory heirs and subjected to the retirement allowance deduction of 5 million yen per statutory heir, before being combined with the rest of the estate. In this way, lump-sum death benefits received by statutory heirs are taxed much more favorably than, for example, cash deposits.

One awkward complication is that inheritance tax returns are due within 10 months of the death, but heirs are required to declare all DC pension lump-sum death benefits that have been or will be received within three years of the death on any inheritance tax return that is filed. So unless the beneficiary has already received the benefit within 10 months of the death, if the heirs think that the beneficiary will receive the benefit within three years of the death, they must estimate the value of the benefit on the inheritance tax return, and file a corrected return later if necessary.

In practice, how heirs should approach lump-sum death benefits depends a lot on the value of the benefit and the identity of the beneficiary. If the beneficiary is a statutory heir and the benefit’s value will clearly be less than the 5 million yen per statutory heir deduction, the heirs can probably ignore it for inheritance tax purposes, regardless of whether it has already been received. But if the beneficiary is not a statutory heir or the benefit’s value will clearly be more than 5 million yen per statutory heir deduction, it would be sensible to apply for the benefit early so that it can be received before the inheritance tax deadline and accurately declared on the inheritance tax return, unless the heirs have reason to believe that the beneficiary will not claim the benefit within three years of the death.

DC pension lump-sum death benefits received between three and five years of a death are not considered to have been inherited at all. Instead, they are considered “temporary income” for the beneficiary, just as if the beneficiary had taken out an insurance policy themselves. Temporary income is subject to an annual 500,000 yen deduction and is halved before being combined with the taxpayer’s other income and taxed at marginal rates (5-45% income tax plus 10% residence tax).

Whether the beneficiary will end up paying more tax on the benefit if received as an inheritance or as temporary income depends on a range of factors (mainly the size of the estate and the beneficiary’s annual income), but in most ordinary scenarios it would be advantageous to receive the benefit as an inheritance rather than as temporary income. This will certainly be true, for example, if the beneficiary is a statutory heir and the benefit is covered by the retirement allowance deduction, or if the estate (including the lump-sum death benefit) is not large enough to trigger an inheritance tax liability at all.

Once five years have passed since the death, the right to claim a lump-sum death benefit expires and the proceeds of the sale of the assets become part of the deceased’s general estate. If the total value of the estate was more than the basic deduction (30 million yen plus 6 million yen per statutory heir), this would typically mean that insufficient inheritance tax was paid and a corrected inheritance tax return should be filed (unless the lump-sum death benefit was declared as general property on the original return in expectation of the beneficiary not making a claim). In this way, a lack of beneficiaries, or a beneficiary failing to claim a lump-sum death benefit within five years, can create tax complications for all heirs.

Asset division

A feature of DC pension lump-sum death benefits is that they are not subject to the normal asset division process. This has both advantages and disadvantages.

Often, if there are multiple statutory heirs, it takes months or even years for the heirs to agree on how the assets should be divided between them. And until that negotiation has concluded, none of the heirs can access any of the deceased’s assets. However, since lump-sum death benefits are not subject to asset division, the beneficiary can claim the benefit immediately, without having to wait for the statutory heirs to reach an agreement. This can be especially useful where the beneficiary has had to cover expenses associated with the death (funeral costs, etc.).

Another advantage of DC pension lump-sum death benefits is that they can be received by an heir who abandons their inheritance. When the deceased had significant debts at the time of their death, or an heir doesn’t want to participate in asset division, an heir will often decide to formally abandon their inheritance. But since lump-sum death benefits are not subject to asset division, they can even be received by a beneficiary who has abandoned their inheritance.

At the same time, the fact that lump-sum death benefits are not subject to asset division can give rise to problems. For example, if a person dies without any Article 41 beneficiaries (see the list above), the lump-sum death benefit will not be accessible to the deceased’s heirs for at least five years, even if the deceased has left their entire estate to those heirs by making a will.

Wow, that was quite something, eh? I am astounded at how user-unfriendly this system is, and how serious the consequences of not knowing how it works could be.

Remember the original thread is here and you can ask questions there.

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