Family member considering gifting me a large sum of money—what would you do?

[wanderer]

Hello and preemptive apology if I've missed anything in the archives or for any possible misunderstandings. I've already posted the following on the JapanFinance sub-reddit but am posting here as well to gather as much good advice as possible.

I am a US citizen in my early 40s with a permanent residency visa in Japan and who has lived here (Tokyo) for roughly 20 years. I am, I understand, an "unlimited taxpayer" with respect to Japanese gift tax.

My mother is considering gifting me around $200,000 (currently approximately ¥23 million) with the understanding this would be used either to help purchase a home in Japan or the US, or to invest (I have a US Vanguard account I opened many years ago and which I regularly contribute to). She has already made a similar gift to my sister who lives in the US so we have at least a nominal understanding of what taxes may be incurred by this. Our questions, and the reason for my post, are in regard to Japanese taxes.

Options I've thought of (and discovered) so far:

1. Receive this money as a straight gift. My understanding is that the annual gift exemption is ¥1.1 million, so this option would incur the largest financial penalty, as it were, unless the money were trickled to me over the next 10+ years.

2.. Consider this money as part of (all of?) an early inheritance as my mother is over 60 years of age (information from https://taxsummaries.pwc.com/japan/indi ... ther-taxes). In this case gifts of up to a total of ¥25 million would be exempt from gift tax.

3. Specifically earmark this gift for a housing purchase. In that case, if I'm understanding https://www.nta.go.jp/taxes/shiraberu/t ... u/4508.htm correctly, there's an exemption of ¥15 million if the money were to be used for the purchase of a new low energy / energy efficient home or ¥10 million for the purchase of a new non-energy efficient home; or ¥10 million exemption for the purchase of a used energy efficient home or ¥5 million exemption for the purchase of a used non-energy efficient home.

4. Yet another option (as explained in https://old.reddit.com/r/JapanFinance/c ... s/gvvvvtq/) would be for my mother to share in the ownership of a purchased home, thereby completely avoiding the issue of gift tax.

5. A variant of the above option would be for my mother to purchase a share of a home and then gift her share to me sometime in the future, taking advantage of the difference in market price and taxable value at that time.

6. I suppose a final option would be to simply use all of the money to further contribute to my Vanguard account and not report the gift / early inheritance to the Japanese IRS. That's not an option I'm considering, however.

My questions:

1. Is my understanding of the possible tax ramifications and potential options above correct? Is there anything I'm missing?

2. What would you do if you were in my situation? I like my life in Japan but I'm not sure I see myself retiring here, so ideas/suggestions that include life outside of Japan are also welcome.

Note that I fully intend to speak with a tax accountant specializing in inheritance tax in addition to my own research. Thank you!

[Tkydon]

Yes, I think you got most of the points.

If you go for the Early Inheritance route, you will be taxed Inheritance Taxes on the whole amount at today's value when your mother passes. You would want to put that away...

On the other hand, she is still young.

You could receive Y1,100,000 ($10k) per year Tax Free.

Remember that if you go the Gift Tax Route, anything you receive in the three years immediately prior to your mother's passing, will be reassessed as part of your Inheritance when you mother passes, and may incur additional Inheritance Tax.

If you have a wife and kids, your mother could transfer $10k to each of you Tax Free to accelerate the transfer.

The Gift Tax is slightly advantaged for Gifts from lineal relatives vs. non-relations.

You can claim the Foreign Tax Credit for any US Taxes incurred.

Unfortunately some other Deductions were terminated at the end of March 2021, and are no longer available.


If you did decide to receive the whole amount and declare the Gift

Y23,000,000 - Y1,100,000 = Y21,900,000 Taxable

Gift Tax Rates From Lineal Relatives (Parents, Grand Parents, etc.)
Band Marginal Tax rate (％) Max Tax in Band Yen
Under 1,999,000 10% Y200,000
2,000,000 3,999,000 15% Y300,000
4,000,000 5,999,000 20% Y400,000
6,000,000 9,999,000 30% Y1,200,000
10,000,000 14,999,000 40% Y2,000,000
15,000,000 29,999,000 45% Y6,750,000
30,000,000 44,999,000 50% Y7,500,000
Over 45,000,000 55% No Limit...

Y4,100,000 + Y3,600,000 = Y7,700,000

Y7,700,000 / Y23,000,000 = 33.48%

It's a shame you didn't get the first $10k last year to take advantage of last year's Tax Free Gift Allowance...

[wanderer]

Thanks very much for the reply. I especially appreciate you breaking things down for me.

Remember that if you go the Gift Tax Route, anything you receive in the three years immediately prior to your mother's passing, will be reassessed as part of your Inheritance when you mother passes, and may incur additional Inheritance Tax.

Could I ask you to please speak more on this? By Gift Tax Route you're referring to receiving the money as a straight gift and paying tax on everything over the yearly exemption of ¥1,100,000? In that case, why would anything I receive as part of a potential additional inheritance three years prior / upon my mother's death be reassessed and incur additional inheritance tax? Wouldn't it be merely assessed and incur inheritance tax, since the original money (the approximately $200,000 I mentioned in the original post) would not be considered an inheritance in the eyes of Japanese tax law?

[Tkydon]

It's just the way the law is written.

I will just quote from my Tax Guide

Gift Before Death.
If a decedent made gifts to an heir or legatee within three years before death or if an heir or legatee selected the unified gift-and-inheritance tax system, these gifts are added to the taxable assets inherited or bequeathed. When a spouse has deducted the spouse allowance for gift tax from these gifts, only the balance should be added. In return, the amount of gift tax thereupon is credited against inheritance tax.

and

Credit For Gift Tax Paid
a) If heirs or legatees had been gifted other assets by the decedent within three years before the decedents death, the value of the gifted assets should be included in the net taxable assets (for inheritance tax). As a consequence, both inheritance tax and gift tax may be levied.
To avoid double taxation, the amount of the gift tax levied on such gifts may be deducted from the amount of the inheritance tax.


I guess it is to prevent people trying to circumvent inheritance taxes by gifting all their worldly goods in the last three years of their lives.