Treatment of stocks, mutual funds, ETFs for inheritance

[RetireJapan]

Fantastic Reddit thread here: https://www.reddit.com/r/JapanFinance/c ... _in_japan/

TLDR: Stocks, mutual funds, ETFs etc. are considered market value for inheritance tax and division purposes, but the inheritor gets the deceased's cost basis. For NISA, the cost basis would be the same as the market value.

Market value can be determined by the lowest of the following: the final price on the day of death, the average final price during the month of death, the average final price during the previous month of death and the average price of two months before the date of death.

[IloveJapan]

Haven’t read the thread yet, but…I while back I read that the Japanese authorities were considering an adjustment of stock asset values to 80% of the market value for inheritance tax purposes.

I haven’t heard anything since, but it wouldn’t surprise me if they made such a change, since 1) that would bring stocks in line with a similar rule (80% again?) that they have for real estate, and 2) the general trend is to encourage the public to invest more in the stock market as (much more than real estate, I think) as a risk asset it promotes economic growth.

Do you know about any developments on this front?

[captainspoke]

I guess I'm on the other side. In my opinion, the stepped up basis on inherited/intergenerational assets is one of the things that's 'broken' about the US. Eliminating that won't ever happen, but this might be more easily rationalized than some of the wealth tax schemes I've read about. The US might also assimilate one or two aspects of how Japan looks at trusts. There should also be some limits added to IRAs as to what can go into them--e.g., so that someone running a business development company cannot put 'worthless' shares into one that later turn into a hundred bagger, or some such (Japan has the right idea with ideco/nisa).

An easier move here might be to increase the exempted amounts for statutory heirs: ¥30M –> ¥40M, and ¥6M –> ¥8M, or something like that.

[ClearAsMud]

I haven’t heard anything since, but it wouldn’t surprise me if they made such a change...

Do you know about any developments on this front?

I haven't seen any news to that effect, and it would indeed surprise me because one major purpose of the inheritance tax is, as captainspoke points out, the redistribution of intergenerational wealth, contributing to greater economic equality. "Generate wealth on your own" would seem to be an even more self-reliantly "American" message than "Never pay inheritance tax and let the unearned wealth you've come into enrich you and yours even more." But Americans appear to be ready to make an exception in this case even though most of the benefits accrue to the uber-rich (how many ordinary taxpayers are likely ever to make, let alone leave behind, 12 million dollars...each?). Japan, like other countries, tries to balance self-interest against the social good, and the fact that the vast majority of Japanese taxpayers do not in fact pay inheritance tax despite the relatively low standard deduction suggests that they may be onto something (I'm saying this despite my own aggrandizing proclivities).

For real estate no less than for market investments, the ostensible principle in taxation is to use actual market value. The trouble is, unlike the constantly recorded real-time trading in the stock market, determining the market value of individual pieces of unsold real estate everywhere in the country on any given day of the year is a challenging task. In addition, the volatility of the open market distorts what government agencies consider to be the "appropriate" value of real estate, which is typically adjusted downward to compensate. Should it come to an actual court case, a professional assessor is called upon to estimate the actual market value, and that value is what the tax office uses even for inheritance purposes. But ease of administration recommends using a reasonably objective national standard that will be viewed as reasonably fair and can be consistently applied throughout the year, so in 1950-55 the NTA introduced the annually calculated sōzokuzei rosenka (相続税路線価) method of estimating the value of inherited property based on the assessed value of specified points on public roadways. This is only one of five methods commonly used to estimate the value of real estate, and (little known fact?) it has gradually risen from 30-50% of the "public price" (公示価格）published annually since 1969 by the Ministry of Land, Infrastructure, Transport and Tourism (in the Seventies) to 80% of that value now. Because the rosenka estimate is published by the NTA itself (property taxes being assessed by individual municipalities and adjusted only once every three years, although they are also tied to the MLIT index), the NTA is likely to accept it for assessing the value of inherited real estate. But on occasion they do take exception to what they regard as excessively low valuations, so it shouldn't be regarded as an absolute.

Inherited assets of all kinds have long been eligible for a special income-tax deduction on capital gains as long as 1) the deduction is claimed by the beneficiary; 2) the beneficiary has actually been assessed inheritance tax; and 3) the assets are sold within a specified period of time (basically three years following submission of an inheritance-tax return). There are also special deductions applicable to inheritance tax per se available in cases like this for residential property. One reason that residential property is treated differently from market investments (so far) is precisely because for many beneficiaries it doesn't represent a financial investment but a place to live: the biggest tax breaks go to modest residential properties and to close, dependent relatives of the decedent, not in order to increase their wealth but to ensure their welfare -- even if, again, a balancing act is involved and collateral effects can be observed.

An easier move here might be to increase the exempted amounts for statutory heirs: ¥30M –> ¥40M, and ¥6M –> ¥8M, or something like that.

This may well be true, though the last time the basic deduction was revised (2015), the result was a rather drastic lowering that made quite a few more taxpayers liable for inheritance tax.