A Plan to Avoid Japanese Gift Taxes while Minimizing U.S. Estate Tax Exposure
Meet the Tanaka Family
- Michael and Michelle Tanaka, Ages 38 and 36 (respectively), Married *
- Harry Tanaka, Age 6, Son of Michael and Michelle Tanaka *
* Dual Citizens of Japan and U.S.
The Need for U.S. Life Insurance
Michael Tanaka has been a serial tech entrepreneur since graduating in 2004 with master’s degrees in mathematics and computer science. In 2012, Michael created Tanaka, Inc., a technology startup focused on creating sophisticated algorithms that had the potential to revolutionize the quality control systems for major industrial manufacturing companies. A significant technological breakthrough in mid-2017 captured the attention of some of the world’s most powerful multi-national corporations. After receiving several enticing offers, Tanaka, Inc. was sold to ABC World, Inc. for a purchase price of $100MM, to be paid over a 5-year period.
Michael quickly realized that the sale of Tanaka, Inc. would require him to engage a team of financial, accounting and legal experts to assist him in managing and protecting the product of his hard work. One member of that team, a sophisticated estate planning attorney, advised Michael that the need for U.S. life insurance was an essential element to his estate plan, but that Japanese gift tax laws made the placement of U.S. life insurance in a traditional irrevocable life insurance trust (“ILIT”) problematic. Specifically, even though the Tanaka family currently resides in the U.S., the Japanese gift tax laws would continue to attach to them for an additional 6-years because the family established residency in Japan, known as “Jusho”, 4 years ago when they moved to Okinawa to help Michelle’s mother, who was dying of cancer. During the next 6-years, any gifts from Michael to a U.S. situs ILIT would trigger a Japanese gift tax (55% top tax-rate), thus frustrating the ability to fund the ILIT with standard gifting and loan strategies.