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.
Survivorship Guaranteed Universal Life
Premium Paying Years: 10
Annual Recurring Premium: $800,000
Initial Death Benefit: $32,000,000
Increasing Death Benefit
The Advanced Planning Solution
Michael’s estate planning attorney brought in an advisor with Highland Capital Brokerage to help with placing the life insurance policy. Her previous experience with this advisor showed her the capabilities of the Highland Advanced Planning team in creating custom life insurance solutions when foreign estate/gift/inheritance tax issues are present, which made the call to this Highland adviser an easy decision.
Given the 6-year attachment of Japanese gift taxes, the Highland advisor and advanced planning attorney recommended that Michael and Michelle own a U.S. life insurance policy on themselves, inside a revocable living trust, for the remaining 6-years where Japanese gift tax would apply, thus avoiding any foreign gift tax consequences. While ownership of a life insurance policy with a large death benefit inside a revocable living trust does create a risk of increased liability for U.S. estate taxes, the likelihood of both Michael and Michelle passing within the time they would have incidents of policy ownership was less than 1%, based on actuarial science. Once the Japanese gift tax no longer applies to the Tanaka’s, Michael and Michelle will sell, or gift, the policy from their revocable living trust to an irrevocable life insurance trust (“ILIT”). Selling the policy to the ILIT would immediately remove the death benefit from the Tanaka’s estate for U.S. estate tax calculations, whereas, gifting the policy to the ILIT would require the Tanaka’s to live an additional 3 years after the gift was made in order to have the death benefit excluded from their gross estate. In either scenario, the sale or gift of the 10-pay policy recommended by the Highland advisor around years 6-7 is advantageous, as the interpolated terminal reserve (“ITR”) value [also known as fair market value] of the policy would be near its lowest illustrated value. This would allow the Tanaka’s to sell or gift the policy to the ILIT for less than the premiums they had paid into the policy.
Once the plan was explained to the Tanaka’s and their estate planning attorney, they agreed to move ahead and accept the small amount of U.S. estate tax exposure risk associated with their revocable living trust owning the policy for the first 6-years. So long as the Tanaka’s both live an additional 6-years, the plan will avoid Japanese gift tax and premium payments, place the death benefit outside the Tanaka’s estate for U.S. estate tax calculations, and allow the Tanaka’s to gift/sell the policy to their ILIT near the lowest valuation point of their survivorship policy, saving themselves money or a large amount of lifetime exemption that could be used with other estate planning techniques.
For help with placing large insurance policies when foreign estate/gift/inheritance tax issues are present contact your Highland Vice President or the Highland Advanced Planning team at firstname.lastname@example.org.
Download these Foreign National Resources, including a Foreign National Insurance Planning brochure, Qualification Guide, and this Case Study in a printable format.