Real estate inheritance is an important issue that many high-net-worth individuals cannot avoid. For the ultra-high-net-worth individuals in particular, taking appropriate prenatal measures is an essential element to ensure a smooth succession of assets to the next generation.
Recent revisions to the inheritance tax system have lowered the basic exemption amount, and an increasing number of people who were previously exempt from inheritance tax are now subject to taxation. In particular, ultra-high-net-worth individuals who own a large amount of real estate are at increased risk of incurring a higher-than-expected tax burden and losing their valuable assets if they do not take appropriate inheritance tax measures.
In this article, we will provide a detailed explanation of the new normal for fail-proof real estate strategies and effective prenatal planning, based on our experience as INA & Associates, Inc. in assisting numerous ultra-high-net-worth individuals with their real estate inheritances. We hope that by using this knowledge, you will be able to ensure that your valuable assets are passed on to the next generation.
Basics of Real Estate Inheritance Strategies Practiced by the Ultra High Net Worth Individuals
Differences from General Inheritance Strategies
Real estate inheritance strategies for ultra-high-net-worth individuals require a fundamentally different approach than general inheritance strategies. Due to the large size of their assets, simple lifetime gifts and utilization of the basic exemption alone will not be sufficient to achieve the desired effect.
The following are the characteristics of real estate strategies that the ultra-high-net-worth individuals should focus on.
First, they should take full advantage of the valuation compression effect of using real estate investments. Converting assets held in cash to real estate can reduce the assessed value for estate tax purposes. Generally, the inheritance tax assessed value of real estate is set at 70-80% of its market value, so a 20-30% reduction in assessed value can be expected compared to cash holdings.
Next, it is important to develop a real estate investment strategy that balances profitability and tax savings. It is required not only to simply reduce the assessed value, but also to create a structure that reduces the inheritance tax burden while generating stable income.
Structure of Inheritance Tax Strategies Using Real Estate
Understanding the tax benefits of real estate inheritance is critical to implementing effective inheritance tax strategies.
| Countermeasure Technique | Effectiveness | Conditions for application | Points to note |
|---|---|---|---|
| Special Exception for Small Building Lots, etc. | Up to 80% reduction in valuation | Residential/business residential land | Area restrictions apply |
| Construction of rental property | Reduction of 30% of assessed value | Continuation of rental business | Vacancy risk |
| Purchase of tower condominium | Significant reduction in assessed value | Restricted by 2024 amendment | Liquidity risk |
| Incorporation | Reduction of stock valuation | Business reality required | Operating cost |
The special exception for small residential lots is one of the most powerful tax-saving methods in real estate inheritance for the ultra-wealthy. A valuation reduction of 80% can be obtained for up to 330 m2 for specified residential building lots, etc. and 400 m2 for specified business building lots, etc., respectively.
For example, if a residential building lot with an assessed value of 100 million yen is subject to the special exception for small-scale building lots, etc., the assessed value will be reduced to 20 million yen. This can significantly reduce the inheritance tax burden.
Importance and Timing of Prenatal Measures
The timing of the implementation of prenatal measures is an important factor that determines the success of real estate inheritance. Since there are only a limited number of measures that can be selected once an inheritance has occurred, a systematic approach from an early stage is essential.
The best time to start prenatal planning is generally around age 60. At this age, you still have sufficient capacity to make decisions and can plan for the succession of assets from a long-term perspective.
In addition, when implementing succession planningthrough real estate investment, it is ideal to start 10-15 years prior to the occurrence of inheritance, considering the investment payback period. This allows you to build a stable revenue base while diversifying investment risks.
Risks of Real Estate Inheritance Learned from Failure Cases
Common Failure Patterns
An analysis of failure cases in real estate inheritance reveals several common patterns. By understanding these failures in advance, similar risks can be avoided.
The most common failure pattern is a delay in the start of inheritance planning. Even if one tries to take measures in a hurry just before an inheritance occurs, there is not enough time to select effective methods. In particular, when real estate investments are used to reduce the assessed value, a certain period of time is required before the investment effects become apparent.
The next most common reason is the difficulty in paying taxes due to lack of cash. In the case of real estate inheritance, since the majority of assets consist of real estate, there are frequent cases of insufficient funds to pay inheritance taxes. Inheritance tax must be paid in cash in a lump sum in principle, and if it becomes necessary to sell real estate to secure funds to pay the tax, a substantial loss may be incurred depending on the market environment.
Cases of Loss due to Insufficient Countermeasures
As an actual case of failure, we will introduce the case of a very wealthy person who owned multiple income-producing properties in central Tokyo.
He owned real estate worth a total of 1.5 billion yen, but did not take appropriate measures before his death. When the inheritance occurred, the inheritance tax amounted to approximately 400 million yen, and the heirs were forced to sell the profitable properties at a price lower than the market price in order to secure funds to pay the tax.
It is estimated that if this person had taken appropriate inheritance measures in advance, the inheritance tax burden could have been reduced by less than half by taking advantage of special provisions for small residential lots, etc., and by reducing the valuation of shares through incorporation.
| Item | Before | After (estimated) | Effect |
|---|---|---|---|
| Real estate appraisal value | 1.5 billion yen | 900 million yen | 600 million yen reduction |
| Inheritance tax amount | 400 million yen | 180 million yen | 220 million yen decrease |
| Amount required to sell | 500 million yen | 200 million yen | 300 million yen decrease |
Key Points for Risk Avoidance
To effectively avoid risks in real estate inheritance, it is important to keep the following points in mind.
First, conduct regular asset evaluations and inheritance tax simulations. Since real estate prices fluctuate depending on the market environment, it is necessary to have a valuation performed by a specialist once a year to estimate the amount of inheritance tax based on the latest taxation system.
The next step is to adopt a portfolio approach that combines multiple inheritance planning methods. Rather than relying on a single method, a strategic combination of multiple methods, such as gifts during one's lifetime, real estate investment, insurance utilization, and incorporation, can achieve the maximum effect while diversifying risk.
Securing liquidity is also an important factor. When implementing inheritance measuresthrough real estate investment, an appropriate ratio of assets that can be converted into cash as needed must be maintained.
Specific prenatal measures practiced by the ultra-wealthy
Methods to reduce the assessed value of real estate
In the real estate strategies practiced by the ultra-high-net-worth individuals, valuation reduction is one of the most important factors. By understanding effective reduction methods and implementing them appropriately, a significant reduction in inheritance tax burden can be realized.
The valuation reduction effect of building rental properties is a particularly effective method. By constructing a rental property on your own land, you can receive a valuation reduction of approximately 20% for the land as land with a house for rent and approximately 30% for the building as a house for rent. In addition, if the construction was financed by loans, a debt deduction can be expected to reduce the inheritance.
| Methods of Reduction | Reduction in valuation of land | Reduction of building valuation | Additional Effect |
|---|---|---|---|
| Construction of rental property | Approx. 20 | Approx. 30 | Debt deduction |
| Special Exception for Small Building Lots | Up to 80 | -20% of the total | Within area limitation |
| Incorporation | Reduction in valuation of stocks | Reduction of stock valuation | Business Succession Strategies |
The strategy of utilizing tower condominiums has been a very effective method in the past. However, due to a tax code revision in January 2024, a valuation correction will be applied to certain high-rise floors, so careful consideration is required.
Strategic Use of Family Trusts
Family trusts are an extremely effective method for the succession of assets ofthe ultra-wealthy. Although it does not provide direct tax savings, it enables measures against dementia and flexible asset succession planning.
The greatest advantage of a family trust is that the trustee can continue to manage and operate assets even after the trustee has dementia. This makes it possible to implement inheritance measuresthrough real estate investment over a long period of time.
In addition, since a family trust allows beneficiaries to be designated for multiple generations, it can also be used as a secondary inheritance strategy. For example, by designating a spouse as the primary beneficiary and children as secondary beneficiaries, a smooth succession of assets can be achieved even at the time of the spouse's inheritance.
Strategic Execution of Living Gifts
Living wills are a basic yet extremely important method of inheritance planning for theultra-wealthy. It is important to strategically use calendar year gifts that take advantage of the basic exemption of ¥1.1 million per year and the taxation system for taxable income at the time of inheritance.
| Giving Methods | Annual Tax Exemption Limit | Characteristics | Applicable Situations |
|---|---|---|---|
| Calendar year gift | 1.1 million yen | Can be continued over the long term | Cash and small real estate |
| Settlement taxation at the time of inheritance | 25 million yen | One time only | High value real estate |
| Business succession taxation | Deferral of entire amount | Business assets only | Business real estate |
Tax Savings from Real Estate Investment
When using real estate investment as an inheritance strategy, it is important to strike a balance between profitability and tax-saving effects. It is necessary to construct an investment strategy that not only simply reduces assessed value, but also takes into consideration the long-term improvement of asset value.
In investing in income-producing properties, it is essential to select properties that emphasize location and future potential. By selecting properties near train stations in central Tokyo or in redevelopment areas that are expected to be in demand over the long term, you can secure stable income and prepare for inheritance taxes.
Overseas real estate investment is another option. However, tax treatment is complicated, and foreign exchange and political risks must also be taken into account, so a thorough review with a specialist is necessary.
Conclusion
Early and systematic prenatal planning is essential for success in real estate inheritance byultra-high-net-worth individuals. Proper implementation of the real estate strategies described in this article can significantly reduce the inheritance tax burden and ensure a smooth succession of assets.
The important points are reiterated below.
By making maximum use of the special exception for small residential lots, etc., and reducing the assessed value of residential and business residential land by 80%, the inheritance tax burden can be significantly reduced. In addition, further tax savings can be expected by converting cash assets to real estate with lower assessed values through construction of rental properties andreal estate investment.
The use of family trusts makes it possible to realize flexible asset succession planning while addressing the risk of dementia. In addition, strategic living gifts can be used to transfer inherited assets in stages and disperse the inheritance tax burden.
However, these measures require specialized knowledge and experience, and require tailor-made strategy design based on individual asset conditions and family structure.
As a next action, we recommend that you first accurately assess your current asset situation and have an inheritance tax simulation performed by a specialist. We hope that you will then formulate an optimal real estate strategy and begin a systematic prenatal planning process.
INA&Associates Inc. provides total support for real estate inheritance forultra-high-net-worth individuals. We will propose the best inheritance strategies to ensure that your valuable assets are passed on to the next generation. Please feel free to contact us.
Frequently Asked Questions
When should I start real estate inheritance planning?
It is important to start real estate inheritance planning as early as possible. Ideally, we recommend that you begin serious consideration around the age of 60, and implement the main measures by the age of 70 at the latest.
In order to maximize the effectiveness of prenatal measures, sufficient time is needed. In particular, it may take several years before the effects of real estate investments to reduce the assessed value of assets or the establishment of a family trust become apparent.
In addition, it is essential to plan while you are still in good health, since the measures you can take will be greatly limited after you have lost the capacity to make decisions due to dementia or other causes.
Q2. What are the conditions to qualify for the special exception for small-scale building lots, etc.?
In order to qualify for the special exception for small residential lots, etc., the following major conditions must be met
In the case of specified residential land, etc., if the spouse inherits the residential land where the decedent resided, it is applied unconditionally. In the case of inheritance by a person other than the spouse, the person must have lived together with the decedent before the start of inheritance, or must not have lived in a house owned by him/her or his/her spouse within 3 years before the start of inheritance.
In the case of specified business-use residential land, etc., a family member succeeding to the business must inherit the residential land that the decedent used for the business and continue the business until the deadline for filing the inheritance tax return.
Detailed conditions for application are complex, and decisions will vary depending on individual circumstances; therefore, consultation with a specialist is recommended.
Q3. Which is more effective, a family trust or a will?
Since family trusts and wills have different purposes and effects, which is more effective depends on the individual situation.
The greatest advantage of a family trust is that it enables continuous asset management from before the trustee's death until after inheritance. This is particularly effective in dementia prevention and multi-generational asset succession planning.
On the other hand, a will is a method of specifying how assets will be divided at the time of inheritance, and has the advantage of being relatively easy to prepare.
Many ultra-high-net-worth individuals use both family trusts and wills to create a comprehensive inheritance plan that makes the most of the features of each.
Q4. Is overseas real estate investment an effective inheritance tax measure?
Overseas real estate investment may be effective as an inheritance tax measure under certain conditions. However, compared to domestic real estate investment, tax treatment is more complicated and various risks must be taken into consideration.
Major risks include exchange rate fluctuation risk, political and economic risk, and tax system change risk. It is also necessary to fully understand the local taxation system and the details of tax treaties with Japan.
When considering an overseas real estate investment, we recommend that you conduct a thorough review with a specialist familiar with international taxation and evaluate the overall risks and returns before making a decision.
Daisuke Inazawa
Representative Director of INA&Associates Inc. Based in Osaka, Tokyo, and Kanagawa, he is engaged in real estate sales, leasing, and management. He provides services based on his extensive experience in the real estate industry. Based on the philosophy that “human resources are a company's most important asset,” he places great importance on human resource development. He continues to take on the challenge of creating sustainable corporate value.
.png)
