Receiving an inheritance can be a blessing, but it also comes with challenges. If you don’t plan correctly, you could end up losing much of your inheritance to taxation and inflation. If you’re living in Japan, this is particularly true due to Japan’s notoriously high marginal tax rates. Fortunately, investing your inheritance correctly can help you mitigate these issues and grow your wealth over time.
Why You Need an Inheritance Investment Plan
When receiving an inheritance, it can be tempting to splurge on recreational spending. Many people fall into this trap, wasting their inheritance without considering the consequences. Then they’re stuck with a hefty tax bill to pay later – and no money leftover with which to pay it.
Foreign people living in Japan must be especially cognizant of the potential tax burden. Not only because of Japan’s inheritance tax rates, but also the risk of double taxation. You may also be taxed by your country of origin or the country of the ‘decedent’ (the person who left you the inheritance).
Creating a financial plan that incorporates your inheritance, or updating your existing one, will give you the following opportunities: :
- -Optimally diversify your investment portfolio, taking into consideration its new size, while maintaining the appropriate level of risk
- -Establish financial security for yourself and your family
- -Understand what level of retirement income you can now target and deploy strategies to secure those future paychecks
- -Create generational wealth that you can pass on to your own children and grandchildren
How to Plan for Taxation on Your Inheritance
In Japan, if you receive an inheritance, you have 10 months from the date of the inheritance event to file and pay any taxes that may apply. If you’re outside of Japan at this time, you may need a local tax representative to assist you.
Inheritance tax must be paid all at once, but you can request a deferred payment. You can make payments at a tax office or post office, or have a lawyer or other tax representative make the payment for you.
Some foreign nationals in Japan are exempt from paying tax on their overseas inheritances if they are considered “temporary foreigners” under Japanese immigration law. To be considered a temporary foreigner, you must hold a Table 1 visa and have no more than 10 years of residency in Japan out of the 15 years prior to the inheritance event. (Foreign nationals who return to Japan within 2 years of receiving their inheritance may not qualify for the exemption.)
Note: depending on your home country, you may also need to file and pay taxes on your inheritance there. Make sure to familiarize yourself with your home country’s laws to avoid losing too much of your inheritance to double taxation and high tax rates.
How to Invest Your Inheritance
There are several approaches to investing your inheritance that will assist you in preserving and increasing its value. One thing to look for is tax-advantaged accounts, like NISA and iDeco domestically, or tax-deferred investment accounts, internationally. These types of accounts, as well as lessening your tax cost, can provide you with a diversified financial portfolio that encompasses a broad range of assets, such as:
- -Stocks and bonds
- -Real estate
- -Mutual funds, ETFs, and hedge funds
Diversification ensures that your wealth is not overly dependent on one particular asset class performing well, reducing the risks associated with any single investment. If one asset performs poorly, you still have other assets that are performing well and generating returns, thereby cushioning the impact of any losses.
Questions to Ask Yourself When Investing an Inheritance
When it comes to investing an inheritance, it is important to determine your goals for the funds. Whether you want to grow the value for the future, generate income now, or some combination of both, it is important to have a clear understanding of your priorities. With this in mind, here are some questions to ask yourself when deciding how to invest your inheritance:
- -Do I want to grow the value of this money for the future, or start receiving an income now?
- -What is my timeline for using this money? Do I need access to it in the short term or can I afford to let it grow over a longer period of time?
- -What would be an appropriate level of risk for me now that my portfolio is bigger?
- -Do I want to invest the entire inheritance at once, or would I prefer to do it gradually?
- -Do I want to invest in individual stocks, mutual funds, exchange-traded funds (ETFs), or a combination of these options?
- -What kind of investment strategy do I want to follow? For example, do I want to invest in growth-oriented or income-generating options?
- -How much time and effort am I willing to put into monitoring and managing my investments?
- -Do I have a particular industry or sector that I am interested in investing in?
- -How will I ensure that my investments align with my personal values and beliefs?
By asking yourself these questions, you can begin to build a clear understanding of what you hope to achieve with your inheritance and what types of investments will be most suitable for you.
Creating an inheritance investment plan is no easy task, but working with a seasoned financial advisor can help. An experienced advisor can help you fully understand inheritance tax laws in Japan and deploy your wealth effectively to meet your financial goals. They can mentor you on the best way to protect your wealth and invest it so that it grows with time. Don’t wait to reach out to a trusted expert – it’s never too early to plan for the future.