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Japan: Adoption of Grandchild in Order to Save on Inheritance Tax Can Be Valid

(Feb. 23, 2017) Japan’s Supreme Court decided, on January 31, 2017, that adoption of a grandchild can be valid even if the main purpose of the adoption is to save part of the heirs’ inheritance tax upon the grandparent’s death.  (Heisei 28 (ju) 1255, S. Ct. (Jan. 31, 2017), COURTS IN JAPAN (click on the characters beside the PDF icon).)

In the case at hand, the grandparent had three children, two daughters and one son. While the grandparent was alive, the son and his wife had an accountant explain to the grandparent the merits of a adopting their son for the purpose of saving on the inheritance tax.  The grandfather subsequently adopted the grandson.  Upon the grandfather’s death, his daughters filed a lawsuit against the grandson, claiming the adoption was invalid because it was for a tax-saving purpose, not really to make a father-son relationship.  (Id.)  The son’s family received, through the grandson, a bigger portion of the estate, while the daughters’ shares were reduced.  (Id.)

Inheritance tax can be saved by increasing the number of children who will be heirs, as a per-child deduction amount is allowed.  (Inheritance Tax Act, Act No. 73 of 1950, amended by Act No. 15 of 2016, art. 15, E-GOV (in Japanese).)  An accountant who reportedly had a great deal of experience in dealing with inheritance tax cases was quoted in a news item as stating that, among wealthy people in Japan, a fair number of people use adoption as a tool to reduce the inheritance tax.  (First Decision of Supreme Court, Allowed Adoption for Inheritance Tax Reduction, Followed Wealthy Class Practice, MAINICHI SHINBUN (Feb. 1, 2017) (in Japanese).)  In fact, the scope of heirs eligible to receive a tax deduction was changed in 1989, in order to reduce adoptions for the purpose of avoiding tax.  (Tetsuro Suzuki, Family Law, Parent and Child Relationship (2), Inheritance Tax Measures and Adoption, Nagoya Kita Law Office website (Nov. 18, 2014) (in Japanese).)

The Supreme Court stated that the motive of saving tax can co-exist with the intention to adopt a person.  In the case at hand, the Court did not find any facts that suggested a lack of intention to adopt the grandson.  Therefore, the Court decided the adoption was valid.  (Heisei 28 (ju) 1255, supra.)