Do you assume that the decedent's debts are irrelevant to you as an heir? If so, you may be mistaken.
Under Japanese law, when a person dies, the heirs inherit all the rights and obligations of the deceased. Simply put, “obligations” means “debts”, and therefore can also be inherited.
This may be difficult to understand for those of you from common law countries that take a “managed liquidation approach” where the debts are paid off or liquidated prior to the distribution of assets to heirs.
Inheritance involving a foreigner poses a difficult question as to which country's laws apply to the inheritance. In Japan, Japanese law naturally applies when a Japanese person dies, and Japanese law may also apply even when a foreigner dies.
This article explores the inheritance (or assumption) of debts [by the heirs] when Japanese law applies to an inheritance.
What Does it Mean for an Heir to Inherit Debts?
In common law countries such as the U.S. and the U.K., inherited property belongs to the estate for the time being, and after administration and liquidation, the remaining property is passed on to the heirs. The decedent's debts will be settled by the estate itself, rather than by the heirs.
In contrast to the paragraph above, in Japan, all assets and liabilities are passed on directly to the heirs. In essence, the direct inheritance of debt means that the heir becomes the debtor of the deceased’s debts by virtue of the inheritance.
For example, let’s suppose that a Japanese husband has borrowed money from a bank. If the Japanese husband dies, the creditor bank will be able to demand repayment directly from his spouse and children, who are his heirs!
You might think “Well, if I can repay the loans using the inheritance, that should be fine.” However, you would be wrong!
If the amount of debt is greater than the amount of inheritance an heir will receive, the heirs will have to repay any outstanding amount on the loan from their own personal assets.
When an Heir Doesn’t Want to Inherit the Debts
When the inheritance assets are sufficient for the heir to pay off the debts of the deceased, the heir can inherit and pay off the debts without any problem.
However, there may be situations where the debts are clearly greater than the assets or where it is unclear whether the assets or the debts are greater. In these types of situations, doesn’t it seem unfair to force the heirs who inherit to repay the debts with their own personal assets.
There are two ways for heirs who do not want to inherit debts to avoid having to repay the debts of the deceased from the heirs own personal assests. One is renunciation of the inheritance and the other is a qualified acceptance of the inheritance.
Renunciation of an inheritance is a procedure in which the heir is treated as though he or she was not an heir from the very start. As such, the heir will not inherit either inheritance assets or debts. Please note that with inheritance renunciation, the heir will not inherit any debts, but he or she also will not inherit any property!
A qualified acceptance is a procedure in which the inherited property is liquidated, and any remaining assets are inherited, and any remaining liabilities are not inherited. It may be a procedure similar to probate in common law countries. However, because of the cost and time involved, qualified acceptance is not widely used in Japan.
Both the renunciation and qualified acceptance of inheritance must be petitioned to the family court within three months from the date of learning of the inheritance. Please note that these procedures cannot be used if the inherited assets have been used up before filing the petition to the family court.
Kobe Legal Partners has handled numerous inheritance cases and specializes in international inheritance matters. Please do not hesitate to reach out and let us know how we can help you.