Leo Wealth: Avoiding Hidden Wealth Traps of Living in Japan

For global citizens, life in Japan is a dream of safety, culture and cuisine. But for your finances, it can quickly become a maze of exit taxes, frozen bank accounts and inheritance pitfalls. Navigating this landscape requires specialized financial planning for US expats in Japan, as standard advice often fails to account for the unique intersection of two complex tax codes.

We sat down with the experts at Leo Wealth to map the minefield. Living in Japan as an expat—especially an American one—is a tale of two tax codes. On one side, you have the IRS, which tracks your income wherever you go. On the other, you have Japan’s National Tax Agency (NTA), which operates on an entirely different set of rules regarding residency and worldwide assets.

To navigate this complexity, I spoke with Thomas Y. Lu, Managing Director, Head of Japan and Jessica Cutrera, President of Leo Wealth. They revealed the critical wealth traps that catch long-term residents off guard—and general strategies to avoid them.

Ten-Year Rule Trap

Many long-term residents assume that Japan only taxes assets located inside the country. That is true—until you hit the 10-year mark. “Japan’s inheritance tax system is fundamentally different from the US model,” explains Lu. “The critical thing to understand is that the tax applies to the recipient (the heir), not just the estate.”

The Trap: Once you have lived in Japan for more than 10 years out of the last 15, you become an unlimited taxpayer. This means if your parents back in the US pass away and leave you a family home or a brokerage account, the Japanese government can tax those worldwide assets at rates up to 55%.

The Carve Out: There is a safety net for expats on specific visas. If you are on a Table 1 visa (such as a Highly Skilled Professional or standard work visa), you generally avoid this worldwide tax even after 10 years as the donor/decedent, provided you don’t hold a Table 2 Visa (Permanent Residency or Spouse of a Japanese National).

The Strategy: Effective financial planning for US expats in Japan often involves visa management. “The planning strategy is often to hold a Table One visa if you want to avoid worldwide inheritance tax,” says Lu.

Japan’s Exit Tax

We often hear about the US Exit Tax for those giving up Green Cards, but Japan also has its own exit tax.

The Trap: “The Japan Exit Tax is a tax on unrealized gains,” warns Lu. “This means if you have a portfolio of stocks that has gone up in value, Japan taxes you as if you sold them the day you left.”

Who is at Risk? This generally applies to holders of Table 2 Visas (Permanent Residents and Spouse of a Japanese National) who have lived in Japan for five out of the last 10 years and hold more than ¥100 million in financial assets.

The Fix: Unlike the US system, which is based on citizenship, Japan’s rule is based on residency and visa status. “Switching to a Table 1 visa can break the five-year count,” Lu notes, offering a potential planning opportunity before you book your flight home.

Banking Freeze (FATCA)

If you have ever received a letter from your bank closing your account because you live abroad, you are a victim of FATCA (Foreign Account Tax Compliance Act).

The Trap: “The issue is that by taking US clients, financial institutions dramatically increase their cost of reporting,” explains Cutrera. “Many firms simply decide it’s easier to not deal with anyone with a US nexus.” Even major global banks often restrict US citizens to cash-only accounts, preventing them from investing for retirement.

The Solution: You don’t have to stop investing. Leo Wealth specializes in hosting US citizens, performing the necessary KYC (Know Your Customer) checks that major banks avoid. This allows expats to maintain institutional accounts with major custodians such as Fidelity or Charles Schwab while living in Tokyo.

The $60,000 Estate Tax Cliff

For couples where one spouse is a US citizen and the other is not (a Non-Resident Alien or NRA), standard US estate planning can fail disastrously.

The Trap: “The main issue is the low exemption for US-situs assets,” says Lu. While a US citizen enjoys a multimillion-dollar exemption, a non-resident holding US assets (such as US stocks or real estate) has an exemption of only $60,000. Anything above that is taxed at 40%.

The Fix: The US  is the only country with a specific inheritance tax treaty with Japan. This treaty can potentially allow Japanese nationals to access the higher US lifetime exemption (currently at $15 million) for their US situs assets.

The Catch: “Utilizing the tax treaty requires an explicit election in the tax return,” Lu emphasizes. “Without it, the IRS will collect the tax.”

Global Planning: Don’t Do It Yourself

Moving funds across borders is fraught with hidden triggers. Cutrera shares a cautionary tale: “We had a client who moved to Japan and remitted income without realizing that remittance triggers Japanese tax for Non-Permanent Residents.”

The Trap: For tax purposes, a remittance is simply the act of bringing money earned abroad into Japan. By making this transfer, the client accidentally turned tax-free overseas income into fully taxable income.

The Reality: “There is no simple checklist,” says Cutrera. “Planning depends on the nationality of your spouse, your children and where your assets are located.”

FAQ

Does Japan tax my worldwide assets if I receive an inheritance? 

It depends heavily on your time in the country. If you have lived in Japan for more than 10 years out of the last 15, you are likely considered an “Unlimited Taxpayer,” meaning Japan can tax you on assets inherited from anywhere in the world, even if the assets never touch Japan.

How can I avoid the Japan Exit Tax? 

The Exit Tax generally applies to Permanent Residents or Spouse of a Japanese national (Table 2 Visa holders) with over ¥100 million in financial assets who have lived in Japan for 5 of the last 10 years. A common strategy for financial planning for US expats in Japan is switching to a Table 1 Visa (like a standard work visa) to break the five-year residency count before leaving the country.

Why are US brokerage accounts difficult to maintain in Japan? 

Due to FATCA regulations, US financial institutions face heavy reporting burdens when dealing with clients abroad. Many simply choose to close accounts for residents of Japan rather than comply. Working with a specialized wealth manager who can perform the necessary compliance checks allows you to maintain these accounts with major custodians.

What is the “Remittance” trap? 

If you are a Non-Permanent Resident for tax purposes, your foreign-sourced income is generally not taxed in Japan unless you bring it into the country. The act of transferring that money—remitting it—triggers the tax. Many expats accidentally make their overseas income taxable simply by moving funds to a Japanese bank account.

Interested in Learning More?

Contact Leo Wealth for a Consultation

Navigating cross-border taxes shouldn’t be a guessing game. If you are concerned about your residency status, planning a move or simply want to ensure your portfolio is tax-efficient, the team at Leo Wealth is ready to help.

Unlike many firms that outsource critical tax work, Leo Wealth has an in-house tax team in Tokyo that understands the intersection of US, Japan and global tax law. Visit Leo Wealth’s Tokyo office to sit down with their experts for a coffee and a conversation about your unique situation.

To schedule your consultation, visit their website. You can easily initiate contact through their website or email. The team typically responds within 24 hours.

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Please consult with a professional advisor regarding your specific situation.

If you enjoyed this article, please let us know and share your thoughts at hello@goconnect.jp.