Inherited Property Disposed of Before Division? How Japan's New Rules Address Unauthorized Sales by Co-Heirs

The period between an individual's death (commencement of inheritance) and the final division of their estate (遺産分割 - isan bunkatsu) can be a vulnerable time for estate assets. During this phase, the inherited property is co-owned by all heirs (共同相続 - kyōdō sōzoku), each holding an undivided interest. A significant problem arises if one or more co-heirs unilaterally dispose of specific estate assets – for instance, by selling property, withdrawing and spending funds, or gifting items – before a formal agreement on division is reached by all parties. Such actions can create substantial unfairness among heirs and significantly complicate the already challenging estate division process.

To address these situations more effectively, Japan introduced a new provision, Article 906-2, into its Civil Code, effective from July 1, 2019. This article provides a clear mechanism for co-heirs to account for assets that were disposed of prior to the completion of the estate division, aiming to ensure a more equitable outcome.

The Challenge of Pre-Division Disposals

Before the introduction of Article 906-2, dealing with assets disposed of by a co-heir before formal division often presented difficulties. While each heir has a theoretical undivided share (相続分 - sōzokubun), the specific assets themselves are co-owned. An heir might legally dispose of their own undivided share in the total estate, but unilaterally selling a specific estate asset (like a car or a piece of art belonging to the estate) without the consent of all other co-owners is generally improper.

If such a disposal occurred, other heirs might have had to resort to separate civil litigation – for example, claims based on tort, unjust enrichment, or for the recovery of property – which could be complex, time-consuming, and separate from the main estate division proceedings in Family Court. There was often uncertainty about how to properly account for the value of the disposed asset within the division process itself, especially if the disposing heir was uncooperative. The new Article 906-2 was partly inspired by the need to create a clear accounting mechanism, particularly in light of other reforms like Article 909-2 (allowing partial withdrawal of bank deposits), which itself is a form of pre-division disposition that needs to be factored into the final settlement.

The New Mechanism: Article 906-2 – Deeming Disposed Property as Part of the Estate

Article 906-2 provides a two-tiered approach to address pre-division disposals within the framework of the estate division itself:

1. Agreement by All Co-Heirs (Article 906-2, Paragraph 1):

This paragraph states: "Even if property belonging to the decedent's estate is disposed of before the division of the decedent's estate, the co-heirs may, by the agreement of all of them, deem said disposed property to exist as part of the decedent's estate at the time of the division of the decedent's estate."

• Unanimous Consent: If all co-heirs agree, they can decide to include the value of an asset that was disposed of before division back into the pool of assets to be divided, as if it were still present.
• Flexibility: This allows for practical solutions where, for example, an asset was sold to pay common estate debts, or where all heirs agree on how to value and account for a disposed item. This aligns with previous practices where, by mutual consent, even notionally existing assets could be factored into an estate division agreement.

2. No Consent Needed from the Disposing Heir(s) (Article 906-2, Paragraph 2):

This is the more impactful provision for dealing with unilateral or unauthorized disposals: "Notwithstanding the provisions of the preceding paragraph, if the property set forth in that paragraph was disposed of by one or some of the co-heirs, the consent of said co-heir(s) who made the disposition shall not be required to obtain [for the purpose of deeming the property to exist as part of the estate]."

• Empowering Non-Disposing Heirs: If one or more co-heirs (but not all of them) have disposed of an estate asset, the other co-heirs can collectively decide to treat that asset as still being part of the estate for the purpose of calculating shares in the division. Crucially, they do not need the agreement of the heir(s) who actually made the disposition.
• Preventing Obstruction: This prevents a co-heir who has improperly benefited from a pre-division disposal from blocking efforts to account for that asset fairly.

Purpose and Rationale Behind Article 906-2

The introduction of this article serves several key objectives:

• Ensuring Fairness Among Co-Heirs: Its primary goal is to prevent a co-heir who unilaterally disposes of estate property from gaining an unfair advantage or from diminishing the rightful shares of the other co-heirs.
• Addressing Unjust Enrichment: It provides a direct way to counteract the unjust enrichment of an heir who has converted an estate asset for their sole benefit before a collective decision on its allocation.
• Simplifying Resolution within Estate Division: A major advantage is that issues related to such disposals can now be more readily addressed directly within the estate division process, whether that process is through negotiation (協議 - kyōgi) among heirs or through adjudication (審判 - shinpan) by the Family Court. This is generally more efficient and holistic than pursuing separate, often more adversarial, civil lawsuits, which might not fully consider specific inheritance factors like an heir's special contribution (kiyobun).
• Filling a Legal Gap: It provides a clearer statutory basis for a common and problematic scenario in estate administration.

How the "Deeming" Mechanism Works in Practice

When Article 906-2 is invoked:

1. The Asset is "Deemed" to Exist: The disposed asset is treated for accounting purposes as if it were still part of the estate at the time of division. The focus is on the original disposed property itself (or its value), not necessarily the actual monetary proceeds if it was sold. This is important because if an heir sold an asset for less than its fair market value, basing the accounting on the low proceeds would still disadvantage other heirs. By deeming the original asset (or its appropriate value) back into the pool, a fairer calculation can be made.
2. Valuation: The value of the asset that was disposed of needs to be determined. This might be its value at the time of disposal, its value at the time of the (notional) estate division, or another time point as agreed by the heirs or determined by the court, depending on the circumstances. This valuation can sometimes be contentious.
3. Attribution to the Disposing Heir's Share: In the final calculation of shares, the value of the asset disposed of by a particular co-heir will effectively be treated as if that heir has already received that value. It will be counted towards, or debited against, their entitlement from the total divisible estate. If an heir disposed of an asset valued at X, that amount X will be considered part of what they have received from the estate.

What Constitutes "Disposal" (処分 - Shobun)?

The term "disposal" in this context is broad and can include various actions taken with respect to estate assets before formal division, such as:

• Selling an estate asset (e.g., real estate, vehicles, stocks, valuable personal effects) to a third party.
• Consuming or spending liquid estate assets (e.g., withdrawing funds from an estate bank account and using them for personal purposes, beyond what might be permissible under specific rules like Article 909-2 for limited immediate withdrawals).
• Gifting an estate asset to a third party without the consent of other co-heirs.
• Mortgaging or otherwise encumbering specific estate property in a way that diminishes its value or availability for division.

It's important to note that withdrawals explicitly permitted under Article 909-2 (partial withdrawal of bank deposits by an heir) are a special case, as that article itself deems such withdrawals as the heir having received a portion of the estate through a partial division. Article 906-2 would more typically apply to other types of disposals or to withdrawals that exceed the specific limits and conditions of Article 909-2.

Scope and Limitations of Article 906-2

Certain situations fall outside or have nuanced interactions with this provision:

• Authorized Disposals: If the disposal of an estate asset was carried out with the prior consent of all co-heirs, or by a duly appointed will executor acting within their proper authority (e.g., selling an asset to pay estate debts or as part of a directed estate administration plan), then Article 906-2 would not typically be used in a punitive way against the acting party, though the transaction and its proceeds would still need to be properly accounted for in the overall estate settlement.
• Disposal of an Heir's Own Undivided Share: Each co-heir generally has the right to dispose of their own undivided inheritable share (相続分 - sōzokubun) in the entire co-owned estate. Article 906-2 is primarily aimed at the unauthorized disposal of specific, identifiable estate assets before the division has determined which heir is entitled to which specific asset. However, the lines can blur if the disposal of an undivided share is structured in such a way that it effectively removes a specific asset from practical division and harms other heirs' concrete entitlements.
• Disposals by Third Parties: While the primary focus of Article 906-2 is on disposals by co-heirs, the literal text of Paragraph 1 ("property...is disposed of") does not exclusively limit it to co-heir actions. However, legislative discussions indicated a primary concern with co-heir conduct. If a third party (not an heir) wrongfully disposes of an estate asset, the estate (acting through the heirs or an executor) would typically have direct claims (e.g., in tort or for unjust enrichment) against that third party. The recovered asset or compensation would then form part of the estate to be divided.
• Unauthorized Disposals and Ineffectiveness: If a co-heir attempts to dispose of more than their rightful share of a specific asset without authority (e.g., trying to sell 100% of an estate property when they only have a 50% co-ownership interest), the portion of the disposition exceeding their authority may be legally ineffective against the other co-owners from the outset. In such cases, the asset (or the relevant share of it) hasn't truly left the estate from a legal standpoint concerning the other co-heirs. Article 906-2 provides a practical accounting mechanism within the division process, especially useful when an asset has effectively been removed from the immediate control of the estate (e.g., a movable sold to a bona fide purchaser, or where direct recovery is complex).

Procedural Implementation

The mechanism of Article 906-2 can be implemented either in out-of-court negotiations or in formal Family Court proceedings for estate division:

• In Estate Division Negotiations (協議 - kyōgi): The non-disposing co-heirs can raise the issue of a pre-division disposal and, relying on Article 906-2(2), insist that the value of the disposed asset be included in the division calculations without needing the consent of the heir(s) who made the disposal.
• In Court-Adjudicated Division (審判 - shinpan): If the heirs cannot agree, any co-heir can petition the Family Court for estate division. In these proceedings, the non-disposing heirs can request the court to apply Article 906-2. The court will then investigate the facts surrounding the alleged disposal, determine the appropriate value to be brought back into account, and factor this into its division order. Even if a court were to make an error in its judgment regarding who specifically made the disposal, the division order itself would generally stand, though separate civil claims between heirs based on the true facts (e.g., for unjust enrichment) might subsequently arise, subject to general civil law principles.

Conclusion

Article 906-2 of the Japanese Civil Code provides a significant and welcome clarification for handling situations where estate assets are disposed of before a formal division is completed. By allowing co-heirs (and the Family Court) to deem such disposed property as still part of the estate for division purposes – crucially, without needing the consent of the disposing heir(s) – this provision powerfully promotes fairness and helps prevent unilateral actions from undermining an equitable distribution. It offers a more streamlined way to address these common and often contentious issues directly within the estate division framework, contributing to a more just and orderly settlement of inherited estates in Japan.