Japan's Inheritance Law Overhaul: What Does the Shift to Monetary Claims for "Legally Secured Portions" (Iryubun) Mean for Heirs and Business Succession?

Japanese Attorney at Law - Bengoshi L.L.

• 11 min read

Japan's system of "Legally Secured Portion" (遺留分 - Iryūbun) is a cornerstone of its inheritance law, designed to guarantee a minimum share of an estate for certain close heirs, irrespective of the deceased's will. Historically, the enforcement of these rights often led to complex legal situations. Significant reforms to the Japanese Civil Code, effective from July 1, 2019, have fundamentally altered how Iryubun infringements are remedied, most notably by shifting from a system of "in-kind" restoration of assets to a right to claim monetary compensation. This change carries profound implications for heirs, estate planning, and particularly for business succession.

The "Legally Secured Portion" (Iryubun) Before the Reforms

Under the pre-reform Civil Code, heirs entitled to an Iryubun (such as a spouse, children, or parents of the deceased) whose portion was infringed by lifetime gifts or bequests made by the deceased, had a "claim for abatement" (遺留分減殺請求権 - iryūbun gensai seikyūken).

The exercise of this claim had a powerful "in-rem" effect (物権的効果 - bukken-teki kōka), meaning that the gifts or bequests were automatically nullified to the extent of the Iryubun infringement. Consequently, the actual property (e.g., real estate, company shares, specific movables) that was the subject of the infringing gift or bequest would, in part or whole, legally revert to the Iryubun claimant. This was often referred to as the principle of "restoration in kind" (現物返還 - genbutsu henkan).

While intended to protect heirs, this system presented considerable practical difficulties:

  1. Creation of Complex Co-ownership: When an indivisible asset, such as a piece of real estate or a block of company shares, was partially abated, it resulted in co-ownership between the original recipient (donee/legatee) and the Iryubun claimant. Resolving these often unwanted co-ownership relationships could lead to further disputes, lengthy negotiations, or additional court proceedings for partition.
  2. Hindrance to Business Succession: For family businesses, the in-kind return of company shares to an heir not involved in the business (or potentially hostile to its current management) could fragment ownership, destabilize management, and jeopardize the smooth continuation of the enterprise. This was a significant concern in an economy with many family-owned businesses.
  3. Uncertainty and Transactional Difficulties: The possibility of assets being clawed back in kind created uncertainty for recipients of gifts and bequests, and could complicate subsequent transactions involving those assets.

The Supreme Court ruling of August 30, 1976 (Showa 51.8.30, Minshu 30-7-768) affirmed this potent effect of the abatement claim, highlighting the direct impact on property rights.

The Core Reform: A Shift to Monetary Claims (Article 1046)

The most fundamental change introduced by the reforms is the transformation of the Iryubun remedy into a right to claim monetary compensation. The new Article 1046 of the Civil Code stipulates that an Iryubun holder whose rights have been infringed can demand a monetary payment from the donee or legatee equivalent to the value of the infringed portion.

Key aspects of this shift include:

  • Preservation of Original Transfer: Unlike the old system, the infringing gift or bequest itself generally remains legally effective with the original recipient. The recipient keeps the asset (e.g., the real estate, the company shares) but becomes obligated to pay a sum of money to the Iryubun claimant. This eliminates the automatic reversion of property rights and the ensuing co-ownership problems.
  • Rationale: The primary reasons for this change were to:
    • Avoid the creation of problematic co-ownership situations.
    • Facilitate smoother and more predictable business succession by allowing the designated successor to retain control of business assets.
    • Align the remedy with the evolving understanding of Iryubun's purpose – less about preserving specific family property for designated heirs and more about ensuring a fair minimum financial share or compensating for the loss of potential inheritance.
  • Nature of the New Claim: The Iryubun right itself is still considered a type of formative right (形成権 - keiseiken). Its exercise now results in the creation of a specific monetary claim against the recipient(s) of the infringing dispositions.

Who Can Claim Iryubun and How is it Generally Calculated? (Article 1042)

The categories of heirs entitled to Iryubun have not changed:

  • Entitled Heirs (遺留分権利者 - Iryūbun Kenrisha): The deceased's spouse, children (including their descendants by right of representation, such as grandchildren if a child has predeceased), and direct ascendants (e.g., parents, grandparents, if there are no children).
  • Excluded Heirs: Siblings of the deceased and their descendants are not entitled to Iryubun.

The overall proportion of the estate subject to Iryubun is also unchanged:

  • Total Iryubun Pool:
    • Generally, one-half (1/2) of the value of the "basic estate" (calculated as described below).
    • If the only heirs entitled to Iryubun are direct ascendants of the deceased, this proportion is reduced to one-third (1/3) of the basic estate value.
  • Individual Iryubun Share: Each entitled heir's specific Iryubun amount is determined by multiplying the total Iryubun pool by their individual statutory inheritance proportion (法定相続分 - hōtei sōzokubun).

The Basic Estate for Iryubun Calculation (Article 1043)

The foundation for calculating Iryubun is the "basic estate value," determined as follows:

  1. Value of all assets owned by the deceased at the time of death.
  2. Plus: The value of certain lifetime gifts made by the deceased (as detailed under Article 1044 below).
  3. Minus: The total amount of the deceased's debts (liabilities).

If the estate includes assets that are conditional rights or rights of uncertain duration, their value for Iryubun purposes is determined by an expert appraiser appointed by the Family Court.

Gifts Added Back to the Iryubun Calculation Base (Article 1044)

The rules for which lifetime gifts are added back to the estate value for Iryubun calculation have been significantly revised, particularly concerning gifts to heirs:

  • Gifts to Non-Heirs:
    • Generally, only gifts made within one year prior to the commencement of inheritance (death of the deceased) are included.
    • However, gifts made more than one year before death are also included if both the donor (deceased) and the donee were aware at the time of the gift that it would prejudice the Iryubun of entitled heirs.
  • Gifts to Heirs (Constituting Special Benefits - 特別受益 - tokubetsu jueki): This is a major area of change.
    • Previously, under case law (e.g., Supreme Court, March 24, 1998, Minshu 52-2-433), gifts to heirs that constituted "special benefits" (typically gifts for marriage, adoption, setting up a business, or significant living expenses that create an imbalance among heirs) were generally included in the Iryubun base regardless of when they were made, unless very specific circumstances made their inclusion unfair.
    • The new Article 1044(3) introduces a 10-year look-back period for such special benefit gifts made to heirs. Only those special benefits given within ten years of the deceased's death are now included in the Iryubun calculation base. This reform aims to provide greater legal certainty and reduce disputes over very old gifts.
    • The "10-year" rule applies specifically to gifts to heirs that are for "marriage or adoption, or as capital for livelihood" (which are typical examples of special benefits). This implies that gifts to heirs that do not fall under the category of special benefits are generally not added back, even if made within the one-year period applicable to non-heirs. This clarifies a previously ambiguous area.
    • If both the deceased and the heir (donee) knew that a special benefit gift (even one made more than 10 years prior) would infringe Iryubun, it can still be included, effectively applying the "knowledge of prejudice" rule.
    • Importantly, even if the deceased expressed an intention to exempt a special benefit gift from "hotchpot" (持戻しの免除 - mochidashi no menjo) for the purpose of calculating actual inheritance shares under Article 903, this exemption does not prevent the gift from being included in the Iryubun calculation base if it falls within the 10-year rule. This maintains the protective nature of Iryubun.
  • Valuation of Gifts: Gifts added back are valued as of the time of the commencement of inheritance, notionally assuming they still exist in their original form, even if the donee has since altered, consumed, or lost the gifted property (Article 1044(2) applying Article 904 mutatis mutandis).

Calculating the Monetary Infringement Amount (遺留分侵害額 - Iryūbun Shingai-gaku) (Article 1046(2))

Once an individual heir's Iryubun entitlement is determined, the actual monetary amount they can claim (the Iryūbun Shingai-gaku) is calculated using a specific formula now codified in Article 1046(2). This formula was largely followed in practice and case law (e.g., Supreme Court, November 26, 1996, Minshu 50-50-2747) even before the reform, but its explicit inclusion provides clarity.

The calculation is as follows:

Iryūbun Shingai-gaku = (Calculated Individual Iryubun Entitlement [per Art. 1042])
MINUS

  1. The value of any legacies or special benefit gifts that the Iryubun claimant themselves received from the deceased.
  2. The value of the net estate assets that the Iryubun claimant is entitled to inherit based on their statutory inheritance share (or share designated in a will), calculated after considering special benefits of all heirs but before considering any contributor's portion (kiyobun).
    PLUS
  3. The amount of the deceased's debts that the Iryubun claimant is responsible for bearing according to their share of inheritance (referred to as "Iryubun holder's succeeding debts" - 遺留分権利者承継債務). The Supreme Court decision of March 24, 2009 (Minshu 63-3-427) provided guidance on handling debts in this context, which is now reflected.

This detailed calculation ensures that the monetary claim accurately reflects the actual shortfall in what the Iryubun holder should have received.

Who Bears the Monetary Obligation and How? (Article 1047)

When multiple gifts and/or legacies infringe the Iryubun, Article 1047 establishes the order and proportion in which the recipients (donees and legatees) must satisfy the monetary claims. These rules largely maintain the substance of the old abatement order but are adapted to the new monetary claim system:

  • Entities Subject to Claim: The claim is directed against:
    • Legatees (including those who receive property through a "specific property succession will" – 特定財産承継遺言, which is a way of designating inheritance of specific assets, or those whose inheritance share is designated by will).
    • Donees of gifts that are included in the Iryubun calculation base.
  • Order of Liability (Who pays first?):
    1. Legatees before Donees: Recipients of legacies (through a will) must satisfy Iryubun claims before recipients of lifetime gifts are called upon.
    2. Later Gifts before Earlier Gifts: Among multiple donees, those who received gifts more recently (closer to the time of death) are liable before those who received gifts earlier. The claim works backward in time from the most recent infringing gift.
  • Proportional Liability (How much does each liable person pay?):
    • Among Multiple Legatees: If there are several legatees whose bequests infringe Iryubun, they bear the monetary obligation in proportion to the value of the legacies they respectively received. The testator can, however, specify a different order or proportion of abatement among legatees in the will.
    • Among Multiple Simultaneous Donees: If several infringing gifts were made at the same time, the donees bear the obligation proportionally to the value of their gifts.
  • Valuation for Burden Calculation:
    • Recipient is also an Iryubun Holder: If a donee or legatee is also an heir entitled to their own Iryubun, the value of the property they received is, for the purpose of calculating their burden towards other Iryubun claimants, first reduced by the amount of their own Iryubun entitlement derived from that specific gift or legacy. This prevents a "circular abatement" where they would be asked to pay for infringing their own Iryubun.
    • The same valuation rules used for including gifts in the Iryubun base (e.g., Article 904 regarding changes in value, Article 1043(2) for uncertain rights, Article 1045 for gifts with burdens or for inadequate consideration) are applied mutatis mutandis when determining the "value of the object of the gift/legacy" for calculating each recipient's share of the monetary burden.

Key New Provisions Supporting the Monetary Claim System

The shift to a monetary claim is accompanied by several new provisions in Article 1047 designed to manage the practicalities of this system:

  1. Court's Power to Grant a Grace Period for Payment (Article 1047(5)):
    A significant practical measure is that the court, upon the request of a donee or legatee liable for an Iryubun payment, can grant a "reasonable grace period" for the payment of all or part of the monetary debt. This acknowledges that recipients of non-liquid assets (like real estate or closely-held business shares) might not have immediate funds to satisfy the claim. This provision offers flexibility and aims to prevent forced sales of assets, which was a concern if a strict immediate monetary payment was always required. Legislative discussions explored alternatives like allowing in-kind payment under certain circumstances, but the final decision favored a primarily monetary system with this judicial discretion for payment timing. If a grace period is granted, interest at the statutory rate would typically accrue from the original due date.
  2. Donee/Legatee's Right to Offset by Paying Deceased's Debts (Article 1047(3)):
    If a donee or legatee who owes an Iryubun infringement payment voluntarily pays a debt of the deceased for which the Iryubun claimant would have been proportionately liable, that donee/legatee can reduce their monetary obligation to the Iryubun claimant. This is done by notifying the claimant. The reduction is capped at the amount of the debt paid. Any right of reimbursement the paying donee/legatee might have acquired against the Iryubun claimant for settling that debt is then extinguished up to the offset amount. This mechanism allows for a more direct settlement of interconnected obligations.
  3. Loss Due to Recipient's Insolvency (Article 1047(4)):
    If a donee or legatee liable for an Iryubun payment is insolvent and unable to pay their share, the resulting shortfall is borne by the Iryubun claimant. The claimant cannot then try to recover this specific uncollectible amount from other solvent donees or legatees who have already fulfilled their respective obligations. This provision maintains the pre-reform principle regarding the risk of a recipient's insolvency.

Time Limits for Iryubun Infringement Claims (Article 1048)

The time limits for exercising the Iryubun right and establishing the monetary claim remain strict (these periods are for the formative right, not the subsequent monetary debt):

  • One Year with Knowledge: The claim must be exercised within one year from the time the Iryubun holder becomes aware of:
    1. The commencement of inheritance (the deceased's death), AND
    2. The existence of the gifts or legacies that infringe their Iryubun.
  • Ten-Year Absolute Limit: Regardless of knowledge, the right is extinguished if not exercised within ten years from the commencement of inheritance.

Once the Iryubun right is exercised and the monetary claim is established, that specific monetary debt then becomes subject to the general rules of extinctive prescription for claims (e.g., five years from when the holder knows they can exercise the right to payment, or ten years from when the monetary claim itself arose, under Civil Code Article 166).

Waiver of Iryubun (Article 1049)

The rules on waiving Iryubun are substantively unchanged:

  • A waiver of Iryubun before the commencement of inheritance (i.e., during the deceased's lifetime) is only legally valid if it receives the permission of the Family Court. This is to prevent potential coercion.
  • A waiver of Iryubun by one entitled heir does not increase or otherwise affect the Iryubun entitlements of other co-heirs who have not waived their rights.

Implications for Business Succession and Estate Planning

The reform of the Iryubun system, particularly the shift to monetary claims, has significant practical consequences:

  • Major Benefit for Business Succession: This is perhaps the most lauded impact. Previously, an heir receiving company shares vital for business continuity could be forced to return some of those shares if they infringed another heir's Iryubun. This could lead to unwelcome outside ownership or deadlock. Now, the successor can generally retain all the shares and instead compensate other Iryubun holders monetarily, preserving the integrity and control of the business.
  • Increased Importance of Liquidity Planning: For testators wishing to make substantial gifts or bequests (especially of illiquid assets like a business or real estate to one heir), it is now crucial to consider how the recipient will fund potential Iryubun monetary claims from other heirs. This may involve strategies like earmarking liquid assets in the estate plan or using life insurance policies payable to the recipient of the Iryubun-infringing asset.
  • Valuation Challenges Remain: While the form of the remedy has changed, the often-difficult task of valuing assets (particularly non-listed company shares, unique real estate, or art) for the purpose of calculating the Iryubun base and the infringement amount remains. Disputes over valuation can still lead to significant contention.
  • Estate Planning Adjustments: Wills and estate plans drafted before this reform may need review to account for the new monetary claim system. Testators might want to make provisions for how monetary Iryubun claims should be satisfied or use the will to adjust the burden of payment among legatees if desired.

Conclusion

The shift from in-kind restoration to monetary claims for Iryubun infringements is a landmark reform in Japanese inheritance law. It aims to strike a better balance between protecting the guaranteed minimum shares for close heirs and promoting legal certainty, facilitating smoother asset transfers, and especially enabling more stable business succession. While it resolves many of the practical problems associated with the old system, it introduces new considerations, primarily around the valuation of assets and the need for recipients of large bequests or gifts to plan for potential monetary liabilities. This fundamental change requires careful attention from legal professionals, business owners, and individuals involved in estate planning in Japan.