My Business Partner in Japan Passed Away: How Are Their Assets and Debts Handled in Succession?

The death of a business partner, shareholder, or key counterparty in Japan can trigger a complex legal process known as sōzoku (相続 – inheritance or succession). This process determines how the deceased's assets and liabilities are identified, valued, and ultimately distributed among their heirs. For businesses and individuals who had dealings with the deceased, understanding the fundamentals of Japanese succession law is crucial for navigating outstanding obligations, claims, and the potential impact on ongoing business relationships.

This article provides an overview of how assets and debts are generally handled under Japanese succession law, including identifying the estate, determining heirs and their shares, accounting for lifetime gifts and contributions, and the process of estate division.

1. Identifying the Heirs and Their Shares

Upon a person's death, the first step is to identify their legal heirs and their respective inheritance shares.

• Determining Heirs: Japanese law establishes a statutory order of intestate succession (succession without a will):
  • Spouse: The surviving spouse is always an heir (Civil Code, Article 890).
  • Direct Descendants: Children (including adopted children) are the first in line after the spouse. If a child has predeceased the deceased, that child's own children (grandchildren of the deceased) inherit by representation (代襲相続 - daishū sōzoku) (Article 887).
  • Direct Ascendants: If there are no children or other direct descendants, the deceased's parents (or grandparents if parents are deceased) become heirs along with the spouse (Article 889 I(i)).
  • Siblings: If there are no direct descendants or ascendants, the deceased's siblings become heirs along with the spouse. If a sibling has predeceased, their children (nieces/nephews of the deceased) inherit by representation (Article 889 I(ii)).
• Statutory Inheritance Shares (法定相続分 - hōtei sōzokubun) (Article 900):
  The Civil Code prescribes default shares for each class of heir. For example:
  • If heirs are spouse and children: Spouse inherits 1/2, children share 1/2 equally.
  • If heirs are spouse and parents: Spouse inherits 2/3, parents share 1/3 equally.
  • If heirs are spouse and siblings: Spouse inherits 3/4, siblings share 1/4 equally.
• Designated Inheritance Shares (指定相続分 - shitei sōzokubun) (Article 902):
  A person can, by will (遺言 - yuigon or igon), specify different inheritance shares for their heirs than those provided by statute, or even designate specific assets for specific heirs (see "Heir-designating bequests" below).

2. The Scope of the Inheritable Estate (相続財産 - Sōzoku Zaisan)

The inheritable estate generally comprises all rights and duties that belonged to the deceased at the time of their death, unless these were exclusively personal to the deceased (Civil Code, Article 896).

• Assets Typically Included:
  • Real estate (land, buildings).
  • Movable property (personal belongings, equipment, inventory).
  • Cash (Supreme Court judgment of April 10, 1992, Hanrei Jihō No. 1421, p. 77).
  • Bank deposits: Following a significant Supreme Court (Grand Bench) judgment of December 19, 2016 (Minshū Vol. 70, No. 8, p. 2121), bank deposits (both ordinary and time deposits) are now generally considered part of the estate subject to division among heirs, rather than being automatically divided according to inheritance shares at death. This overturned a long-standing precedent.
  • Claims held by the deceased (e.g., accounts receivable, loans made by the deceased).
• Assets Often Excluded or Treated Separately:
  • Divisible Monetary Claims (other than bank deposits): Claims like general accounts receivable or tort claims for damages are traditionally considered to be automatically divided among the heirs according to their respective inheritance shares at the moment of death. They do not form part of the estate that needs to be actively divided through an estate division agreement, unless the heirs mutually agree to include them (Supreme Court judgment of April 8, 1954, Minshū Vol. 8, No. 4, p. 819).
  • Rental Income from Estate Property Accruing After Death: Rent generated by real estate belonging to the estate after the deceased's death is generally not considered part of the original estate to be divided. Instead, it accrues directly to the co-heirs according to their inheritance shares in the property, unless otherwise agreed (Supreme Court judgment of September 8, 2005, Minshū Vol. 59, No. 7, p. 1931).
  • Life Insurance Proceeds Payable to a Named Beneficiary: These are generally considered the beneficiary's own property and not part of the deceased's inheritable estate, unless the estate itself was named as the beneficiary.
  • Retirement Allowances or Death Benefits Payable by an Employer: Depending on the terms of the employment agreement or relevant regulations, these may be payable directly to specific survivors and not form part of the estate.

3. Handling Debts of the Deceased (相続債務 - Sōzoku Saimu)

Heirs inherit not only assets but also the debts of the deceased.

• Automatic Division of Monetary Debts: Monetary debts owed by the deceased are, by operation of law, automatically divided among the heirs according to their respective statutory inheritance shares at the time of death (Supreme Court judgment of June 19, 1959, Minshū Vol. 13, No. 6, p. 757). Each heir becomes directly liable to the creditor for their proportionate share of the debt.
• Creditors' Rights and Designated Shares (Article 902-2):
  Even if the deceased's will designates specific inheritance shares for debts that differ from the statutory shares, or if an estate division agreement among heirs allocates debts in a particular way, this internal allocation is not binding on the creditors unless they consent to it.
  Article 902-2 of the Civil Code (introduced in the 2020 reforms, codifying prior case law like Supreme Court, March 24, 2009, Minshū Vol. 63, No. 3, p. 427) clarifies that a creditor of the deceased can still demand payment from each co-heir in proportion to their statutory inheritance share, even if a will or an agreement among heirs attempts to allocate the debt differently. If an heir pays more than their internally agreed share (but within their statutory share liability to the creditor), they may have a right of recourse against other heirs.

4. Determining Each Heir's Actual Entitlement: Calculating "Actual Inheritance Shares" (具体的相続分 - Gutaiteki Sōzokubun)

While statutory or designated shares provide a baseline, the final "actual inheritance shares" (具体的相続分 - gutaiteki sōzokubun) used for dividing the positive assets of the estate are often adjusted to ensure fairness among co-heirs. This involves considering:

• Starting Point: The value of the deceased's positive assets at the time of inheritance, with certain assets (especially those subject to special benefits) notionally added back for calculation. Valuations for division are generally made at the time of division, but gifts for hotchpot purposes are valued at the time of the gift, then notionally revalued for the division process.
• Adjustments for Fairness:
  • Special Benefits (特別受益 - tokubetsu jueki) (Article 903):
    If an heir received substantial lifetime gifts from the deceased for specific purposes such as marriage, adoption, starting a business, or as capital for their livelihood, or if they received a bequest (遺贈 - izō), these are considered "special benefits."
    The value of such inter vivos special benefits is generally added back notionally to the value of the estate at the time of death to create a "hypothetical estate" for calculating shares. This process is called "hotchpot" (持戻し - mochimodoshi). After calculating each heir's share of this hypothetical estate, the value of the special benefit received by an heir is deducted from their respective share. Bequests are already part of the estate at death so aren't "added back" in the same way but are counted towards the recipient's share.
  • Exemption from Hotchpot (持戻し免除 - mochimodoshi menjo) (Article 903, paragraph 3): The deceased can, by will or other manifestation of intention, exempt a special benefit from being added back into the hotchpot calculation. In such cases, the heir receives the gift in addition to their normal inheritance share from the remaining estate.
  • Contribution (寄与分 - kiyobun) (Article 904-2):
    If a co-heir made exceptional contributions to the maintenance or increase of the deceased's property (e.g., through providing extensive personal care, significant financial support, or labor in a family business beyond what would ordinarily be expected), their inheritance share can be increased to reflect this "contribution." The amount of the kiyobun is first determined by agreement among the heirs or, if no agreement is reached, by the Family Court. This determined amount is then notionally deducted from the value of the estate before calculating the basic inheritance shares. The contributing heir then receives their basic share plus the amount of their kiyobun. (The Supreme Court judgment of February 24, 2000, Minshū Vol. 54, No. 2, p. 523, discusses gutaiteki sōzokubun in relation to these concepts).

These adjustments aim to achieve substantial fairness among heirs by taking into account the benefits already received or special efforts made during the deceased's lifetime.

5. The Process of Estate Division (遺産分割 - Isan Bunkatsu)

• Co-ownership (共有 - kyōyū) by Heirs (Article 898): Until the estate division is completed, the divisible assets of the estate are co-owned by all the heirs in proportion to their (adjusted) inheritance shares.
• Methods of Division (Article 907):
  1. Agreement (遺産分割協議 - isan bunkatsu kyōgi): The primary method is by agreement among all co-heirs. This requires unanimity. The heirs are free to agree on any method of division, which can deviate from calculated actual inheritance shares if all consent. Such agreements typically specify which heir receives which assets and often include internal agreements on who will bear which of the deceased's debts (though, as noted, this internal allocation doesn't bind creditors without their consent). An estate division agreement (遺産分割協議書 - isan bunkatsu kyōgisho) is usually prepared, often notarized if real estate registration is involved.
  2. Family Court Adjudication (遺産分割審判 - isan bunkatsu shinpan): If the co-heirs cannot reach an agreement, any heir can petition the Family Court for division. In Japan, mediation (調停 - chōtei) before the Family Court is usually a prerequisite to formal adjudication. If mediation is successful, the mediated agreement has the same effect as a court adjudication. If mediation fails, the court will adjudicate the division, taking into account the nature of the assets, the heirs' circumstances, ages, occupations, etc., generally aiming for division in kind (現物分割 - genbutsu bunkatsu) where feasible (Supreme Court judgment of May 31, 1955, Minshū Vol. 9, No. 6, p. 793). Other methods include division by compensation (代償分割 - daishō bunkatsu, where one heir takes a specific asset and compensates other heirs monetarily) or division by sale (価額分割 - kagaku bunkatsu, where assets are sold and the proceeds are divided).
• Partial Division: It is possible to divide only part of the estate if the heirs agree or if the court determines that a partial division will not harm the interests of other heirs (Article 907, paragraph 1 and paragraph 2, proviso).
• Effect of Division (Article 909): An estate division, whether by agreement or court order, has a retroactive effect, meaning each heir is deemed to have acquired their allotted property directly from the deceased at the time of death. However, this retroactivity cannot be asserted against the rights acquired by third parties in good faith in the interim period.
• Non-Performance of Division Agreement: If an heir fails to perform an obligation undertaken in an estate division agreement (e.g., a monetary payment to another heir), the other heirs generally cannot unilaterally terminate the entire division agreement based on general contract law principles of termination for default. The Supreme Court judgment of February 9, 1989 (Minshū Vol. 43, No. 2, p. 1) held that statutory contract termination does not apply due to the retroactive effect of estate division and the need for legal stability; the remedies are typically specific performance of the agreed obligation or damages. However, all co-heirs can mutually agree to rescind the original division agreement and conduct a new division (Supreme Court judgment of September 27, 1990, Minshū Vol. 44, No. 6, p. 995).
• Partial Withdrawal of Bank Deposits Before Division (Article 909-2): Recognizing the practical need for funds for immediate expenses like funeral costs or living expenses, the law (as amended) allows each co-heir to withdraw a limited portion of the deceased's bank deposits even before the estate division is finalized. The amount is generally up to one-third of the deposit balance multiplied by the heir's statutory inheritance share, subject to a cap per financial institution (currently ¥1.5 million). Such withdrawals are treated as a partial division of the estate.

Conclusion: Navigating the Complexities of Japanese Succession

Succession in Japan involves a detailed and often complex process of identifying heirs, determining their rightful shares, accounting for lifetime financial interactions with the deceased, and ultimately dividing the assets and allocating the debts. For business partners, creditors, or debtors of a deceased individual in Japan, understanding this process is essential. It can affect how outstanding business matters are resolved, how debts are recovered or paid, and how the deceased's interest in any joint ventures or partnerships is ultimately transferred. Given the intricacies involved, particularly when significant assets or complex family situations are present, seeking specialized legal advice is highly recommended to navigate the Japanese succession landscape effectively.