Qualified acceptance in practice (1)
– Views on procedure selection –

By Takuya Murao

  1. Inheritance methods

There are three inheritance methods in law that a legal heir may utilize, namely unconditional acceptance, qualified acceptance and renunciation of inheritance. Amongst these, unconditional acceptance and renunciation of inheritance are generally used, with it normally being the case that unconditional acceptance is selected when the assets outvalue the liabilities and renunciation is selected when the liabilities outvalue the assets. However, it is sometimes difficult to accurately ascertain the assets and liabilities during the period for deciding whether to renounce an inheritance (in principle 3 months, although an extension is available upon application); for example, when the decedent is a director of a company and it is possible that they are the guarantor for the company’s debts. The process of qualified acceptance is available for this type of situation.

  1. What is qualified acceptance?

Qualified acceptance is to “accept inheritance with a reservation to perform the obligations or testamentary gifts of the decedent only within the extent of the property obtained through the inheritance”. This means that if a liability that exceeds the value of the estate is discovered, repaying the debt using only the estate’s assets is sufficient and repayment from the heirs’ personal assets is not required. This means the heirs can inherit the assets while avoiding the risk of personally bearing any liabilities. This point alone makes it seem a very useful process. However, qualified acceptance is used rarely in practice; in the 2014 fiscal year there were 1,273,020 deaths (Ministry of Health, Labour and Welfare demographic statistics) yet qualified acceptance was used in just 770 cases (2014 judicial statistics).

  1. Reasons for not using qualified acceptance

Why is this seemingly helpful process of qualified acceptance not used?

(1)  First, the fact that an application by all heirs is required in order to select qualified acceptance is cited as a reason. When there are several heirs and one of them chooses renunciation or unconditional acceptance, then qualified acceptance cannot be selected.

(2)  Next, for taxation purposes, the special taxation method of “deemed capital gains tax” also becomes a large burden to the heir. “Deemed capital gains tax” is a provision where the assets within the estate that may generate profit from an increase in value, such as real property and stocks, are deemed to have been transferred as of the time that the inheritance process commences and capital gains tax is taxed against them. In other words, the tax that would normally be assessed upon the future disposal of the inherited assets in the case of unconditional acceptance is instead assessed earlier. For this tax, the heir must file a tax return concerning the decedent’s assets (called a quasi-final return) in advance, within 4 months of the day after becoming aware of the commencement of the inheritance process.

(3)  Finally, the most fundamental problem is that the qualified acceptance process is complex and there are few professionals who are familiar with the detailed methods of the process, despite it being necessary to depend upon a professional. As qualified acceptance follows a similar process to the role of an administrator in the case of bankruptcy, beginning with promptly ascertaining the estate’s assets and liabilities and ending with paying out the liabilities while the heirs inherit the residual assets, it is too complex for persons who lack legal knowledge. On the other hand, experience is not gained through actual practice either because the number of people who use qualified acceptance is extremely small, as mentioned in section 2 above. So, there seems to be the situation where professionals such as tax accountants and lawyers do not actively recommend the use of qualified acceptance because they too do not fully understand the process.

  1. Utility of qualified acceptance

As has been discussed, because qualified acceptance is a complex process that requires professional knowledge, it cannot be called a user-friendly system by any standard. However, it is wasteful to renounce an inheritance because it is unknown whether there are liabilities despite there clearly being assets, so if qualified acceptance is used appropriately the estate can be inherited while avoiding the risk of being burdened with liabilities. If at minimum (1) the agreement of all heirs can be obtained, (2) it is clear that there is a certain level of assets, and (3) there is a possibility that latent liabilities such as guaranty obligations exist, then qualified acceptance should be brought into view and you may want to consult with a lawyer.

In the following instalments, I would like to explain the qualified acceptance process in detail based on cases previously handled by our office.