Death Retirement Allowance and Death Benefit: 5 Million Yen

The short answer: what a bereaved family receives after a death, and the tax on each

Sources: National Tax Agency, No.4117 "Death retirement allowances subject to inheritance tax"[National Tax Agency], No.4114 "Death benefits subject to inheritance tax"[National Tax Agency], No.4120 "Treatment of condolence money received"[National Tax Agency], Japan Pension Service, "When a person receiving a pension dies"[Japan Pension Service], Japan Health Insurance Association, "Burial allowance and burial expenses"[JHIA]

The 5 million yen x statutory heirs allowance runs separately for the retirement allowance and the insurance money

For death retirement allowances the National Tax Agency gives the formula "5 million yen x the number of statutory heirs = the exempt limit", and it gives the same formula for death benefits. The two sit in different provisions (separate items of Article 12 of the Inheritance Tax Act) and are calculated independently of each other.

• How the statutory heirs are counted. Someone who has renounced the inheritance is still counted. Adopted children count as one if there is a biological child, and up to two if there is none.
• The exemption applies only to what an heir receives. Insurance money or a retirement allowance received by someone who is not an heir (a common-law spouse, a person who renounced the inheritance, a grandchild who is not an adopted grandchild, and so on) gets no exemption.
• Where several heirs receive money, the allowance is split in proportion to the amounts received. If the wife receives the whole insurance payout, she uses the whole 15 million yen allowance.
• A death retirement allowance falls under inheritance tax when payment "was fixed within three years of the death". A retirement allowance fixed after three years becomes occasional income of the relative who receives it.

Who paid the premiums changes the tax. If the deceased paid them, it is inheritance tax; if the recipient paid them, income tax (occasional income); if a third party paid them, gift tax. For the whole picture of the inheritance tax basic exclusion (30 million yen + 6 million yen x statutory heirs), see the basic exclusion for inheritance tax and how to reduce the bill.

Condolence money: six months of salary (three years if work-related) stays out of the estate

Condolence money, wreath money and funeral money paid by a company separately from the retirement allowance are treated as condolence money - and so fall outside inheritance tax - up to three years of the ordinary salary at the time of death for a work-related death, and six months for a death unrelated to work[National Tax Agency]. On a monthly salary of 500,000 yen that is 3 million yen when the death is unrelated to work, and 18 million yen when it is work-related (a workers' accident). Anything above that enters the death retirement allowance calculation with its 5 million yen x statutory heirs allowance.

Even where the company's rules call the payment "condolence money", if it is in substance a retirement allowance (calculated from years of service, for instance) it is treated as a retirement allowance. Conversely, where a company with no retirement allowance rules pays the family a sympathy payment, it is condolence money as long as it stays within the range above. Families of owners of small and medium-sized companies can make sure of this exemption if the company keeps its directors' retirement allowance rules and its condolence money rules as separate written documents.

Pensions: the unpaid pension is "occasional income", survivors' pensions are tax-free

• Unpaid pension. Pensions are paid in arrears (two months' worth in each even-numbered month), so the amount up to the month of death is always left unpaid. It goes to a relative who shared a livelihood with the deceased, in the order spouse, child, parent, grandchild, grandparent, sibling, then other relatives within the third degree; where someone higher in the order exists, those below cannot claim[Japan Pension Service]. It is not part of the estate but occasional income of the person who receives it, and there is no tax if, combined with any other occasional income that year, it stays within the 500,000 yen special deduction. The time limit is five years.
• Basic Survivors' Pension and Employees' Survivors' Pension. Both are tax-free, and no tax return is needed. From April 2028 the Employees' Survivors' Pension for a spouse under 60 with no children becomes, as a rule, a five-year fixed-term benefit. For the details, see the Employees' Survivors' Pension becoming a five-year fixed-term benefit from April 2028.
• Notification of death. When a pension recipient dies, a "notification of death of a person entitled to a pension" goes to the pension office (as a rule this is unnecessary if the My Number is registered). If the notification is late and pension payments keep arriving, they have to be repaid.

Health insurance: the 50,000 yen burial allowance, and medical refunds

• Burial allowance (50,000 yen). When an employee (an insured person under health insurance) dies, the family member whose livelihood was supported by them receives 50,000 yen. If there is no such family member, the person who carried out the burial receives burial expenses at cost (capped at 50,000 yen). A death within three months of leaving the job is also covered. When a dependent dies, the insured person receives a family burial allowance of 50,000 yen[JHIA]. People on National Health Insurance or on the medical system for the late-stage elderly receive a funeral expense benefit from the municipality (30,000-70,000 yen, depending on the municipality). None of these is paid unless you apply, and the time limit is two years.
• High-cost medical expense benefit and medical costs above the ceiling. If a hospital stay before the death qualified for the high-cost medical expense benefit, the heirs claim and receive it. Because it was a right of the deceased, it is included in the estate.
• Loss of health insurance status. A spouse who was a dependent loses that status when the insured person dies, and so has to join National Health Insurance or switch to the health insurance of their own workplace (within 14 days).

The order of the procedures and their deadlines are set out in the money roadmap after a parent dies. Condolence gift money is tax-free and does not enter the estate either (tax on wedding gift money and condolence gift money).

What you can do while alive: designing insurance and retirement allowances to use the exemptions in full

• Use up the exemption on the death benefit. In a household likely to face inheritance tax, converting 5 million yen x the number of statutory heirs from savings into whole life insurance means that amount passes to the family tax-free. Make the heirs the beneficiaries - a grandchild or a common-law partner cannot use the allowance.
• Company owners should put retirement allowance rules and condolence money rules in order. The death retirement allowance has 5 million yen x statutory heirs, and condolence money has six months of salary (three years if work-related), and the two exemptions run separately. Without written rules the tax office can deny them, so set out the basis for the amounts (the merit multiplier and so on) in writing.
• Check the combination of who pays the premiums and who receives the money. If the wife is the policyholder, the husband is the insured person and the wife is the beneficiary, the death benefit is the wife's occasional income (not inheritance tax): the exemption is unavailable, but in exchange there is the 500,000 yen deduction for occasional income and taxation on half the remainder. Which is better depends on the amounts.

How much life insurance you need in the first place is something to decide on the basis of the survivors' pension and your savings. See do you really need life insurance.

Summary

• Both a death retirement benefit and death insurance proceeds are each tax-exempt up to ¥5 million times the number of legal heirs; the two allowances can be used separately.
• The tax exemption applies only to the portion received by heirs. It cannot be used by someone who renounced their inheritance or by a common-law spouse.
• A condolence payment is tax-exempt up to 6 months of ordinary salary (3 years if the death was work-related) and is not counted as part of the estate.
• An unpaid pension benefit becomes occasional income for the surviving family member who receives it. Survivor pension benefits and the ¥50,000 burial allowance are tax-exempt.
• Burial and funeral allowances are only paid if you apply, and the claim expires after 2 years.

Reference links (sources)

This article is based on the materials below. Whether an inheritance tax return is required depends on the estate as a whole, so consult a tax accountant if you go beyond the exemptions.

• National Tax Agency, No.4117 Death retirement allowances subject to inheritance tax (5 million yen x statutory heirs, within three years)
• National Tax Agency, No.4114 Death benefits subject to inheritance tax (5 million yen x statutory heirs, no exemption for anyone who is not an heir)
• National Tax Agency, No.4120 Treatment of condolence money received (three years, six months)
• Japan Pension Service, When a person receiving a pension dies (the order of priority for claiming an unpaid pension)
• Japan Health Insurance Association, When you or a family member dies (burial allowance and burial expenses)

Note: this article is general information. The example amounts are estimates and change with the assets and the family situation.