Civil Trusts: A Japanese Family Trust You Can Set Up Without Leaving the Country

"I want to set up a trust, but I do not want to open offshore accounts or build a complex foreign structure to do it." We hear this repeatedly from wealth holders resident in Japan. In fact, much of it can be done entirely within Japan. The "civil trust" (minji shintaku) provided for under Japan's Trust Act is a structure that can be established among family members.

Simple to Establish, Not Simple to Design

Article 3 of the Trust Act sets out three ways to create a trust — by contract, by will, and by self-declaration (a declaration of intent made by notarial deed or equivalent). The contract method is the most common and takes effect on the parties' agreement. It requires no trust-business licence and no trust bank, and can be established within a family — which is the key difference from a commercial trust.

A typical design looks like this. The father is the settlor and the eldest son the trustee, entrusted with managing real estate or shares in the family company. The father is the first beneficiary, receiving income during his life. After his death, the spouse becomes the second beneficiary, and thereafter the children the third. Article 91 of the Trust Act provides that, for a trust under which beneficial interests pass successively on a beneficiary's death, the arrangement remains effective, after thirty years have elapsed from creation, up to the beneficiary then in existence who acquires the interest. Where a will can name only one generation, this "successive-beneficiary" trust can embed the order of succession several generations ahead.

Tax May Be Deferred, but It Does Not Disappear

This is where a common misunderstanding arises. Article 9-2 of the Inheritance Tax Act provides that a person who becomes a trust beneficiary without bearing appropriate consideration is deemed to have acquired that right from the settlor by gift (or, where the trust takes effect on the settlor's death, by bequest). In other words, at the moment a beneficial interest transfers, it is treated as subject to inheritance or gift tax. A civil trust is not a tax-reduction device. What it reduces is not tax, but procedural complexity.

The trustee is also subject to a duty of segregated administration under Article 34 of the Trust Act: trust property must be kept separate from the trustee's own property. Even when a child manages a parent's real estate, it may not be commingled with the child's own assets.

The Practical Obstacle, and Why It Is Still Chosen

The principal practical hurdle for a civil trust is the dedicated trust account (shintaku-guchi kōza). In principle, trust property should be held in a separate account, yet in practice many financial institutions do not accommodate account opening for civil trusts. On cost, too — including preparation of the notarial deed and judicial scrivener fees — a certain initial outlay is required.

Even so, civil trusts are chosen because they combine dementia-contingency planning with flexibility.

A will takes effect only after death and is of no use if dementia sets in beforehand. Adult guardianship has the court appoint a guardian, but centres on preserving property, making active management difficult. A civil trust takes effect during life: if capacity is lost, the trustee keeps managing; on the settlor's death, the beneficiary switches automatically.

In our experience, what decides the success of a civil trust is less the elegance of the legal drafting than a single question — whether the trustee can genuinely be trusted. At the core of the mechanism is not the contract, but family trust. Setting one up presupposes the involvement of a judicial scrivener to draft the trust agreement and a tax accountant to trace the tax consequences of each transfer of beneficial interest.

This article provides general information on tax systems and does not constitute individual tax consultation. Specific filings and tax computations are handled by licensed partner tax accountants whom we introduce.