SOUTH KOREA Law and Practice Contributed by: Woong-kyu Cho, Ji-eun Kim and Hyun-kyung Kim, Barun Law LLC
3. Trusts, Foundations and Similar Entities 3.1 Types of Trusts, Foundations or Similar Entities Both trusts and foundations are recognised in Korea. However, Korean law does not recognise private-ben - efit foundations established primarily to hold, manage or transfer family wealth. As a result, foundations are rarely used for private wealth succession. By contrast, trusts have become an increasingly important succession planning tool. Their principal advantages include flexibility in implementing long- term succession arrangements and the bankruptcy remoteness of trust assets. Given that Korea applies the substance-over-form principle, adopting the legal form of a trust does not itself provide tax benefits. In particular, Korean tax law does not recognise a complete separation of taxation between the settlor and the trust through non-gran - tor or irrevocable trusts. Consequently, testamentary substitute trusts remain the structures most com - monly used in practice. Under the current tax regime, establishing a trust may result in gift tax on the beneficial interest and inherit - ance tax on the trust property, creating potential dou - ble taxation. Accordingly, the settlor usually retains the beneficial interest during their lifetime. The scope for tax planning through trusts is neverthe - less expected to expand. More recently, the Supreme Court held that, where a settlor establishes a testa- mentary substitute trust under which the heir, follow - ing the settlor’s death, becomes entitled to receive the proceeds from the trustee’s sale of the trust prop - erty rather than the real property itself, the heir is not regarded as acquiring the real property for acquisition tax purposes. The decision is regarded as expanding the opportunities for tax-efficient succession planning through testamentary substitute trusts. 3.2 Recognition of Trusts The Korean Trust Act legally recognises the valid - ity and effectiveness of trusts. Accordingly, property transferred to a trustee becomes, both internally and
and satisfies the prescribed use-of-funds and employ - ment requirements for ten years, a KRW500 million deduction is available, followed by a preferential 10% gift tax rate on up to KRW5 billion of the tax base (or KRW10 billion where at least ten new employees are hired). Although the scope of the start-up funding regime has recently been expanded, including by increasing the number of qualifying business sectors, the govern - ment is considering narrowing the preferential treat - ment to prevent abuse. The regime should therefore be used with careful planning and close attention to future legislative developments. 2.7 Transfer of Assets: Digital Assets Under Korean law, there has been limited legislative development concerning the inheritance and succes - sion of digital assets. Digital assets with ascertainable economic value, including cryptocurrencies and other tokenised assets, are generally subject to Korean inheritance and gift tax, whether held through a cryptocurrency exchange or a private wallet. Assets held through an exchange can generally be transferred in accordance with the exchange’s procedures. By contrast, assets held in a private wallet may be inaccessible without the rel - evant private key, seed phrase, or similar credentials. Accordingly, although such assets form part of the decedent’s estate, further legal and policy discussion is needed as to whether inheritance tax should apply where the heirs cannot practically access them. By contrast, digital assets such as email and other online accounts, whose independent economic value is uncertain or difficult to quantify, are generally not treated as part of the taxable estate in practice. How - ever, Korean law provides no mechanism for automat - ically suspending or terminating such accounts upon the account holder’s death. As a result, the online accounts of deceased persons often remain active, creating practical difficulties.
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