FPSB Korea | Fianacial Planning Cases

“Death” is a question of Buddhist meditation, something that is not welcomed by anybody. Thus, people tend to avoid the fact that they will die one day and other things related to death instead of facing it directly. Note, however, that this causes many problems in relation to “inheritance.” If the preparation is not complete, and the legal procedures concerning an inheritance are not satisfied, family troubles and economic loss may occur in many cases. Thus, the important thing is to prepare in advance with enough lead time and establish the solution so that you can avoid the problem. If you want to bequeath your property to the heir/heiress in the most convenient manner and at minimum cost, prepare and plan in advance.

If you plan an inheritance, you can expect the following effects:

You can control effectively the asset at a time in close proximity with your death.

Even after your death, you can take care of your children well.

You can minimize the economic and emotional burdens of the heir/heiress.

You can remove trouble among heirs/heiresses with regard to the inherited property.

The cost and time required for the probate can be prevented and minimized.

You can maintain your lifetime business continuously.

In case of charity and donation, you can give a lot back to the community.

You can bequeath your valuables as well as those of your family to the heir/heiress.

A good way of planning an inheritance is to check your net assets. Next, you have to decide who will receive an inheritance and what will be inherited. No matter how much your asset is, the most important thing is the early and exact establishment of your asset transfer plan for your family’s inheritance or a social donation.

An inheritance asset includes the realistic right and duty as well as bond, intangible/immaterial and general liabilities, guarantee, and potential debt. Thus, to determine exactly the size of an asset, check these first so that you can make a list. You also have to determine the market price per asset. For this, you have to put in order the asset acquisition date, relations with possessions and shares, various property taxes, and income taxes.
Moreover, you have to consider if the heir/heiress such as your spouse, children, relatives etc., have the ability to manage your assets. Decide whether you shall bequeath your assets after or before your death. In addition, consider if you bequeath it as it is or in cash. This process is related to tax matters, and it can affect the heir/heiress’s future. In case of an inheritance plan, you need to consider the living expenses of your spouse, the heir/heiress, and your children. Still, the more important thing is your own living expenses until prior to the inheritance stage. At this time, you need to consider the cash flow above all. Even though you already deposited 500 million won in a bank, at 5% interest, the actual amount you can spend for living expenses is only 20 million won per year. When you share your asset, one more thing to consider is whether you change the beneficiary of the life insurance you have subscribed to or not. In most insurance contracts, the beneficiary can be change. Thus, if necessary, a person other than the current beneficiary can ask for the insurance money at the time of your death.

If you don’t specify the method of dividing and bequeathing your asset in detail your family may be confused after your death. The best way to specify the asset division method is the testament. The testament should contain all possible information: who can inherit what property, and how? This is a formal act that requires a strict method; thus, if one violates the legal matters, everything becomes invalid. Testament methods include a holograph deed, a recording, a notarial deed, a secret deed and an oral deed. Among them, the testament method through an oral deed is approved exceptionally only for cases such as diseases and urgent matters. If there is no legal testament, remember that assets are divided according to the legally appointed inheritance portion.

Advantages and disadvantages of the different kinds of testament

	Advantage	Disadvantage	Remarks
Holograph deed	Simple, possible without witness or cost	Risk of forgery/alteration; seal of approval necessary	When it doesn’t follow the legal & formal act, it becomes invalid
Recording	Relatively simple	-	Witness (1 person)
Notarial deed	No risk of forgery/alteration	Cost incurred, process complex	Witness (2 people)
Secret deed	Kept a secret	Process complex; seal of approval necessary	Witness (2 people) Confirmed within 5 days
Oral deed	In case of urgent matters such as diseases	Seal of approval queried within 7 days	Witness (2 people)

You need to prepare documents against the time when you contract diseases and lose your mental functions. A letter of attorney and a lifetime testament are used at this time; they are not yet generalized, but we can utilize them depending on a necessity. A letter of attorney is a document designating a representative who shall perform the work that you yourself cannot perform. If you lose your mental functions and contract serious diseases, a representative shall manage your asset and perform legal tasks.
A lifetime testament is a document specifying one’s personal wish, e.g., whether you want special medical treatment or not in case you contract serious diseases and you cannot decide on medical treatment.

When you try to turn over your lifetime business to someone, you choose a reliable and wise successor to which you can turn over the proper business using the most effective tax avoidance strategy at the most appropriate time. For this, you need to go through the following process with the help of a professional:

Determine the exact status of your business to decide on a proper transfer method.

If you have a personal business company, you can choose among these options: turn over the personal business company as it is, turn over stocks after transferring them to the corporation, or turn over the business by selling or through M&A. Each case requires proper assessment and offers points for consideration.

You have to plan and carry out your successor’s training.

You have to decide whether you transfer only the ownership or together with a management right. To transfer the ownership as well as a management right, you need to have a strategy for examining and fostering the successor’s ability with education, training and experience, etc.

You have to think about your retirement plan.

The business transfer should not be performed using only your own idea; establishing a fund plan for aging is a must. For proper business transfer, you can consider dividing the role temporarily with your successor before you retire completely.

You have to prepare an appropriate tax payment plan.

After you prepare the business transfer method, you need to analyze the tax effect that will occur later and come up with the best alternative. In addition, you need to prepare for the tax payment fund method.

In USA and other foreign countries, many trusts are prepared to aid in effective inheritance. In Korea, however, they are almost nonexistent. Nonetheless, some banks in Korea develop a testamentary trust to sell it. For the testamentary trust, a bank and the client write a testament as a notarial deed to keep it in the bank’s custody; they then select a trust before or after the client’s death according to the testament’s content. The trust is selected with regard to other assets such as cash to execute the testament. Some banks require more money for utilizing a testamentary trust; once you subscribe to it, however, you can maximize the service concerning an inheritance.

If the inheritance assets do not exceed a certain amount, you need not worry about the inheritance tax. A government adopts an inheritance deduction system for maintaining the stability of the heir/heiress’s life and basic standard of living. If you use it, you can avoid the burden of inheritance tax. For example, in case your spouse is alive, you can avoid the tax for asset of 1 billion won. If your spouse is dead, you can avoid the tax for asset of less than 500 million won; you can also deduct the funeral expense and financial assets (10 % of the financial assets’ net assessment amount, 200 million won as the limit). In Korea, tax is imposed based on a cumulative tax rate after adding up all inheritance assets. Therefore, to reduce the inheritance tax, you should fully diversify the inheritance assets before staring an inheritance. Furthermore, you need to consider the following points concerning the inheritance tax:

As a disposal asset or a withdrawal asset worth over 200 million won within 1 year or over 500 million won within 2 years of the inheritance start date per asset’s type, the fund whose usage cannot be specified is included in the inheritance asset. Generally, we cannot predict our death date; thus, the wealth management for over 200 million won or fund withdrawal must be specified through its receipt or contract.

For the fund that you donated before within 10 years of the inheritance start date and the fund you donated before to the person other than the heir/heiress within 56 years, these funds are included in the inheritance asset. As such, inheritance tax is imposed. Therefore, to transfer the asset to your children or to other beneficiaries, dividing it and donating it on a 5- or 10-year cycle are recommended.

Koreans’ average life span reaches 70 years; considering that pre-inheritance asset is added to the inheritance asset within 10 years (or 5 years), you need to plan an inheritance 20~30 years before the date of the start of inheritance. In particular by the time you are in your 30s~40s, you need to concentrate on accumulating basic assets; you need to increase your assets when you are in your 50s as well as prepare the inheritance for a long time.

If you donate property worth up to 300 million won every 10 years, donation tax is not imposed. Thus, if you donate 300 million won periodically every 10 years since 20~30 years ago, legal inheritance is possible without the burden of donation tax of as much as 900~1200 million won. In this case, the assessment amount as per the tax law should be below 300 million won, and the donation asset may be in the form of cash or real estate.

In case of a prior donation, since the donation tax is higher than the inheritance tax, you have to review the method of minimizing such. A good idea would be to donate first the asset whose price will increase as an under-assessed asset and execute a donation with payment.

If you expect the inheritance asset to be not that big at the inheritance period, there is no need to diversify your asset through prior donation with a donation charge. Nonetheless, don’t discount the scenario wherein there is possibly more actual inheritance asset than the one you projected. That’s because you might not calculate the future value increase of the fund or a house offered for separate use such as death insurance money.

Since the surrounding conditions are changing continuously, you need to examine the inheritance plan like any other plan continuously even though it is finalized. An amendment of related laws, a change of an inheritance asset, or a sudden aggravation of health are major factors causing a change in the inheritance plan. If all these factors need to be reflected, you need to consult regularly with a professional to adjust the plan. Even though you have a good command of strategizing for prior donation, you should not donate as much asset to avoid adversely affecting the quality of your life. You should consider your asset’s cash flow and review your retirement life and subsequently think about donation.

The following is a brief description of an inheritance strategy per asset. Please consult with a CFP certificant for details.

Cash

Unlike real estate and stocks, it does not leave transaction traces; in case of huge sums of money, however, physical transfer is not easy. Thus, using a prior donation method within a possible amount range for children who can trace the fund source is recommended.

Deposit

In case of an amount under a certain level, the fund’s source examination is omitted.
For the deposit, a financial inheritance deduction is applied after the deposit is added up together with other financial assets. In terms of a financial asset’s inheritance deduction, the amount to be deducted can be maximized when the financial net asset (the amount derived by subtracting a financial liability from a financial asset) is 1 billion won.

Insurance

Except for diversifying an inheritance asset, insurance can be utilized to prepare the fund for the payment of a huge amount of inheritance tax. Since you are the insurance policyholder, however, the insurance money paid after your death can be included in the inheritance asset. Thus, if you subscribe to insurance in the name of your child who has a job, and then you designate him/her as the insurance money beneficiary, you can avoid the inheritance tax and donation tax.

Apartment

According to the National Tax Service, the apartment’s basic market price -- and in most cases as well -- is within 500 million won. Thus, it can be said to be the most appropriate asset for executing prior donation to your spouse, since donation tax of up to 300 million won is waived between husband and wife. If you donate the lease’s guarantee money and a financial institution’s loan together with your house to your child (“donation with payment”), you can reduce the inheritance tax.

General real estate

In case there is no sale, public sale, and acceptance within 6 months before and after the inheritance start date or within 3 months from the donation date, the inheritance asset is assessed to be at 70~90% of the market price. Thus, an inheritance with real estate is one way of reducing the inheritance tax. You need to execute prior donation from real estate whose price is supposed to increase greatly. In case of real estate whose price is supposed to decrease, the payment of inheritance tax in goods can be considered.

As for the methods of legally deducting the standard for the assessment of inheritance tax as much as possible, the following may help. Please consult with a professional for details.

You need to maximize your spouse’s inheritance deduction.
Your spouse’s inheritance deduction amount ranges from 500 million won to 3 billion won, the amount your spouse actually inherits within a legal inheritance amount. When you calculate the legal inheritance amount of your spouse, more than that amount can actually be inherited. In such case, you can maximize your spouse’s inheritance deduction amount.

You need to check thoroughly all the debts to be deducted at the time of calculating the inheritance tax. Debts, like unpaid interest, surety obligations, joint obligations, and lease’s guarantee money, can be deducted regardless of size.

When the funeral expense exceeds 5 million won, you have to put in order the documentary evidence. For funeral expense of less than 5 million won, 5 million won is deducted; beyond 5 million won, however, they check the fact of expense through evidence to deduct up to 10 million won.

When inheriting a building, the lease on a deposit basis is more profitable than a monthly rent. In case you inherit real estate for rent, you as the heir/heiress should refund the guarantee money at the lease contract’s maturity. Since this lease’s guarantee money corresponds to a debt, it can be deducted.

Even thought you don’t have money for tax, you should report it first. If you report it within 6 months of the inheritance start date, they deduct 10% of the calculated tax amount. The deduction of the reported tax amount is possible even if you don’t pay the tax within the reporting period.

According to the statistics of the National Tax Service, the inheritance taxpayer’s average tax amount is 130 million won in 2000, 210 million won in 2001, and 290 million won in 2002. Note the gradually increasing trend. Of course, these include the taxpayers with huge sums of money. Thus, most people’s inheritance tax is actually less than that. Still, the level can hardly be ignored. If you utilize the inheritance tax payment system within 3 years and the installment payment system and payment in goods as per the tax law, you can reduce the burden. In this case, however, there may be an inquirer’s limit or the burden of interest. At this time, a good alternative is to use straight life insurance. You can prepare the inheritance payment fund through savings or investment. Since your death date is unpredictable, the subscription to straight life insurance -- which decides the insurance subscription amount according to the expected inheritance tax -- is one of the best alternatives.

Concerning an inheritance, there are complicated problems in the legal and tax contexts. To settle these, help from a lawyer or a tax professional is recommendable; in particular, a professional lawyer for the inheritance plan can provide help concerning testament writing or its execution. You can also get counseling from a certified public accountant and a tax accountant regarding several matters such as inheritance or donation. If you consider the fact that inheritance matters are closely connected with your retirement life and other financial issues, utilizing a competent financial planner who can consult with you on the inheritance’s legal and tax issues with you based on his/her overall knowledge and understanding of financial planning can be said to be the best option. Among financial planners, there are many who work in cooperation with a professional lawyer for the inheritance plan and tax professionals. If you consult with these financial planners, you can get support from a law professional and a tax professional to get comprehensive, integrated service.

case 01 : Use and Management of Liabilities

case 02 : Protection of Family

case 03 : Preparation for Children’s Educational Expenses

case 04 : Preparation for Children’s Wedding Fund

case 05 : Main Purchase Activities

case 06 : Occupation Change

case 07 : Education on Children’s Money Management

case 08 : Preparation for Post-Retirement and Long-Term Nursing

case 09 : Preparation for Inheritance

Financial Planner and Client
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