Navigating Gift and Estate Tax Laws in Korea and the U.S.: A Comprehensive Guide

Yunseo Sung (US CPA and Korean CTA) 

As a Certified Public Accountant (CPA) in the U.S. and a Certified Tax Accountant (CTA) in Korea, I aim to provide clear and practical advice on managing wealth across borders. Whether you're looking to preserve your assets or plan for the future, understanding gift and estate tax laws is crucial. Let's explore these complexities with straightforward strategies to help you achieve your financial goals.

Photo by Jakub Zerdzicki: https://www.pexels.com/photo/house-key-with-euro-bills-in-background-30704827/

Navigating U.S. Gift and Estate Tax Laws

Imagine Jane, a successful entrepreneur who wants to secure her children’s financial future while also planning for the smooth transfer of her wealth after she passes. :

·       In the U.S., gift and estate taxes are part of a unified system, meaning that the same lifetime exemption applies to both lifetime gifts and transfers at death.

·       Unified Exemption and Annual Exclusion: In 2024, Jane can gift up to $18,000 per recipient annually without triggering gift tax. If she makes larger gifts, she can use her unified lifetime exemption of $13.61 million, which applies to both gifts made during her lifetime and the value of her estate at death.

·       Tax Rates and Filing Requirements: Gifts exceeding the annual exclusion must be reported on IRS Form 709, and estates exceeding the lifetime exemption are subject to estate tax rates ranging from 18% to 40%.

·       Unlimited Marital Deduction: Transfers to a U.S. citizen spouse are completely tax-free, both during life (gifts) and upon death (estate transfers). However, gifts to a non-citizen spouse are limited to $185,000 annually in 2024.

·       Tax Liability: In the U.S., the donor pays gift tax, while estate taxes are levied on the estate before the assets are transferred to heirs.

·       Minimizing Gift and Estate Tax Liabilities: By using the annual exclusion, the lifetime exemption, and the unlimited marital deduction, individuals can significantly reduce their potential tax burdens. Additionally, tools like irrevocable trusts, Grantor Retained Annuity Trusts (GRATs), and lifetime gifting strategies help in efficient estate planning.

In the U.S., the high annual and lifetime exemption amounts mean that gift and estate taxes typically affect only the wealthiest individuals, while most Americans can transfer assets without incurring taxes.

 Navigating Korea's Gift Tax Laws

Now, consider Min-jun, a high-net-worth individual in Korea who wishes to gift part of his wealth to his family:

·       Exemption Limits and Tax Rates: Korea offers different exemptions based on relationships:

Relationships	Exemption
Spouse	KRW 600 million
Direct ascendants and descendants	KRW 50 million (KRW 20 million if the recipient is a minor)
Other relatives	KRW 10 million

Exemption amounts are aggregated over a 10-year period, and exemptions are only applicable to Korean resident recipients.

·       Tax Liability: In Korea, the recipient of the gift pays the tax.

·       Filing Requirements: Gifts must be reported within three months, with penalties for non-compliance.

·       Minimizing Gift Tax Liabilities: Min-jun can spread gifts over time and gift to multiple recipients to maximize exemptions. In Korea, where the exemption amounts are relatively small, it’s essential to structure gifts strategically. Gifting assets that have a low current value but are expected to appreciate significantly in the future can help minimize the taxable amount. Since the exemption is aggregated over a 10-year period, careful pre-planning allows for more effective use of exemptions through early gifting.

 Korea's Estate Tax Landscape

Let’s look at Soo-jin, a Korean business owner planning her estate:

·       Thresholds and Rates: The basic exemption is KRW 200 million, with tax rates from 10% to 50%.

·       Estate Planning Techniques: Due to limited trust options in Korea, strategic early gifting and utilizing personal and spousal deductions are key strategies. While trusts are widely used for estate tax reduction in many countries, in Korea, the legal framework for trusts is relatively restrictive. Trusts are primarily used for asset protection or wealth preservation rather than for minimizing estate tax burdens. The Korean tax authorities closely scrutinize the use of trusts, and there are strict anti-avoidance rules that limit tax benefits from setting up foreign trusts for estate planning purposes.

 Comparative Analysis and Case Study

Both the U.S. and Korea impose significant taxes on gifts and estates, but their approaches differ in key ways, affecting how high-net-worth individuals should structure their wealth transfer strategies.

·       Unified vs. Separate Systems: The U.S. operates under a unified system where the same lifetime exemption (currently $13.61 million in 2024) applies to both gift and estate taxes. This provides flexibility, allowing individuals to make large gifts during their lifetime without necessarily facing immediate tax liabilities. However, it's important to note that non-residents of the U.S. are not eligible for the full lifetime exemption. They are subject to a significantly lower exemption amount (currently $60,000) for U.S.-situated assets. In contrast, Korea treats gift and estate taxes separately, with much lower exemptions for both. Additionally, there is no gift or estate tax exemption available to non-resident recipients in Korea. This requires more careful, pre-emptive planning in Korea to avoid triggering significant tax liabilities.

·       Unlimited Marital Deduction: The U.S. offers an unlimited marital deduction for both gifts and estates transferred to a U.S. citizen spouse, allowing tax-free transfers regardless of amount. For non-citizen spouses, however, a limited annual exclusion applies. In Korea, there is no equivalent of an unlimited marital deduction; instead, Korea resident spouses receive a relatively high exemption for gifts (KRW 600 million) and inheritances (KRW 500 million – KRW 3 billion), but tax still applies after these thresholds.

·       Use of Trusts: In the U.S., trusts are commonly used as a powerful tool for both estate tax reduction and asset protection. Popular options like Irrevocable Trusts, Grantor Retained Annuity Trusts (GRATs), and Charitable Trusts provide significant flexibility and tax planning advantages. In contrast, Korea’s trust system is far more limited. Trusts in Korea are primarily used for asset management or wealth preservation rather than for minimizing estate taxes, due to strict regulations and anti-avoidance rules that prevent the use of foreign trusts for tax-saving purposes.

·       Exemptions and Rates: The U.S. offers much higher lifetime exemptions (up to $13.61 million in 2024) and lower rates for a broader population, making gift and estate taxes a concern mainly for the wealthiest individuals. As a result, most Americans do not need to worry about these taxes in their everyday financial dealings. On the other hand, Korea's lower exemptions (e.g., KRW 50 million for gifts from parents to children) mean that even middle-income individuals must carefully consider tax implications when making gifts or transferring assets to family members. For example, gifting assets with a low present value but high potential for appreciation is an effective strategy to minimize the taxable amount in Korea. Furthermore, since the gift exemption is calculated over a 10-year period, early gifting and spreading gifts over time are critical in maximizing tax efficiency.

·       Tax Liability: In the U.S., the giver is responsible for paying gift taxes, while the estate is taxed before distribution to heirs. Korea, however, imposes the gift tax on the recipient, which can sometimes create cash flow challenges for beneficiaries who receive non-liquid assets.

Case Study: Cross-Border Planning for High-Net-Worth Individuals

Consider the case of a Korean tech entrepreneur, Soo-jin, who holds significant assets in both Korea and the U.S. To pass her wealth to her children, Soo-jin needs to navigate the complexities of both tax systems. In the U.S., she can make use of the unified gift and estate tax exemption, along with strategic use of trusts, to transfer a large portion of her assets tax-free. However, if Soo-jin is not a U.S. resident, she will only benefit from a reduced exemption amount for her U.S.-situated assets.

In Korea, Soo-jin faces much stricter limitations. With smaller exemptions and the absence of tax-efficient trust options, as well as no exemptions for non-resident recipients, she needs to carefully plan her gifts over time to avoid steep tax liabilities. By gifting assets early that have a low current value but high growth potential, and making use of the 10-year period for exemption aggregation, she can reduce her family's tax burden.