Overseas Koreans and Korean Americans who have lived for many years in common-law jurisdictions such as the United States often use Living Trusts, including Revocable Trusts, or Irrevocable Trusts to manage family assets, avoid probate, and reduce the risk of inheritance disputes.
A natural question then arises:
“Can I include real estate, bank deposits, or shares located in Korea in a U.S. trust and pass them on to my children?”
The short answer is that any attempt to transfer Korean assets through a trust established overseas requires considerable caution and may involve substantial legal and tax risks.
This article explains the extent to which Korean inheritance law recognizes foreign trusts and discusses how foreign trusts may be used as part of a long-term cross-border asset management strategy.
1. Why Foreign Trusts Are Commonly Used and Korea’s Substance-Over-Form Tax Principle
In common-law jurisdictions such as the United States, probate proceedings after death can be lengthy and expensive. For this reason, inter vivos trusts are commonly used to facilitate the transfer of assets and avoid the probate process.
Overseas Koreans who are familiar with these systems sometimes assume that simply including Korean real estate or financial assets in a foreign trust will allow those assets to pass to their children without Korean inheritance or gift tax consequences.
However, Korean tax law generally applies the substance-over-form principle, under which taxation is determined based on who actually controls the property and enjoys the economic benefits, rather than merely on the title of the trust or the formal contractual structure.
Accordingly, in the case of a revocable trust, Korean tax authorities may view the transfer of the beneficial interest as occurring upon the settlor’s death, resulting in inheritance tax consequences. By contrast, an irrevocable trust may be treated as giving rise to gift tax consequences when the trust is established and the assets are transferred.
In other words, placing Korean assets into a foreign trust does not, by itself, eliminate Korea’s taxing authority over those assets.
| Category | Revocable Trust | Irrevocable Trust |
|---|---|---|
| Korean Tax Treatment | Potentially subject to inheritance tax | Potentially subject to gift tax |
| Typical Taxing Point | Death of the settlor / transfer of substantive beneficial interest | Establishment of trust and transfer of assets |
2. Risk of Mismatched Taxing Events
A more serious cross-border risk may arise from differences between Korean tax law and the tax law of the settlor’s country of residence.
For example, if Korean assets are transferred into an irrevocable trust, the Korean tax authorities may regard the transfer as a taxable gift at the time the assets are placed into the trust.
At the same time, the U.S. Internal Revenue Service or another foreign tax authority may characterize the same arrangement differently for estate or inheritance tax purposes.
Where the timing and classification of taxation differ between the two countries, a foreign tax credit may not be fully available because the taxes are imposed at different times or under different tax categories. This may create a risk of substantial economic double taxation.
Foreign trusts may also trigger extensive financial reporting and information disclosure obligations.
Under international financial-information exchange frameworks, including FATCA and the Common Reporting Standard (CRS) where applicable, information concerning overseas accounts, trust interests, and beneficial owners may be reported to relevant tax authorities.
Accordingly, transferring Korean assets into a foreign trust without a carefully coordinated cross-border legal and tax analysis may create reporting risks and potential exposure to additional tax assessments and penalties rather than producing the expected tax savings.
3. Legal Effect of Foreign Trusts and Ownership of Korean Real Estate
Even where a trust has been validly established under U.S. or other foreign law, using that trust directly to transfer ownership of real estate located in Korea can be legally difficult.
Under Korea’s private international law principles, rights in rem concerning real property are generally governed by the law of the jurisdiction in which the property is located—the lex situs principle.
Accordingly, legal ownership, transfer, and registration of Korean real estate are principally governed by Korean law, including the Korean Civil Act, Trust Act, and Real Estate Registration Act.
Korea’s registration system also requires the transfer or creation of property rights to be based on legally recognized grounds and to comply with Korean registration requirements.
A foreign trust instrument that is valid under foreign law therefore does not automatically function as a sufficient instrument for transferring or registering title to Korean real estate.
Even if the foreign trust document has been apostilled and officially translated into Korean, additional Korean-law requirements may still have to be satisfied before any change of ownership or trust registration can be recognized.
As a result, merely listing Korean real estate as an asset of a foreign trust does not necessarily create an enforceable or publicly registered proprietary interest in Korea and may lead to significant complications when the settlor dies or when the trustee attempts to dispose of the property.
4. Inheritance Law Issues: Korea’s Forced Share Regime
A further issue arises where a foreign trust is used to concentrate Korean assets in the hands of a particular beneficiary while excluding other statutory heirs.
Korea’s forced share, or yuryubun, regime may become relevant where Korean inheritance law applies.
Depending on the applicable governing law and the circumstances of the estate, certain statutory heirs, including descendants and a spouse, may be entitled to claim a legally protected minimum portion of the estate.
Accordingly, the fact that an asset was transferred to or placed in a foreign trust during the settlor’s lifetime does not necessarily prevent the asset or the economic benefit from being considered when determining forced-share rights.
For example, where assets placed in a trust are characterized as a special benefit granted to one co-heir, or where the transaction is otherwise legally relevant to the calculation of the forced share, those assets may still become the subject of inheritance litigation.
If an heir whose forced-share rights have been infringed successfully brings a claim before a Korean court, assets located in Korea may ultimately become subject to enforcement measures.
A foreign trust therefore should not be assumed to provide a simple means of bypassing Korea’s forced-share rules.
Where disproportionate succession is contemplated, the trust structure should be reviewed together with Korean inheritance law to determine whether the intended distribution can actually be implemented and what litigation risks may arise.
A foreign trust is not a universal solution for transferring assets located in Korea. Without careful planning, it may create significant risks involving Korean registration requirements, forced-share claims, conflicting tax treatment, and potential double taxation.
A more appropriate strategy may be to manage overseas assets through a foreign trust while separately structuring Korean assets under Korean law, including through a Korean testamentary substitute trust or another succession arrangement specifically designed to comply with Korean legal requirements.
For cross-border families, an effective succession plan should therefore be coordinated from both sides—taking into account the inheritance, trust, tax, registration, and reporting rules of Korea as well as those of the settlor’s country of residence.