[PB Notebook] Stop Inheritance Disputes... 'Testamentary Trusts' for Smooth Planning and Distribution Gain Popularity

Introducing asset management strategies proposed by financial firms' PBs (Private Bankers) in [PB Notebook]. Let's take a look inside the PBs' notebooks.

Kangtae Kim, Head of PB Team, Yangjae PB Center, KB Kookmin Bank WM Star Advisory Group

We often witness disputes arising from inheritance within families through movies or dramas. In particular, due to the nature of my profession, I have observed many inheritance dispute cases that ordinary people rarely experience. In most cases, if there are no special disagreements, the inheritance process proceeds smoothly according to the statutory inheritance ratios. However, as the old saying goes, "There is no business before money," when it comes to distributing a large sum of money, the reality is that everyone tries to get as much of their share as possible.

In such situations, a testamentary substitute trust can be a good solution to resolve family conflicts caused by inheritance disputes in advance. A testamentary substitute trust is a product where, during one’s lifetime, money or real estate is entrusted to a bank, allowing the trustor to manage the trust assets and enjoy the benefits, and after death, the inheritance is executed by distributing the assets to heirs according to predetermined ratios (not the statutory inheritance ratios). Although some people prepare inheritance plans by drafting and notarizing a will during their lifetime, financial institutions generally restrict the full withdrawal of inherited deposits unless all heirs agree, even if a will exists. This is because, under civil law, the deceased’s last valid will is effective, but financial institutions cannot verify whether the will presented by the heirs is the last will made during the deceased’s lifetime. On the other hand, if assets are placed in a testamentary substitute trust, they are transferred directly to the designated beneficiaries according to the contract, which increases the practical value of such trusts.

Recently, more customers have been seeking testamentary substitute trusts, and the reasons are becoming increasingly diverse. Some customers are worried about inheritance but unsure how to proceed; others want to prevent posthumous disputes through inheritance planning; some wish to leave assets to specific individuals among statutory heirs or to third parties; and some are concerned about their children’s stable living after their death or fear their children might squander the inherited assets. These are the reasons why personalized solutions are necessary for each individual.

Let us share some real cases of customers who have prepared effective inheritance plans through testamentary substitute trusts, so we can anticipate various situations that may one day happen to us.

The first case involves concerns about problems arising from transferring more assets to a specific heir, which is actually the most common reason customers seek testamentary substitute trusts. People may consider lifetime gifts or bequests through wills to leave more assets to a grateful spouse or child who cared for them during their lifetime, but these methods do not defend against the minimum inheritance rights (yuryubun) of heirs. However, a recent district court precedent states that assets placed in a testamentary substitute trust within one year before the commencement of inheritance are not subject to yuryubun return claims. At present, testamentary substitute trusts have emerged as the only solution to defend against yuryubun disputes.

The second case involves a customer worried about preserving and managing the assets of elderly parents during their lifetime. The parents are very kind and tend to help anyone in need, but there is concern about potential fraud such as voice phishing. In this case, when establishing a testamentary substitute trust, if a special clause is set so that mid-term termination or changes are not possible without the consent of all heirs as posthumous beneficiaries, it can protect against situations where the parents’ decision-making ability is impaired later, preventing unnecessary help or becoming a target of third-party crimes.

The third case concerns a customer contemplating property succession for minor children after divorce. The customer is raising minor children after divorce and worries that if something happens to them, the ex-spouse might manage or dispose of the inheritance left to the minor children. Although minor children are statutory heirs and inherit solely by law, if the ex-spouse exercises parental authority over the minor children, they may end up managing the children’s inherited assets. However, by establishing a testamentary substitute trust that transfers the assets to the minor children once they reach adulthood, even if the customer suddenly passes away, it can prevent the ex-spouse from misusing the assets left for the children.

Besides these, there are various concerns depending on individuals, such as cases where one does not want equal inheritance to substitute heirs (spouse, direct descendants) of a deceased child, or cases where single individuals prefer to leave assets meaningfully through donations rather than to distant relatives. In each case, a customized inheritance plan is necessary.

Testamentary substitute trusts are asset management trust products that prepare for death in an ultra-aged society, but unlike overseas, their recognition is relatively low in Korea due to insufficient promotion. Even now, many heirs face situations where they inherit assets without proper preparation. How about catching two birds with one stone?preventing inheritance disputes and increasing assets?through long-term, detailed inheritance planning and asset management using testamentary substitute trusts?

This content was produced with the assistance of AI translation services.