Supreme Court: "When Calculating Statutory Share, Only Life Insurance Proceeds Received by Third Party Up to One Year Before Death Beneficiary Designation Are Considered"

"Limited Approval Heirs' Net Inheritance Share Is Zero When Calculating Statutory Share"
Partial Loss in Lawsuit Against Deceased Doctor's Wife and Mistress

[Asia Economy Reporter Choi Seok-jin, Legal Affairs Specialist] The Supreme Court has ruled that when calculating an heir's statutory reserved portion, life insurance proceeds received by a third party who is not a co-heir should only be considered if the beneficiary designation or change occurred within one year prior to the commencement of inheritance.

This is the first Supreme Court ruling clarifying that when a third party, not one of the co-heirs, is designated or changed as the beneficiary of life insurance, the restriction under Article 1114 of the Civil Act regarding gifts included in the base assets for calculating the reserved portion applies based on the date of designation or change.

The Supreme Court's Second Division (Presiding Justice Min Yoo-sook) announced on the 11th that it partially overturned the lower court's ruling ordering C to return approximately 1.2 billion KRW plus interest to B, the wife of the deceased A, in the reserved portion return claim lawsuit filed against A's mistress C, and remanded the case to the Gwangju High Court.

The court stated, "Regarding death insurance money received by a third party who is not a co-heir, in order to consider the insurance premiums paid by the deceased as the value of a gift included in the base assets for calculating the reserved portion, the designation or change of the defendant as the insurance beneficiary must have been made within one year prior to the commencement of inheritance, or both parties must have known at that time that it would harm the reserved portion right holder for it to be added as the value of a gift."

Furthermore, the court pointed out, "Nevertheless, the lower court judged that the deceased gave a gift of property to the defendant after August 9, 2013 (the date of the first-instance divorce trial ruling), knowing that it would harm the plaintiff, the reserved portion right holder, without examining whether the value of the gifted property exceeded the remaining estate at the time of each gift, and without considering the deceased's age, occupation, income, or circumstances of death. It also ruled that the insurance premiums paid by the deceased were gifts regardless of whether the designation or change of the defendant as the insurance beneficiary was made within one year prior to the commencement of inheritance or whether both parties knew it would harm the reserved portion right holder at that time."

It added, "This lower court ruling misapplied the law concerning Article 1114 of the Civil Act and failed to conduct necessary investigations, affecting the judgment outcome. The defendant's appeal on these grounds is valid."

B, the wife, married A, a doctor born in 1968, in 1997 but had conflicts due to A's frequent absences. From around October 2011, A began cohabiting with his mistress C, and B filed for divorce in 2012, but the case was dismissed on the grounds that she was the cause of the marital breakdown.

A continued living with mistress C until his death by a fall on January 8, 2017. After losing the first-instance divorce case on August 9, 2013, he changed the beneficiaries of four life insurance contracts, in which he was the insured, to C. In February 2015, he also changed the beneficiary of another life insurance contract to C.

After A's death, C received a total of 1.28 billion KRW in death benefits as the beneficiary of nine life insurance contracts, including the five mentioned above. A, who co-managed two hospitals with 11 other doctors, earned over 400 million KRW annually and paid more than 20 million KRW monthly in insurance premiums, including a policy with a monthly premium of 9.85 million KRW, enabling C to receive such a large death benefit.

The issue was the calculation of the reserved portion between A's sole heir, his wife B, and C.

Korean Civil Law recognizes the freedom of the deceased to dispose of their property but guarantees each heir a minimum right to the inheritance through the reserved portion system.

When the deceased gifts or bequeaths property to a third party during their lifetime, heirs can claim a return only for the portion that falls short of a certain ratio (one-half to one-third) of their statutory inheritance share.

The spouse is entitled to half of the statutory inheritance share as the reserved portion. In this case, since B is A's sole heir, all of A's inheritance constitutes B's statutory share, and half of that is recognized as B's reserved portion.

Article 1113(1) of the Civil Act states, "The reserved portion is calculated by adding the value of gifted property to the value of the property held by the deceased at the commencement of inheritance and deducting the full amount of debts."

Article 1114 of the Civil Act limits the scope of gifts to be included in the base assets for calculating the reserved portion: "Only gifts made within one year prior to the commencement of inheritance shall be calculated according to Article 1113. If both parties knew that the gift would harm the reserved portion right holder, gifts made even earlier than one year shall be included."

In other words, when the deceased dies, the heir must first calculate their statutory inheritance share to determine the reserved portion, and only gifts made to third parties within one year before death are included in the inheritance property.

At the time of death, A left active assets totaling approximately 1.214 billion KRW, including 230 million KRW in deposit claims and about 984 million KRW in hospital share redemption money. B inherited 230 million KRW, while C received the hospital share redemption money through a private gift contract (an agreement made during A's lifetime that the shares would be gifted to C upon A's death). Six months before death, A added a special clause to the partnership agreement with fellow doctors stipulating that his shares would be paid to C upon his death.

After A's death, B inherited 230 million KRW but filed for limited acceptance of inheritance because A's debts exceeded 575 million KRW, surpassing the active assets. B then filed a reserved portion return claim lawsuit against C, arguing that the 1.28 billion KRW death benefit received by C or the insurance premiums paid by A before death constituted gifts included in the base assets for calculating the reserved portion under the Civil Act.

The first instance court ruled that the 1.28 billion KRW death benefit received by C could not be included in the base assets for calculating the reserved portion, assessed the base assets at approximately 630 million KRW, and ordered payment of half, about 319 million KRW, plus interest.

Since the date when A designated or changed C as the insurance beneficiary was not within one year prior to inheritance commencement (A's death), to include it in the base assets for calculating the reserved portion, it must be recognized that A knowingly harmed the reserved portion right holder, his wife B, which was difficult to prove.

Another issue was whether B's net inheritance amount after limited acceptance (actual amount inherited) should be considered as negative 344 million KRW, reflecting passive assets exceeding active assets, or zero, since limited acceptance limits debt repayment responsibility to active assets. The first instance court concluded that B's net inheritance amount should be evaluated as zero due to limited acceptance.

The lower the net inheritance amount is evaluated, the greater the amount that can be claimed from third parties infringing on the reserved portion, which benefits the heir (B).

However, the second instance court completely overturned the first instance ruling.

The second instance court held that since A designated or changed C as the insurance beneficiary and paid premiums thereafter, it could be seen as a gift made with knowledge that it would infringe on the reserved portion of the heir A, and that C, the recipient, was also aware of this.

Additionally, the second instance court concluded that B's net inheritance amount after limited acceptance should be considered as negative 344 million KRW, not zero.

The Supreme Court reversed this second instance conclusion, affirming the first instance's calculation method.

The court stated, "When the deceased enters into a life insurance contract designating a third party who is not a co-heir as the beneficiary, or changes the beneficiary to such a third party and pays premiums until death, it is reasonable to regard this as a gift to the third-party beneficiary. Since this is a gift to a third party who is not a co-heir, under Article 1114 of the Civil Act, the gift can only be included in the base assets for calculating the reserved portion if the designation or change of the beneficiary to the third party occurred within one year prior to inheritance commencement or if both parties knew at that time that it would harm the reserved portion right holder."

The court also stated, "Even if the reserved portion right holder's specific inheritance share is less than the inheritance debts, if limited acceptance has been made, the net inheritance amount should be considered zero, not negative, when calculating the reserved portion deficiency."

A Supreme Court official explained, "Considering that life insurance functions similarly to bequests or private gifts, it can be included as a gift in the base assets for calculating the reserved portion. However, this ruling is the first to clarify that when a third party who is not a co-heir is designated or changed as the insurance beneficiary, the restriction under Article 1114 of the Civil Act applies based on the date of designation or change."

The Supreme Court also clearly stated in this ruling that the burden of proof regarding the awareness of harm between the deceased and the third-party recipient at the time of the gift lies with the heir exercising the reserved portion return claim.

In other words, when A designates or changes C as the beneficiary of life insurance in which A is the insured, it can be treated as a gift to C. If the designation or change date is not within one year prior to inheritance commencement, the gift property can only be included in the base assets for calculating the reserved portion if malice (awareness that it infringes on B's reserved portion) is recognized between the two parties. The burden of proof for this malice lies with B, the heir claiming the reserved portion return.

Previously, the Supreme Court held that if the reserved portion right holder's specific inheritance share is less than the inheritance debts, i.e., if the net inheritance amount is negative, the excess should be added to the reserved portion amount (calculated as a negative) to determine the reserved portion deficiency. This ruling is the first to clarify that this legal principle does not apply when limited acceptance of inheritance has been made.

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