Inheritance tax 50% for assets over 3 billion won... Elderly wealthy choose 'tax-saving divorce'

#1. Mr. A, approaching 90 years old, is a billionaire with assets worth over 10 billion KRW. In early 2023, Mrs. B, A’s wife, demanded a divorce. Mrs. B had caught evidence suspected to be Mr. A’s infidelity. At that time, all their assets were registered under Mr. A’s name. Mrs. B was curious about tax-saving methods. During consultations, it was confirmed that if the property division amount from the divorce was received entirely in cash, neither Mr. A nor Mrs. B would have to pay taxes. Their two children persuaded their father, Mr. A, to divorce their mother, Mrs. B. Their reasoning was that inheritance tax must be paid on the assets inherited after the father’s death, but if the asset size is reduced through property division with the mother before death, the inheritance amount would be smaller, thus lowering the inheritance tax. They also argued that since the mother is not an heir, the amount that can be inherited could potentially be larger. Eventually, Mr. A divorced Mrs. B.

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#2. Mr. C became worried about heavy taxation as the number of houses he owned increased. He was deeply concerned about tax savings. To avoid heavy taxation, he decided to divorce his spouse. Mr. C sought legal advice on how to proceed, as there is a risk of being caught for a sham divorce during audits.

#3. Mr. D, a “gireogi appa” (a father who stays in Korea while his family lives abroad for children’s education), heard that divorcing his wife who was living overseas could be a way to save on gift tax. He immediately consulted a lawyer for detailed advice.

There is a growing trend among ultra-elderly asset holders aged 70 and above choosing “tax-saving divorce” as a strategy for asset management. Usually, they receive tax consultations to avoid huge inheritance or gift taxes and conclude that “divorce is the best way to save taxes,” leading them to seek divorce consultations at law offices. Lawyers warn that “sham divorces are illegal,” but they cannot deny that property division through divorce can be used as a practical tax-saving method, making it difficult for them to refuse providing advice.

Asset Management through Tax-Free ‘Property Division’

The legal community views excessively high inheritance and gift tax rates as the fundamental cause. Inheritance tax rates reach 50% when the taxable base exceeds 3 billion KRW, and the non-taxable limit for spousal gifts is only 600 million KRW. Analysts also note that the recent sharp rise in real estate prices has increased such demand.

According to the National Statistical Portal (KOSIS), the number and proportion of divorces among couples aged 70 and above have been increasing. Even though the total number of divorces decreases when both husband and wife are aged 75 or older, the trend of increasing divorces among this group continues. Since 2020, the proportion of divorces where the husband is 75 or older and the wife is also 75 or older has consistently exceeded 30%.

For couples both aged 75 or older, the number of divorces was 224 in 2014, 233 in 2015, 268 in 2016, 331 in 2017, 449 in 2018, 526 in 2019, 555 in 2020, 629 in 2021, 681 in 2022, and 682 in 2023. Their divorce rates were 24% in 2014, 25% in 2015 and 2016, 26% in 2017, 28% in 2018, 31% in 2019 through 2021, 35% in 2022, and 36% in 2023 . While tax-saving is not the sole cause of ultra-elderly divorces, the legal community believes this trend has had an influence.

“It Will Continue Unless the Tax System Changes”

A family law specialist lawyer said, “There has been demand for advice for a long time,” adding, “In my experience, most clients are over 60.”

He explained, “Even if you are not a billionaire with assets over 10 billion KRW, once you exceed 3 billion KRW, a 50% inheritance tax rate applies, so people inevitably consider property division through divorce.” He added, “When asked if divorce is the best way to avoid taxes, it is very difficult to answer. Although the choice is up to the client, as a lawyer, I cannot say ‘no.’”

Another family law specialist said, “Although there is a ‘separate property system for spouses,’ the tax system is structured around a single household, and the spousal tax deduction threshold is low, so high-net-worth individuals judge that divorce is better,” reporting that “the number of wealthy clients deciding that divorce is the best option is increasing.”

The National Tax Service defines divorces aimed at reducing taxes as “sham divorces” and imposes taxes accordingly. This sometimes leads to legal disputes. Another family law specialist said, “It can be seen as a means of tax evasion,” but added, “If divorce is chosen through mutual agreement for various reasons, including saving taxes, it cannot be considered illegal.” He noted, “Compared to other countries, Korea’s tax system based on spouses is heavier than for unmarried individuals, so people tend to choose divorce. Even owning just one apartment in Seoul results in high taxes, so without changes to the tax system, demand for related consultations is expected to increase.”

Japan and France Fully Exempt Spouses

Despite numerous demands, inheritance and gift tax conditions have not changed for decades. To avoid inheritance taxes that can reach 60% including major shareholder surcharges, wealthy individuals are turning overseas, causing issues such as offshore asset flight and offshore tax evasion.

According to a thesis titled “Review of Rational Reform Measures for Inheritance and Gift Taxes in an Aging Society” by attorney Shin-hye Yoo (47, Judicial Research and Training Institute class 40), most OECD member countries except Japan have abolished inheritance tax or operate with reduced burdens. Among 38 OECD member countries, 24 impose inheritance-related taxes. The U.S., U.K., Denmark, and South Korea apply the estate tax method (taxing the entire estate of the deceased), while the other 20 countries use the inheritance acquisition tax method (applying progressive tax rates only on the inherited property acquired by heirs).

Among non-OECD countries, Singapore abolished inheritance tax in 2008. China, Hong Kong, Russia, and Vietnam also have no inheritance tax. South Korea is the only country applying the estate tax method that sets a deduction limit for spouses. The U.S., U.K., and Denmark fully exempt spouses without limits. Most countries using the inheritance acquisition tax method, including Japan and France, also fully exempt spouses without limits.

Reporter Su-yeon Park, Law Times

Reporter Su-hyun Han, Law Times

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