The Pitfalls of Korea-U.S. Cross-Border Inheritance···Ignorance Can Lead to Double Taxation and Even Criminal Punishment

-Legal Column by Son Dong-hoo, U.S. Attorney, Daeryun LLC (Limited)

As the inheritance cycle of first-generation Korean immigrants to the U.S. begins in earnest, the paradigm of asset management is rapidly shifting from 'accumulation' to 'succession.' Whereas the challenges of the past focused on local settlement and children's education, now the key topic is how to safely and efficiently pass on a lifetime's accumulated assets to the next generation. In particular, for so-called 'cross-border asset holders' who hold assets in both Korea and the U.S., inheritance and gifting involve complex legal issues beyond simple asset transfer within the family. Ranging from the risk of double taxation by both countries on the same asset to the possibility of criminal punishment for failing to report overseas assets, a lack of sophisticated strategy can directly lead to the loss of asset value.

The first practical hurdle one faces is the differing taxation standards of the two countries. The U.S. exercises taxing rights over worldwide assets based on citizenship or domicile within the U.S. If one is a U.S. citizen residing in Korea, one may be subject to taxation in both countries, so it is essential to precisely analyze the scope of taxation and the applicability of the foreign tax credit. However, as of 2025, the federal estate tax exemption limit is about 13.61 million dollars (about 27.22 million dollars for a married couple combined), and actual taxpayers are less than 0.1% of all decedents. That said, with the possible expiration (sunset) of the TCJA at the end of 2025, the exemption limit may be reduced to about half, so advance preparation is necessary.

The difference in who bears the tax also acts as a fatal risk. In Korea, the recipient (donee) of the asset bears the tax, whereas in the U.S., the transferor (donor) of the asset bears the tax obligation. As the taxpaying entity itself differs, and there is no inheritance/gift tax treaty concluded between Korea and the U.S., there are frequent cases where double taxation is not fully resolved and the value of assets is impaired.

Beyond taxation, administrative procedures and foreign exchange regulations are also barriers that cannot be overlooked. Under the Foreign Exchange Transactions Act, if one omits the reporting obligation for inherited or gifted property, one must be aware that, depending on the case, it can become subject to criminal punishment beyond a mere administrative fine. In the U.S. as well, if one holds Korean financial accounts totaling 10,000 dollars or more annually, a reporting obligation for FinCEN 114 (FBAR) and Form 8938 (FATCA) arises. In case of violation, civil fines of up to 50% of the account balance and criminal punishment are possible, making it one of the most frequently occurring risks in practice.

In addition, Probate, the U.S. inheritance certification procedure that proceeds under court supervision and requires considerable time and cost, acts as a substantial administrative burden for the bereaved family. To resolve these multilayered problems, alternatives utilizing 'trusts' have recently drawn attention in legal circles. In the U.S., succeeding to assets while omitting the inheritance certification procedure through a Living Trust has already become common. However, while a Living Trust is effective in avoiding probate, it has no federal estate tax savings effect. If tax savings is the goal, a separate structural design such as an Irrevocable Trust, ILIT, or GRAT is needed.

In Korea as well, following the recent Constitutional Court decisions of unconstitutionality and constitutional nonconformity regarding the legal reserve of inheritance (yuryubun) system, a legal foundation respecting the decedent's intent has been established, and demand for customized succession structures such as testamentary trusts is rapidly increasing. Ultimately, the essence of cross-border asset management lies not in simple tax savings, but in establishing an 'integrated strategy' that encompasses the law, taxation, and foreign exchange regulations of both countries. Only sophisticated design that can coordinate each country's procedural characteristics and even recent changes in legal doctrine is the sole path to fully preserving the value of wealth built over a lifetime and safely passing it on to the next generation.

Reporter Lee Dong-oh (canon35@mt.co.kr)

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The Pitfalls of Korea-U.S. Cross-Border Inheritance···Ignorance Can Lead to Double Taxation and Even Criminal Punishment (Go)