When Passing Property to Your Children... What Matters More Than 'Inheritance' vs. 'Gift' [Column]

When passing a parent's property to their children, people often agonize over whether inheritance or a gift is more advantageous. But in asset succession there is a more important question: namely, 'When should the property be transferred?'

Recently, the government proposed a plan to expand the amount deducted per child in calculating inheritance tax—the so-called child deduction—from the current 50 million won to 500 million won. This is a government proposal not yet reflected in law.

Looking only at the fact that the deduction increases tenfold, it is easy to conclude, "There is no need to gift in advance; passing it on through inheritance will do." But this is only half the truth.

First, one must note that inheritance tax is not determined by the child deduction alone. One applies whichever is more advantageous between the sum of the basic deduction and the other personal deductions (including the child deduction) and the lump-sum deduction, and if there is a spouse, the spousal inheritance deduction must be considered separately.

Under the government proposal, an heir with two children could receive a deduction of at least 1.2 billion won by combining the basic deduction of 200 million won and the child deduction of 1 billion won, and when there is a spouse, this total deduction grows even larger. In other words, looking only at the deduction amount, inheritance may appear advantageous.

However, there is a variable more important than the deduction amount: the future value of the asset. If real estate currently worth 1 billion won has the potential to rise to 2 billion won in the future, gifting it now means, in principle, bearing gift tax based on the current value of 1 billion won, with the subsequent increase attributed to the child's property.

On the other hand, if you hold it without gifting and inheritance commences, tax is calculated based on the increased value of 2 billion won. That is why, no matter how much the child deduction is expanded, for an asset expected to rise in value, gifting in advance—even at some loss on the deduction amount now—may ultimately be advantageous.

That said, it is not the case that hurriedly gifting is unconditionally the answer. This is because property gifted to an heir within 10 years before the decedent's death is added back to the taxable value of the inheritance (5 years for a non-heir).

In other words, if death occurs before a full 10 years have passed since the gift, the property you took pains to transfer in advance is ultimately included in the inherited property and the tax is recalculated.

However, even in this case, since the gift tax already paid at the time of the gift is deducted from the calculated inheritance tax within a certain range, it is not something to dismiss as 'meaningless because it's within 10 years.' Ultimately, you must calculate together the period between the gift and death, the tax rate at the time, and the change in property value during that interval to accurately weigh the advantages and disadvantages.

On top of this, the considerations also differ depending on the type of asset. For real estate, you must review not only gift tax but also acquisition tax and the capital gains tax upon future disposal.

For listed stocks, the timing of the gift is important because future stock price increases can be transferred to the child; for unlisted stocks, since the gift value is determined by the valuation method under tax law, you must consider not only corporate value but also future management-rights succession.

Ultimately, you cannot decide whether inheritance or a gift is advantageous based on the 'expansion of the child deduction' alone. Only by comprehensively considering the deduction amount, the future value of the asset, the time of death, and the type of asset can you establish the optimal succession strategy of which asset to pass on, when, and to whom.

Josebo / Attorney Kim Hwa-yeong of Daeryun Law Firm

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