Testamentary Substitute Trust & Forced Heirship in Korea
Table of Contents
- 1. What is a Testamentary Substitute Trust in South Korea?
- 2. How are Trust Assets Treated for Forced Heirship Purposes?
- 3. What Happens When the Trustee is Designated as Post-Death Beneficiary?
- 4. How is the Forced Heirship Share Calculated?
- 5. How is Forced Heirship Restitution Made?
- 6. What are Key Considerations When Designing Testamentary Substitute Trusts?
- 7. FAQ
Case Study: Mr. A owned six apartments in South Korea. Before his death, he transferred all properties to his eldest son C through various methods: one by notarized will, four through different trust arrangements, and one by gift after resolving a title trust. When Mr. A passed away, his other children D and E discovered they were left with nothing. Can they claim forced heirship restitution against these trust assets?
Six Properties, Six Transfer Methods: What are the Legal Consequences?
* This case study is a hypothetical scenario designed to explain the relationship between testamentary substitute trusts and forced heirship under South Korean law.
Mr. A used different transfer methods for each property: Apartment A was bequeathed by notarized will. Apartment B was transferred through a trust where C served as both trustee and successor beneficiary. Apartment C used a third-party trustee (trust company) with C as post-death beneficiary. For Apartments D and E, C was designated as trustee, post-death beneficiary, and residual beneficiary. Apartment F was purchased with C’s funds under Mr. A’s name and later transferred as a gift. Each structure triggers different legal analyses, but Korean courts have consistently held that testamentary substitute trusts cannot circumvent forced heirship rights. Below, we examine each scenario in detail.
1. What is a Testamentary Substitute Trust in South Korea?
A testamentary substitute trust is a trust arrangement where the settlor designates themselves as the lifetime beneficiary and specifies that trust assets will pass to designated beneficiaries upon death. Unlike traditional wills, these trusts avoid strict formal requirements under the Korean Civil Act while allowing flexible estate planning.
Definition and Legal Framework
Under the Korean Trust Act, a testamentary substitute trust allows the settlor to maintain control over assets during their lifetime while predetermining post-death distribution. The settlor typically serves as the primary beneficiary, receiving income or benefits from trust assets until death, at which point the designated “post-death beneficiary” receives the trust property.
This structure offers several advantages over traditional wills in South Korea. First, testamentary substitute trusts do not require compliance with the strict formal requirements for wills prescribed in Articles 1060-1070 of the Korean Civil Act (holographic will, notarized will, secret will, oral will, or will by recording). Second, the settlor can freely modify trust terms during their lifetime. Third, trust assets can be professionally managed by a trustee, which is particularly beneficial for complex assets or when the settlor’s capacity may decline.
Why Forced Heirship Still Applies
Despite these advantages, Korean courts have consistently held that testamentary substitute trusts cannot be used to circumvent forced heirship rights. The Supreme Court of Korea in Case 2019Da294466 (decided July 11, 2024) explicitly confirmed that assets transferred through testamentary substitute trusts are “substantively equivalent to gifts” and must be included in the forced heirship calculation base. This ruling ensures that the protective purpose of the forced heirship system is preserved regardless of the estate planning technique employed.
2. How are Trust Assets Treated for Forced Heirship Purposes?
Korean courts analyze testamentary substitute trust assets based on their substantive economic effect rather than their formal structure. When assets gratuitously pass to beneficiaries upon the settlor’s death, they are treated as gifts subject to forced heirship claims, regardless of how the trust was designed.
Analysis by Transfer Type
Using the case study above, here is how each property would be analyzed:
Apartment A (Bequest by Notarized Will): This is a straightforward forced heirship case. Under Article 1114 of the Korean Civil Act, bequests are fully included in the forced heirship calculation base. D and E can claim restitution.
Apartment B (Trustee as Successor Beneficiary): The Supreme Court in Case 2019Da294466 held that such arrangements are substantively equivalent to gifts. The court stated: “The lower court correctly held that the property should be included as gifted property in the calculation of the forced heirship base.” D and E can claim restitution.
Apartment C (Third-Party Trustee with Post-Death Beneficiary): Using a trust company as trustee does not change the substantive analysis. Lower court precedents have consistently held that when trust assets gratuitously pass to a designated beneficiary upon the settlor’s death, they are subject to forced heirship claims. D and E can claim restitution.
Apartments D and E (Trustee as Post-Death and Residual Beneficiary): The Supreme Court in Case 2022Da307294 (decided April 16, 2024) held that designating the trustee as sole post-death beneficiary violates Article 36 of the Trust Act and is void. However, the lifetime self-benefit trust portion remains valid. Upon the settlor’s death, the trust terminates, and residual assets become part of the estate. D and E can claim restitution.
Apartment F (Title Trust Resolution): If C funded the entire purchase and Mr. A was merely the nominal owner, the transfer is not a “gift” but a title trust resolution. This property may be excluded from the forced heirship calculation base, depending on factual findings regarding the funding source.
Summary Table
| Property | Transfer Method | Forced Heirship Claim | Legal Basis |
|---|---|---|---|
| A | Bequest by notarized will | Available | Civil Act Article 1114 |
| B | Trustee as successor beneficiary | Available | Supreme Court 2019Da294466 |
| C | Third-party trustee, C as post-death beneficiary | Available | Lower court precedents |
| D | Trustee as post-death beneficiary, no residual beneficiary | Available | Supreme Court 2022Da307294 |
| E | Trustee as post-death and residual beneficiary | Available | Trust Act Article 36, substantive analysis |
| F | Title trust resolution (C funded purchase) | May Be Excluded | Not a gift if C funded purchase |
3. What Happens When the Trustee is Designated as Post-Death Beneficiary?
Under Article 36 of the Korean Trust Act, the trustee cannot be the sole beneficiary of trust assets. When a testamentary substitute trust designates the trustee as the sole post-death beneficiary, that designation is void. However, the Supreme Court has applied the doctrine of partial invalidity to preserve the valid portions of such trusts.
Article 36: Prohibition on Trustee Benefit
Article 36 of the Korean Trust Act states: “A trustee shall not enjoy the benefits of the trust as a beneficiary. However, this shall not apply where the trustee is one of the co-beneficiaries.” This provision exists to prevent conflicts of interest and ensure the trustee acts in the beneficiaries’ interests rather than their own.
Supreme Court Case 2022Da307294
The Supreme Court of Korea addressed this issue directly in Case 2022Da307294 (decided April 16, 2024). The court held: “Under Articles 36 and 5(2) of the Trust Act, a trust contract where the trustee becomes the sole beneficiary of trust assets is void. However, Article 5(3) provides that when part of the trust purpose falls under paragraphs (1) or (2), the trust remains valid for the remaining purposes not falling under those paragraphs.”
The court further explained: “Therefore, even if the post-death sole beneficiary designation to the trustee is void, the remaining portion—the lifetime self-benefit trust allowing the settlor to manage or operate trust assets—remains valid unless maintaining the trust clearly contradicts the settlor’s intent.”
Consequences of Partial Invalidity
When the post-death beneficiary designation is void but the lifetime self-benefit trust remains valid, the trust terminates upon the settlor’s death under Article 98(1) of the Trust Act (achievement of purpose). The question then becomes: what happens to the trust assets?
If no valid residual beneficiary is designated, under Article 101(1) of the Trust Act, assets revert to the beneficiary (the settlor) and become part of the estate. These assets are then subject to normal inheritance rules, including forced heirship claims by all legal heirs.
4. How is the Forced Heirship Share Calculated?
The forced heirship shortfall is calculated using a specific formula prescribed by Korean law. Understanding this calculation is essential for both claimants and defendants in forced heirship disputes involving testamentary substitute trusts.
Calculation Formula
The forced heirship shortfall equals: [Base Assets for Calculation × Forced Heir’s Statutory Ratio] minus [Special Benefits Received by Forced Heir] minus [Assets Obtained by Inheritance] plus [Inherited Debt Share].
The Base Assets for Calculation includes: (1) the positive estate value at death (including bequests), plus (2) gifts made during the decedent’s lifetime, minus (3) estate debts. For testamentary substitute trusts, the trust assets are treated as gifts and added to this calculation base.
Forced Heirship Ratios
| Heir Category | Statutory Inheritance Share | Forced Heirship Ratio |
|---|---|---|
| Spouse | 1.5 shares (with children) | 1/2 of statutory share |
| Children | 1 share each | 1/2 of statutory share |
| Lineal Ascendants | 1 share each | 1/3 of statutory share |
| Siblings | 1 share each | No forced heirship right |
Practical Example
In a referenced Korean court case involving testamentary substitute trusts, the calculation proceeded as follows: The trust assets were valued at KRW 1,533,000,000. After deducting the lease deposit return obligation of KRW 930,000,000, the net value for forced heirship calculation was KRW 603,000,000. The plaintiff’s forced heirship ratio was 1/9 (calculated as 2/9 statutory share × 1/2). Therefore, the plaintiff’s forced heirship amount was KRW 67,000,000 (603,000,000 × 1/9).
Timing of Valuation
The value of trust assets for forced heirship purposes is assessed as of the date of the decedent’s (settlor’s) death. For gifts with encumbrances such as mortgage obligations or lease deposit return duties, the net value after deducting such liabilities is used in the calculation.
5. How is Forced Heirship Restitution Made?
Korean law establishes in-kind restitution as the principle for forced heirship claims. Forced heirs have the right to demand return of the actual property, and courts must honor this request when restitution is feasible.
In-Kind Restitution as the Principle
According to the Supreme Court of Korea in Case 2004Da51887 (decided June 23, 2005), forced heirship restitution is principally made in kind—returning the actual gifted or bequeathed property. The court in Case 2005Da71949 (decided May 26, 2006) further clarified: “When a forced heir requests in-kind restitution and it is possible, the court must order in-kind restitution.”
When Monetary Compensation is Permitted
Monetary compensation is only permitted when in-kind restitution is “impossible or extremely difficult.” The Supreme Court in Case 2013Da65963 (decided February 13, 2014) explained that this includes situations where third parties have acquired rights such as mortgages, surface rights, or other encumbrances over the gifted property that would make physical return impractical.
Trust Agreement Provisions Cannot Bind Forced Heirs
In Seoul Eastern District Court Case 2018Na28992, the defendant argued that the trust agreement specified monetary compensation as the restitution method and this should be followed as the decedent’s express intent. The court rejected this argument, holding: “The plaintiff is not a party to the trust agreement and therefore is not bound by the restitution method specified in the trust agreement between the decedent and defendant.”
This ruling is significant for estate planning: provisions in trust agreements between the settlor and trustee/beneficiary cannot override the forced heir’s statutory right to claim in-kind restitution.
6. What are Key Considerations When Designing Testamentary Substitute Trusts?
When structuring testamentary substitute trusts in South Korea, careful attention must be paid to Trust Act requirements and forced heirship implications. Proper planning can help achieve the settlor’s objectives while minimizing legal risks and potential disputes.
Trustee Designation Limitations
Following Supreme Court Case 2022Da307294, designating the trustee as the sole post-death beneficiary is void under Article 36 of the Trust Act. When designing testamentary substitute trusts, practitioners should ensure the trustee and post-death beneficiary are different persons, or that the trustee is only one of multiple co-beneficiaries.
Forced Heirship Impact Assessment
Even when assets are transferred through testamentary substitute trusts, other heirs’ forced heirship rights remain protected under South Korean law. Trust design should either: (1) plan asset distribution within the bounds of other heirs’ forced heirship shares, or (2) anticipate and prepare for potential forced heirship disputes by setting aside assets or insurance proceeds to satisfy claims.
Residual Beneficiary Designation Issues
Even when designating the trustee as residual beneficiary for post-termination assets, Article 36 of the Trust Act may apply. According to legal scholarship, “considering that benefits arising from statutory trust relationships after the original trust terminates are also included in trust benefits, Article 36 of the Trust Act should apply even when the trustee is designated as the sole residual beneficiary” (Kwon Byeongcheol, Justice Journal No. 207, Korean Law Academy, 2025).
Documentation and Professional Guidance
Testamentary substitute trusts in South Korea involve a complex intersection of trust law, tax law, registration requirements, and inheritance law. From the trust design stage, consultation with attorneys specializing in inheritance matters and tax professionals is essential to minimize legal risks and ensure the settlor’s intent is legally realized while respecting the rights of all heirs.
7. FAQ
Atlas Legal, located in Songdo, Incheon, South Korea, provides comprehensive legal services in inheritance law and trust disputes. Our team has extensive experience advising on testamentary substitute trust structures, forced heirship calculations, and dispute resolution strategies for both domestic and international clients with assets in South Korea.
* The legal information provided in this article is for general guidance purposes only. Legal determinations may vary depending on specific factual circumstances. Professional legal consultation is recommended for accurate advice on individual cases.