How much inheritance tax would heirs owe if parents leave behind a Seoul home worth 2 billion won ($1.4 million) and 100 million won in bank deposits? If the surviving spouse receives the share set by law, the estimated tax comes to about 136 million won. If two children divide the entire estate instead, the bill jumps to about 264 million won — a gap of more than 100 million won depending on who receives how much.
Kim Do-hoon, a tax specialist at KB Kookmin Bank's WM Star Advisory Group, said planning must go beyond reducing the tax itself. "You have to prepare both to lower the inheritance tax and to secure the funds to pay it within the filing and payment deadline," he said. "If most of the estate is real estate, you need to review options such as installment payments, life insurance or a will-substitute trust in advance."
Exceptions to the '1 Billion Won Threshold'
It is widely believed that no inheritance tax applies to estates of up to 1 billion won when a spouse and children survive. That is because a spousal deduction of at least 500 million won applies even if the spouse inherits nothing or receives less than 500 million won. Applying the lump-sum deduction of 500 million won — instead of the basic deduction combined with other personal deductions — brings the total to 1 billion won.
"If the spouse actually inherits more than 500 million won, the spousal deduction also increases, capped by the statutory share," Kim said. "Depending on the size of the estate and the actual allocation, the deduction can reach up to 3 billion won."
This formula does not apply to every case, however. Common-law spouses cannot claim the spousal deduction. If the deceased was a non-resident living abroad, only the basic deduction of 200 million won applies, with no spousal or lump-sum deduction. The deduction ceiling can also shrink when assets are bequeathed to a grandchild who is not a first-in-line heir, or when prior gifts are added back into the taxable estate.
How the estate is divided also shapes the tax burden. Consider a spouse and two children inheriting a home valued at 2 billion won and 100 million won in deposits. The spouse's statutory share is three-sevenths of the estate, or 900 million won. If the spouse actually inherits that amount, a spousal deduction of 900 million won applies along with the lump-sum deduction of 500 million won. If the children take everything, the spousal deduction is limited to the 500 million won minimum.
"If the spouse inherits the statutory share of 900 million won, the estimated inheritance tax is about 136 million won, but if the two children split the entire estate, it rises to about 264 million won," Kim said. "The tax burden differs by more than 100 million won depending on the allocation."
Paying Over Up to 10 Years When Cash Falls Short
The problem is that only 100 million won of the 2.1 billion won estate is in cash. With the estimated tax ranging from 136 million to 264 million won, the deposits alone cannot cover it. And if the home is where the surviving spouse lives, selling it quickly to raise the money is difficult.
That is where installment payment comes in. When the inheritance tax due exceeds 20 million won, heirs can provide collateral and spread payments over up to 10 years. The period must be set so that each installment exceeds 10 million won, and the interest rate on deferred payments is 3.1% a year in 2026.
"The surviving spouse may need to keep living in the inherited home, or the property may be hard to sell," Kim said. "Even when the value is expected to rise, using installment payments can be more advantageous than rushing to sell."
Pledging real estate as collateral, however, results in a mortgage being registered on the property. If the home is leased under jeonse (a Korean lease system requiring a large lump-sum deposit instead of monthly rent), the senior claim of the tenant's deposit may leave the collateral value insufficient. That is why the interest cost, the outlook for home prices and the likelihood of a sale all need to be weighed together.
Who Paid the Premiums Is the Key
Life insurance taken out before death is another way to secure funds for the tax. What matters, though, is not only who is named as policyholder and beneficiary but who actually paid the premiums.
Even if a parent is named as the insured, the death benefit is included in the taxable estate if the parent was the policyholder paying the premiums. If both the policyholder and the beneficiary are the child, and the child pays the premiums with their own money, the proceeds can fund the tax payment without inheritance tax on the benefit.
"Think of the policyholder as the person paying and the beneficiary as the person receiving," Kim said. "Even if you name the child as both policyholder and beneficiary, going through the motions is not enough — you have to be able to prove the child actually paid the premiums with their own funds."
A will-substitute trust can also serve as a source of funds. When a person dies, withdrawals from deposits in their name are restricted and may be unavailable until heirs reach an agreement on dividing the estate. If those talks drag on, heirs can find themselves short of cash to pay the tax even though other assets exist.
"If you fail to file and pay within the six-month deadline, penalties keep mounting and the whole family suffers," Kim said. "Designing a will-substitute trust so that the funds needed for the inheritance tax can be paid out to the children prevents that."
When the Spouse Pays, Plan for the Second Transfer Too
Concentrating assets in the spouse to cut the immediate tax bill is not always the better choice. Assets inherited by the spouse become taxable again when that spouse dies. The first round of tax may fall, but the second round borne by the children can rise.
"When you add up the first and second rounds of inheritance tax, concentrating assets in the spouse is not necessarily advantageous," Kim said. "The allocation between spouse and children should be decided with both transfers in mind."
Another approach has the spouse inherit up to the statutory share and then shoulder the entire inheritance tax alone. Heirs bear joint liability for the tax, so one heir paying the full amount within the limit of what they received is not treated as a gift to the others. To the extent the spouse pays the tax, the estate that later passes to the children also shrinks.
If there is enough time before death, gifting assets to a spouse or children in advance to reduce the taxable estate is another option. When large financial transactions have taken place, it helps to let the family know the reasons behind them, in case heirs are later asked to account for the flow of funds. Arrangements for dividing the estate should also be settled in advance to head off family disputes.
"When an inheritance occurs, the first step is to identify the entire estate — real estate, deposits, insurance proceeds — and then divide it smoothly through family agreement," Kim said. "Six months may look long, but preparing documents, reaching agreement and carrying it out takes considerable time, so calculate the expected tax early and move quickly on a payment plan."
Jung Ji-won's Money Trace tracks the investment flows of wealthy individuals through wealth management specialists in the financial industry. It follows the trace of money to see where the affluent are looking and how they allocate their assets.
