These days, there is an increase in the number of Koreans who own U.S. real estate. The estate tax rate in Korea is one of the highest in the world, and safe real estate investment in the U.S. is still very active, which meets the desire for asset investment abroad. However, real estate investment in the U.S. should be considered with a general understanding of the gift and estate laws of the U.S. and Korea.
In particular, when a property owner passes away, there can be a substantial amount of estate tax to pay to the U.S. and Korean governments. For example, when a U.S. permanent resident or a citizen is deceased, the estate tax exemption amount will be 11.7 million dollars(in 2021) to receive the estate of the deceased.
That is, if $1 is ￦1,000, there will be no estate tax when one inherits the estate up to 11.7 million won. (As a presidential election promise, the Biden administration promised to reduce the gift and estate tax exemption amount significantly. Although no change in the exemption amount has been implemented, the amount will likely decrease to 3.5 million dollars.) On the other hand, the gift and estate tax exemption amount for a non-resident alien is $60,000.
When the deceased bequeaths estate more than $60,000, the heir must pay tax for the excessive amount. The tax rate is 30% for $100,000 or more, exempting the tax exemption amount; 32% for $150,000 or more; 37% for $500,000 or more; 39% for $750,000 or more; and 40% for $1,000,000 or more.
Let's say Chul Su Kim deceases with properties worth $1,070,000. The estate tax rate for his children will be 40% while exempting $60,000 from the total estate.
There are some misunderstandings in this situation. The first misunderstanding is that when all children are U.S. citizens, they do not need to pay taxes. Unfortunately, the estate tax can be exempted only when the spouse is a U.S. citizen and receives the estate. This is not the case if the children receive the estate. When the heir is a permanent or non-permanent resident, the gift and estate tax exemption amount from a non-permanent resident spouse is $159,000 annually.
A gift tax will be imposed if the estate is worth more than $159,000 annually. (On the other hand, a U.S. citizen can infinitely receive any amount of estate from a non-permanent resident spouse without any worry about taxation.) Furthermore, the estate tax exemption for a permanent or non-permanent resident to receive from a non-permanent resident is only $60,000. If a non-permanent resident who owns U.S. properties dies, and the spouse is a permanent or non-permanent resident, the estate tax exemption amount for the spouse is only $60,000.
The second misunderstanding is that the gift and estate tax exemption amount is multiplied based on the number of beneficiaries or the heirs. As a joke, I often tell my clients that the U.S. gift and estate tax policy is not a childbirth policy. That is, the grantor or the donor decides the tax exemption amount, so the tax exemption amount does not increase however many children there are as heirs of the estate.
The third misunderstanding is that one can avoid paying any gift and estate tax to the U.S. government if it is paid to the Korean government. However, no taxation agreement has been signed between Korea and the U.S. According to the International Revenue Service Website, the U.S. government has signed taxation agreements on gifts and estate with fifteen countries, but Korea is not one of them. Therefore, when a Korean invests in U.S. properties, he must thoroughly check whether double taxation will be possible.
The fourth misunderstanding is that one can avoid estate taxes through a living trust. A living trust is not a tool to remove estate taxes, and its primary focus is to inherit estates without going through the probate court when a grantor passes away.