[Column] Supporting a Disabled Child Throughout Life: Utilize Trusts

April 20 marked Disability Day. In this article, I will examine what kinds of safety nets our society provides for people with disabilities from a tax perspective, and recommend the active use of disability trusts.

The Inheritance and Gift Tax Act includes a provision called "Exclusion of taxable value for assets gifted to people with disabilities." In summary, if a person with a qualifying disability entrusts assets received as a gift to a trust company, up to 500 million KRW can be exempt from gift tax. Let’s look at an example. Mr. A, in his 80s, is a self-made entrepreneur. However, he lost his spouse early and has two children: a daughter with a disability and a son with whom he has a strained relationship. As Mr. A ages, he is increasingly concerned about how to pass on his assets, as well as how to ensure his daughter’s stable livelihood after his death.

He could consider either inheritance or lifetime gifting. The calculations differ depending on various circumstances, but under the current inheritance tax system?which is different from the inheritance acquisition tax system used in some other countries?a high tax rate of 40-50% is applied if the taxable base for inheritance tax exceeds 1 billion KRW. Therefore, if there are two or more children, it is worth considering lifetime gifting to each child to reduce the taxable value of the estate.

The amount that can be gifted to a child without incurring gift tax is up to 50 million KRW over ten years (20 million KRW for minor children). For amounts exceeding 50 million KRW, a gift tax of 10-50% must be paid. Therefore, if Mr. A gifts 550 million KRW to his son, 50 million KRW is exempt, but 87.3 million KRW in gift tax must be paid on the remaining 500 million KRW. However, for his daughter with a disability, 50 million KRW is exempt as a general deduction, and the remaining 500 million KRW can be gifted through a disability trust without incurring any gift tax.

There is a significant difference between general gifting and gifting through a disability trust. In the case of a general gift deduction, if the gift is made within ten years prior to Mr. A’s death, the value of the lifetime gift is added back to the estate for inheritance tax purposes, and only the gift tax already paid is deducted, effectively nullifying the benefit. However, assets gifted through a disability trust are excluded from this aggregation, so the benefit is guaranteed. In other words, even if Mr. A hesitates to make a lifetime gift because he may not survive for another ten years, considering the disability trust exemption, a lifetime gift becomes an essential choice. Even after Mr. A’s death, the trust company will help ensure that the assets gifted to his daughter are not misappropriated and can be used as stable living expenses.

However, there are some shortcomings in the current law regarding the disability trust exemption. To achieve the intended purpose of the system, withdrawals of principal are restricted to certain uses, such as living expenses (up to 1.5 million KRW per month), medical and nursing care costs, and special education expenses. The law also requires the settlor to submit supporting documents and application forms, making this their responsibility. For a settlor with a disability, it may be difficult to continuously manage these requirements, and if there is no reliable guardian, there is a risk that some of the trust assets may not be utilized during their lifetime.

To address this, it is crucial to maximize the portion of benefits that can be freely withdrawn. Trust companies offering disability trusts include banks, insurance companies, and securities firms, so it is advisable to make a rational choice with a primary focus on investment expertise.

Son Gwanghae, Tax Accountant at Mirae Asset Securities