Testamentary Substitute Trust

A will takes effect upon death, but a testamentary substitute trust allows the transfer of assets to be designed through a trust structure during one's lifetime.

Trust property is legally separated from the trustee's own property and managed apart from it.

Also, even if the trustee dies or goes bankrupt, the trust property remains safely protected.

Trust property is also protected from compulsory execution, disposition for default, and enforcement of security interests (Trust Act, Articles 22, 23, and 24).

The truster may directly control the trust while holding various powers, such as the following.

The right to change the beneficiary, however, is available only for trusts that fall under the following.

It can reduce disputes among heirs over a will, and by determining the distribution of property in advance, it can help prevent conflict within the family.

A testamentary substitute trust can be carried out by entering into a contract with a financial institution to entrust assets and design the succession procedure.

Banks, trust companies, and similar institutions offer various trust products, and you can compare them to find the product that fits your own situation.

You then submit the necessary documents to the financial institution and transfer the property to be placed in trust to that institution.

Once you designate the beneficiary and set the post-death management procedure, the trust contract takes effect, and the property is managed and operated according to the contract.

Documents Required for the Contract

※ The documents above may differ somewhat according to the internal regulations of the financial institution, and additional related materials may be requested.

A declaration of trust, by contrast, allows the truster to carry out the procedure by personally becoming the trustee, without a financial institution.

To do this, the inheritance procedure must be designed, and a specific plan should be established for how the property will be managed and distributed through the trust.

At this stage, to secure legal effect, a declaration of trust and a notarial deed must be prepared, and once all procedures are completed, the declaration of trust takes effect.

Although a declaration of trust may in principle be made by the truster personally becoming the trustee without separately appointing one, it may be subject to limitations in registration practice or in its tax effect, so professional advice is needed.

Under the Financial Investment Services and Capital Markets Act, the property that may be entrusted in a money trust contracted with a financial institution is limited to the following seven categories. (Financial Investment Services and Capital Markets Act, Article 103)

In this regard, although the declaration-of-trust method is not directly subject to the restrictions under the Trust Business Act, for effective implementation it is generally composed of the assets listed above in practice.

A trust is legally terminated where it falls under any one of the following (Trust Act, Article 98).

The truster and the beneficiary may terminate the trust at any time by mutual agreement (Trust Act, Article 99).

The trust can therefore generally be terminated where the truster and the beneficiary consent together.

The trust cannot be terminated, however, where the truster does not exist.

Where the truster receives all of the trust benefits, the truster or the truster's heir may terminate it unilaterally.

If the trust agreement provides otherwise, however, that provision applies.

Where special circumstances that were not foreseen at the time of the trust act arise, a petition for termination of the trust may be filed with the court (Trust Act, Article 100).

In the following cases, the trust property vests in the beneficiary.

Where the trust act designates a person entitled to the vesting of the residual trust property, however, the property vests in that person entitled to the vesting (「Trust Act」 Article 101 (1)).

Where both the beneficiary and the person entitled to the vesting waive their rights to the residual property, that property vests in the truster or the truster's heir (Trust Act, Article 101 (2)).

Where the truster set up the trust for a wrongful purpose, such as evading creditors or escaping execution, and the trust is consequently terminated by the court, the trust property vests in the truster (Trust Act, Article 101 (3)).

Even if a trust has been terminated, it continues to be managed as trust property until the residual property is actually transferred to the person entitled to the vesting.

At this point, the person entitled to the vesting is deemed to temporarily hold the status of a beneficiary (Trust Act, Article 101 (4)).

This means that, in tax and registration practice, the property continues to be held in the name of the trustee until the transfer to the name of the person entitled to the vesting is completed, and the beneficiary of the residual property holds the same status to exercise rights as the former beneficiary.

This law firm has many inheritance specialist attorneys registered with the Korean Bar Association, as well as specialist attorneys with an average of more than 10 years of experience.

Through tailored legal services that span the entire process, from trust design to contract advice, asset transfer, and post-death vesting, stable inheritance planning and support are possible.

If it is difficult to prepare the procedure on your own, you may wish to proceed more accurately and safely with the support of an inheritance attorney.