Food company OTTU is all the rage in South Korea these days, with news of its efforts to turn part-time workers into full-time employees, support more than 4,000 children with heart disease, and freeze the price of instant noodles for 10 years. The company’s popularity is evident in the fact that many people refer to it as “God tofu,” and there is even a movement to buy its products. Recently, the company’s largest shareholder, Chairman Ham Young-jun, has been in the news for paying his inheritance taxes of KRW 150 billion over five years. If this is true, he will have to pay more than 40% of his inheritance in inheritance taxes. This is quite different from other chaebols who have been evading inheritance taxes through various schemes. But what would have happened if he had inherited in the U.S.?
There are two main types of estate taxes in the United States. There’s a federal estate tax and a state estate tax. Unlike Korea, where you only have to pay taxes to the IRS, in the U.S., both the federal and state governments are involved in estate taxes. Let’s start with the federal estate tax. The federal government exempts the inherited assets from estate tax if they are worth $5.49 million or less. If your estate is larger than the exemption ($5.49 million), you’ll pay 40% estate tax on the excess. It’s important to note that the federal government bundles estates and gifts together, which means that assets you give as gifts to your children while you’re alive are also included when calculating your estate later. For example, Mr. A leaves $3 million in assets, including real estate and a car, which is below the exemption amount, so he owes no federal estate tax. However, if Mr. A had given his children $4 million worth of real estate as gifts during his lifetime, the situation would be different. In this case, the federal estate tax would be 40% of the difference between the total estate ($7 million) and the exemption amount ($5.49 million), or $1.21 million.
So what about state estate taxes? Let’s use New York State as an example. Like the federal government, New York exempts estates from estate taxes as long as the value of the estate does not exceed the exemption amount. As of 2017, New York’s exemption is $5.25 million. The difference with the federal estate tax is that if your estate exceeds the exemption, you’re taxed on the entire estate, not just the difference between the estate and the exemption. In our example, Mr. A would be taxed on $7 million instead of $1.21 million. The good news is that unlike the federal estate tax rate, which is set at 40%, the New York State estate tax rate ranges from 3.06% to a maximum of 16%, depending on the size of the estate. Another good news is that the exemption threshold increases by nearly $1 million each year. In 2016, the exemption threshold was $4.18 million. Before the law was enacted in 2014, the exemption was $1 million, so that’s a more than fivefold increase in just three years.
Let’s take a look at how much inheritance tax Mr. Ham would have to pay to the government if he received an inheritance in New York compared to South Korea. First, let’s calculate the federal estate tax. Mr. Ham would have to pay 40% of the difference between the total amount of his inheritance (KRW 3,600 billion, about $320 million) and the exemption amount ($5.49 million) to the federal government in estate tax (about $314.5 million). This amount is about $125.8 million, which is about $141.9 billion in today’s dollars. Next, let’s calculate the New York State estate tax. Since Mr. Ham’s inheritance is over the exemption threshold and the amount is large, it would be subject to the 16% estate tax rate. He would pay 16% of the entire amount (about $320 million) in New York State estate tax. This is about $51.2 million, or about $55.7 billion in today’s dollars. If you combine the federal estate tax and the New York state estate tax, the total is about $7.6 billion.
If you live in New Jersey, you’ll need to pay more attention when it comes to estate taxes. For starters, the exemption threshold is significantly lower. In 2016, the nominal exemption was only $675,000, although it increased to $2 million in 2017. Additionally, New Jersey has an inheritance tax that is separate from the estate tax. Inheritance tax is a tax that applies regardless of the amount of the inheritance, based on how closely the person who inherits was related to the person who left the inheritance. New Jersey divides these relationships into three main groups. The first group is immediate family. This includes spouses, parents, grandparents, children (even if adopted), grandchildren, and grandchildren. This group is completely exempt from estate tax. The second group includes brothers, sisters, sons-in-law, daughters-in-law, etc. of the person who left the estate. This group is exempt from estate taxes up to $25,000, but anything above that is subject to estate taxes up to 16%, depending on the amount. The third group includes everyone else, who must pay inheritance tax (15% up to $700,000 and 16% above that).
As you can see, estate and inheritance laws vary from state to state, and everyone’s situation is different, both in terms of the amount of assets they have and the circumstances in which they find themselves, so it’s important to have an estate plan in place. Regardless of the size of your estate, proper estate planning can help you avoid unnecessary expense and time in the event of an untimely death, which is why we strongly recommend that you seek proactive advice from an attorney who is familiar with and experienced in estate and inheritance law.
If you have any further questions about the content of this column, or if there is a piece of law you would like our readers to know about, please do not hesitate to contact us at mail@songlawfirm.com.