Trusts of wills: Banks vie for W100tr inheritance market

Advent of superaged population prompts shift in wealth management from accumulation to transfer

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A woman in her late 40s and mother of two recently enrolled in a will-substitute trust at a local bank. Despite her relatively young age, she was doing her estate planning due to terminal cancer, which can progress rapidly and unpredictably.

Her primary concern has been ensuring the proper distribution of her assets to her two children after her death, particularly to her 10-year-old youngest who has a disability. She stipulated that her oldest should receive the majority of his inheritance at age 30, while her younger child's living expenses and specific needs would be provided in installments until exhausted.

Trusts vs. wills

A growing number of Korean nationals have been opting for trusts instead of wills recently.

Reports show that the total balance of will-substitute trusts at the nation's top five banks — KB Kookmin, Shinhan, Hana, Woori and NongHyup — reached 3.3 trillion won ($2.4 billion) in the first quarter this year, a 43-percent jump from a year ago and more than triple the 880 billion won recorded in 2020.

A will-substitute trust, a type of living trust that takes effect before death, allows assets to be placed with a financial institution for posthumous distribution.

Unlike insurance or wills that transfer assets in a lump sum at death, a will-substitute trust allows detailed specifications of inheritance methods through a contract, such as annual distributions or transferring ownership when beneficiaries reach a certain age.

"Under civil law, wills must meet strict requirements, so omitting details like an address or typing on a computer — which happens commonly — can invalidate them. A will-substitute trust operates similarly, but is structured as a contractual arrangement under trust law, offering better representation of one's intentions," said Bang Hyo-seok, a family law and estate planning attorney at Wooil Law Firm.

In response to rising demand, local financial institutions, especially banks, are increasingly entering the market.

Hana Bank, a leader in the trust sector, has spearheaded will-substitute trust services under its Hana Living Trust brand since 2010. In April, it launched the industry's first estate management services to help draft, store and execute wills, expanding partnerships including a recent alliance with the nation's largest law firm, Kim & Chang, and Japan's trust specialist bank, Sumitomo Trust.

Shinhan Bank is establishing a computerized system for will-substitute trusts and recently opened the "Shinhan Trust Lounge" for customized consulting. Woori Bank reduced the minimum subscription for will-substitute trusts from 500 million won to 50 million won, making them more accessible. Additionally, the state-run Industrial Bank of Korea relaunched its will-substitute trust products in May.

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100-trillion-won market

As Korea faces significant population aging, the market for will-substitute trusts, among various wealth management services, is rapidly expanding.

By next year, the nation is expected to become a superaged society, with those aged 65 or older comprising 20 percent of the population.

Inherited assets surged to 96 trillion won in 2022, up by 60 trillion won from five years ago, according to Statistics Korea. Including gifted assets, the total reached 188.4 trillion won, more than doubling the 90.4 trillion won recorded in 2017.

"The aging trend has shifted the focus of asset management from wealth accumulation to wealth transfer, highlighting the importance of comprehensive asset management, which includes inheritance and gifts," explained an industry official.

With the expansion of the senior population, which has sizable assets, the necessity of estate planning is felt not only by the wealthy.

A recent Hana Institute of Finance report revealed that eight out of 10 middle-income individuals intending to pass assets on to their children believe preparation for inheritance is crucial. Those in their 60s prioritize planning "when ill," while those in their 40s favor starting "as soon as possible."

Song Eun-jung, a general manager at Hana Bank's Hana Living Trust Center, highlighted a significant increase in middle-class customers seeking estate planning assistance.

"Owning a single apartment in Seoul can easily exceed 1 billion won nowadays. However, with families having fewer children — typically two or three — it becomes more challenging to achieve consensus among beneficiaries during estate division," she noted.

Song pointed out that many customers opt for will-substitute trusts to avoid disputes among beneficiaries, which have been on the rise. Legal disputes related to inheritance increased from 1,872 cases in 2018 to 2,776 cases in 2022, according to Supreme Court data.

"Given the increasing number of elderly and single-person households, along with complex family dynamics from divorce and remarriage, misunderstandings often arise. A will-substitute trust allows individuals to manage assets securely during their lifetime and specify distribution timing and methods," explained Song.

Regulatory constraints

The expansion of the will-substitute trust market is driven by banks' efforts to bolster their non-interest income sectors. These fee-based trusts complement other trust products, enabling banks to diversify revenue streams beyond the dominant interest income, which constitutes over 90 percent of their profits.

However, for the market to grow further, industry insiders advocate for regulatory improvements.

Under the current law, only seven types of assets can be entrusted: cash, securities, monetary claims, movable assets, real estate, real estate-related rights and intangible property rights. Trusts involving debt obligations such as mortgage loans and insurance claims are prohibited, limiting the succession of life insurance and real estate, including home mortgage loans.

In October, the Financial Services Commission, along with industry officials from the trust and financial sectors, proposed a plan to change the regulations, including diversifying the types of assets that can be handled by trusts, the partial delegation of tasks to nonfinancial specialized institutions and permitting the promotion of trust products.

"Constraints on eligible trust assets and limited awareness of will-substitute trusts have kept the domestic market relatively small compared to more developed markets like Japan and the US," noted a banking official, adding, "With regulatory improvements and enhanced tax incentives, we anticipate the market will expand to meet the demands of the aging population."

By Choi Ji-won(jwc@heraldcorp.com)