Making donations was once considered a privilege of the wealthy but is growing in popularity among a wider group of people. Not only wealthy people in their 50s and 60s, but office workers in their 30s and even housewives are stepping up to donate.
In particular, donations are replacing inheritance. Along with the explosive popularity of investment funds over the past several years, the number of donations into small-sized funds is increasing. According to an annual report by the National Tax Service, 121,471 Koreans donated or paid gift taxes in 2007, up 120 percent from 2002, while the amount of such taxes rose 325 percent over the same period to W2.79 trillion (US$1=W1,313). In contrast, only 2,603 Koreans paid inheritance tax last year, totaling just W1.167 trillion, while the rate of increase was far smaller than the rise in gift taxes.
◆ Gift Taxes Offer More Potential Tax Breaks
The reason why making donations is more popular than claiming inheritance is because of its lower tax burden. Cho Jae-young, head of financial planning at Samsung Life Insurance, says the same tax rates (10 percent to 50 percent) apply. But for the recipient, the tax burden on donations is much lighter, says Cho. Last year, the limit on tax deductions was raised from donations of up to W300 million to W600 million. This has prompted individuals owning numerous homes to donate their real-estate assets to their spouses, in order to lower the real-estate transfer tax burden.
◆ Donate Before Asset Values Rise
As in the past, the rich continue to favor transferring real estate, stocks and other assets via donations while the value is still low, if they are going to pass them on to their children in the future. Kim Keun-ho, a tax accountant at Hana Bank, says the value of assets such as real estate increases by the amount of consumer price rises each year, so by the time one reaches old age, their value will probably have more than doubled.
◆ Parents Manage Assets After Donations Are Made
Kim at Hana Bank says one reason more people are favoring donations is that, in the past, people tended to avoid talking about family wealth, but attitudes have changed. Reducing taxes has become a common subject of discussion. But parents fear that donating huge sums of money to their children may damage their appetite for work. That's why, Kim says, many parents continue taking care of assets even after donating them to their children.
Meanwhile, the Lee Myung-bak administration is moving to lower gift taxes (although this was included in a tax reform bill, lawmakers were unable to ratify it in December of last year), leading wealthy Koreans to postpone making major donations.
But in the case of donating funds, such transactions must be reported to tax officials in order for them to be valid. Caution must also be taken, since Kookmin Bank and some other lenders require clients to cancel their funds before making a nominal transfer, because of the need to pay a cancellation fee. But Shinhan, Hana and Korea Exchange banks allow customers to transfer funds to their children without canceling them.