Hello, I am Lawyer Bae Gi-hyung from Cheongchul Law Firm.

A trust is the complete transfer of ownership rights to the trustee, both internally and externally. Once the transfer of property rights to the trustee is completed, the trustee becomes the rights holder of the property in question, which means the trust property is separated from the grantor's assets. Therefore, in principle, the grantor's creditors cannot enforce claims on the trust property.

Article 22(1) of the Trust Act declares, in accordance with this principle, that "no enforcement, auction for the execution of secured rights, preservation measures (hereinafter referred to as 'forced execution, etc.') or collection actions for national taxes, etc., can be carried out concerning trust property."

However, there are certain exceptions, such as enforcement based on rights arising from 'causes occurring before the establishment of trusts' or 'rights arising in the course of trust affairs' (Article 22(1) of the Trust Act).

Then, if a tax claim arises against the grantor, particularly if that tax claim arose before the trust transfer, can the trust property be seized?

[Question]

Can the trust property be seized based on the tax claim against the grantor?

[Answer]

The Supreme Court's ruling on October 15, 1996, 96Da17424 stated, "Article 21(1) of the Trust Act allows for enforcement or auction only in cases based on rights arising from causes occurring before the trust or rights arising in the course of handling trust affairs. Therefore, even if the tax imposed as a result of the inheritance of the trust property is considered as 'rights arising from causes before the trust,' unless enforcement was not carried out before the trust was established, that tax claim cannot be considered as 'rights arising from causes before the trust' under Article 21(1) of the Trust Act." The judgment concluded that the trust property under the name of the trustee cannot be seized based on tax claims against the grantor.

In particular, this ruling pertains to the case of 'trusting the inheritance property after the death of the decedent and distribution of the inherited property,' where the inheritance tax claim arose from causes before the trust, but it was determined that, unless enforcement was not carried out before the trust action, it cannot be considered as 'rights arising from causes before the trust' under Article 21(1) of the Trust Act.

This means that enforcement is only possible if certain countervailing rights were obtained by the creditor of the grantor based on causes occurring before the trust.

Additionally, the exception outlined in Article 21(1) of the Trust Act which governs enforcement against trust property includes, aside from 'rights arising from causes before the trust,' also 'rights arising in the course of managing trust affairs.' Therefore, can these tax claims be considered as 'rights arising in the course of managing trust affairs'?

In this regard, The Supreme Court's ruling on January 24, 2013, 2010Du27998 stated that "the exceptions allowing for enforcement or auction against trust property as detailed in Article 21(1) of the Trust Act refers only to rights where the trustee is the debtor, and does not include situations where the grantor is the debtor." Thus, it remains ruled that enforcement cannot be carried out.

Consequently, trying to seize trust property transferred to the trustee based on tax claims against the grantor is illegal and 'automatically void.'

In South Korea, trusts are commonly used in the process of real estate development projects through 'land trusts.' For instance, if taxes were imposed on the grantor (the project initiator) before the management-type land trust, enforcement cannot occur after the trust unless a seizure occurred prior to the grantor entrusting the business site.

However, it should be noted that if such actions are misused to avoid national tax collection, there is a possibility of cancellation under Article 8 of the Trust Act or Article 30 of the National Tax Collection Act.

Lawyer Bae Gi-hyung has worked in the construction/real estate team of the Defense Acquisition Program Administration and a large law firm, specializing in real estate and trust contracts. If any issues arise related to real estate development projects, trusts, finance, or construction disputes, please feel free to contact me.

Cheongchul Law Firm consists of lawyers who were formerly part of the top four law firms in the country — Kim & Chang, Bae, Kim & Lee, Lee & Ko, and Shin & Kim. We form teams with specialized lawyers in fields related to a case, not just one lawyer. Cheongchul provides comprehensive solutions that go beyond resolving specific issues, ultimately focusing on achieving what our clients desire through legal consulting. If you need assistance in achieving your goals, do not hesitate to contact Cheongchul.