When Inheritance Requires Trading With The Enemy

Families can be torn apart by all sorts of circumstances, whether a failed marriage, an estranged relationship between siblings, a longstanding grudge, or a massive geopolitical shift.

One of these may seem out of place among the others, but the fallout of war and political upheaval is a reality for millions of people. Some of those people have property they may want their family to inherit.

It is not a mainstream estate planning issue, but a recent South Korean Supreme Court ruling served to shine a spotlight on how complicated inheritance can become when international sanctions are involved.

Harry Truman invoked the Trading with the Enemy Act and blocked money transfers to North Korea nearly 63 years ago; while George W. Bush terminated many of these restrictions, sanctions under the International Emergency Economic Powers Act largely replaced them.

Inheritance complications stemming from sanctions is not a problem restricted to the Korean peninsula. We have had economic restrictions against Cuba for more than half a century and against Iran since not long after the 1979 Islamic revolution. America today has large communities of prosperous Iranian and Cuban refugees, along with many thriving communities of well-integrated Korean Americans, nearly all of whom come from or are descendants of emigrants from South Korea. While 1,463,474 people self-identified as Korean in the 2010 U.S. census, the total of North Korean refugees in America is currently only 159.

What happens when an American who belongs to one of these groups accumulates a sizable estate that he or she wishes to share with relatives who live under sanctioned and untrustworthy regimes? It is a very tricky estate planning problem that I have almost never heard discussed in my own 27 years in the industry.

The case on which the South Korean Supreme Court recently ruled illustrates some of the complications. It concerned a man, identified only as Mr. Yoon, who fled his native North Korea during the Korean War, leaving behind a wife and five of his six children. He remarried and had four more children in South Korea, after any hope of reuniting with his original family was lost. (He was able to remarry because South Korean law annulled the unions of spouses who were separated when war divided the peninsula.) When Mr. Yoon died in 1987, he left an estate worth 10 billion won, approximately $8.9 million.

While his South Korean-born children moved to inherit, his North Korean-born daughter – the child who had fled south with Mr. Yoon – filed a lawsuit claiming that the inheritance should be shared with her five North Korean siblings. After expending great effort to represent her siblings in a South Korean court, the daughter won her case, a decision which the Supreme Court recently upheld. This paves the way for North Koreans to inherit property from family members currently living in South Korea (or, theoretically, elsewhere).

The decision is easier to make than to implement, however. The New York Times observed that Mr. Yoon’s North Korean children are “unlikely to get their money anytime soon.” While the South Korean decision might trigger all sorts of new cases, the extreme limits on communication and commerce between North and South Korea makes any sort of legal transfer tremendously cumbersome, if not impossible.

In most cases, small or short-term transfers are often ineffective, sometimes unwise, and maybe illegal, depending on the nature of the property and the sanctions involved. North Korean defectors in the U.S. have been trying to find ways to support the family members they left behind since we first started accepting them in 2004. Defectors in South Korea face similar challenges, and it’s unclear how the decision about inheritance will actually work in practice. Even the existing, complicated systems for getting cash to North Korean family members under the table are beginning to erode as the Bank of China distances itself from the North Korean Foreign Trade Bank following U.S. sanctions.

But political situations have a way of changing in the course of a generation or two. During World War II, the TWEA blocked money movements from the U.S. to Germany and Japan, who today are among our closest allies. As recently as the ‘80s, West Germans faced a problem similar to that of today’s South Koreans in attempting to provide for relatives who lived on the other side of the Iron Curtain in East Germany. The Berlin Wall eventually came down. The Demilitarized Zone on the Korean peninsula is unlikely to last forever.

In the meantime, estate planning will remain complicated for those with family cut off by sanctions and other economic or communication limitations. This South Korean decision is one step forward in what will remain a maze for some time to come.

We have tools and techniques that let us conserve and manage resources for relatives who are not free to act for themselves. I would imagine that in many such cases, we would use trusts and conservatorships to handle such property until heirs are able to take action. The tricky part is to find ways to reach and remember those heirs who today live beyond the reach of the free world’s economy.

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