Life insurance is often one of the most effective tools in estate planning, but it can also be one of the most misunderstood. While the proceeds of domestic life policies are generally considered “deemed property” in a deceased estate, there are several deductions, exemptions, and nuances that depend on the nature of the policy, the beneficiary nominations, and even the marital contract of the policyholder. For this reason, the way in which life cover is structured within an estate plan plays a critical role in reducing estate costs, avoiding unnecessary taxes, and ensuring liquidity for heirs.
In this article, we explore what is meant by deemed property, how estate duty and executor’s fees apply, and the specific circumstances you should take into account when aligning your life policies with your broader estate plan.
Understanding deemed property
In terms of the Estate Duty Act, the estate of a deceased person consists of all property and deemed property, whether situated in or outside South Africa – although note that for non-residents, only property located in South Africa is included for estate duty purposes. Deemed property refers to assets that come into existence only as a result of death, such as the proceeds of a life assurance policy.
Estate duty is payable on the dutiable amount of an estate exceeding R3.5 million, charged at 20% on the first R30 million and 25% on any value above that. Executors are entitled to fees of 3.5% on the gross value of estate assets and 6% of income collected after death. However, the inclusion of life policy proceeds in the estate duty and executor’s fee calculation depends on several important exceptions. Here are some of the key situations to consider:
Where a spouse is nominated as beneficiary
If your spouse is named as the beneficiary of a domestic life policy, the proceeds are considered deemed property in your estate. However, Section 4q of the Estate Duty Act allows for a full deduction of such proceeds when calculating estate duty, keeping in mind that no executor’s fees are payable on these proceeds either. Note that the definition of “spouse” in this context is broad, extending to legally married partners, customary unions, religious marriages, and same-sex or heterosexual partnerships recognised by law.
Did you know? A correctly nominated spouse beneficiary not only ensures tax relief but also expedites access to funds without waiting for estate administration.
Where the estate is nominated as beneficiary
It’s important to note that where the estate is nominated as beneficiary, the policy proceeds are paid into the estate and become subject to estate administration and, as such, are included when calculating estate duty and executor’s fees. In this regard, bear in mind that their liquidity impact must be carefully considered. It’s also important to note that marital regime plays a role here. For marriages in community of property, only half of the proceeds are considered for estate duty, as the other half accrues to the surviving spouse. For marriages out of community of property without accrual, the full proceeds are included in the deceased estate. Where accrual applies, the proceeds are factored into the accrual calculation, and if the deceased estate has an accrual claim, it is deemed property for estate duty purposes.
Did you know? Naming your estate as beneficiary can help cover estate debts, but it also exposes the proceeds to both estate duty and executor’s fees.
Policies registered against an antenuptial contract
If you are legally married in terms of the Marriage Act or Civil Union Act and have a policy registered against your antenuptial contract in favour of your spouse or children, the proceeds are excluded from both estate duty and executor’s fees calculations. This can be a valuable planning tool to protect dependants from unnecessary costs.
Did you know? Policies linked to antenuptial contracts enjoy automatic exemption from estate duty – a feature often overlooked in estate planning.
Company-owned policies
Company or employer-owned policies, such as buy-and-sell or key person assurance, can be structured to qualify for estate duty exemptions in terms of Section 3(3)(a)(ii) of the Estate Duty Act. However, note that for a buy-and-sell arrangement, the policy must be owned by a business partner or co-shareholder, the premiums must not be paid by the life assured, and the policy must be designed to fund the purchase of the deceased’s business interest. Similarly, for key person assurance, the company must be the policy owner and beneficiary, the premiums must be paid by the company, and the company must not be classified as a “family company” in relation to the life assured. In these cases, the proceeds are paid directly to the company and avoid both estate administration and estate duty.
Did you know? Properly structured company-owned policies can fund business succession without attracting estate duty or executor’s fees.
Approved and unapproved death benefits
Approved death benefits are policies held in the name of a retirement fund and are distributed in terms of Section 37C of the Pension Funds Act, meaning that the proceeds do not form part of the deceased estate. On the other hand, the proceeds of unapproved group life policies are generally excluded from the dutiable estate when the spouse is the nominated beneficiary, thereby shielding them from estate duty.
Did you know? Retirement fund death benefits are protected by law and distributed by the trustees, not in accordance with your will.
As these examples show, life insurance interacts with estate duty and executor’s fees in highly specific ways. The choice of beneficiary, the marital contract, and whether the policy is personally or company-owned can dramatically alter the estate’s tax liability and liquidity. As such, life cover should never be viewed in isolation but rather as an integral part of a holistic estate plan. Finally, bear in mind that it is essential to review these policies regularly to ensure that your estate plan remains up-to-date, compliant, and cost-efficient.
Have a fantastic day.
Sue
