Life insurance in the context of your estate plan

Generally speaking, the proceeds from domestic life policies are considered deemed property in a deceased estate. However, there are certain deductions and exemptions which apply depending on the nature of the policy, the nominated beneficiaries, and the marriage contract, amongst other things and, as such, the careful structuring of any life insurance policy n a person’s estate is of critical importance. In this article, we explore what is meant by deemed property, how and when estate duty and executor’s fees are charged, and specific situations which should be considered when putting your estate plan together

In terms of the Estate Duty Act, the estate of any person consists of all the property and deemed property of the deceased, including property both in and outside of South Africa – except in the case of a non-resident in which case only the property situated in this country will be included for estate duty purposes. Deemed property is essentially any property that did not exist at the date of death, but which comes into existence as a result of that person’s death, such as in the case of life assurance policies where the proceeds are paid out on the event of death.

Estate duty, which is tax levied in terms of the Estate Duty Act, is calculated on the dutiable amount of a deceased estate exceeding R3 500 000 at a flat rate of 20% on the first R30 million, and 25% to the extent that the estate exceeds R30 million. According to the Master’s prescribed tariff, an executor is entitled to a fee of 3.5% on the gross value of assets in a deceased estate, and 6% on income accrued and collected after the death of the deceased. That said, it is important to keep in mind that there are a number of complexities when it comes to determining whether the proceeds of domestic life assurance policies are included for the purposes of determining estate duty and/or executor’s fees, which makes the role of such policies an important part of effective estate planning and ultimately reducing estate costs. Specific notable situations include the following:

  • Where a spouse is nominated as a beneficiary: If you have nominated your spouse as the beneficiary to a domestic life policy, such proceeds are considered a deemed asset in your estate but can be deducted for estate duty purposes in terms of Section 4q of the Estate Duty Act, keeping in mind that no executor’s fees are payable on these proceeds either. In the context of the Estate Duty Act, the definition of ‘spouse’ includes those legally married in terms of South African law, those in a customary union, people in a partnership recognised as a marriage by any religion, and those in a same-sex or heterosexual union.
  • Where the estate is nominated as beneficiary: If the estate of the deceased is the nominated beneficiary, the proceeds of the policy will be paid into the estate and subject to estate administration. The proceeds will be taken into account when calculating the estate duty and executor’s fees liability of the estate and, as such, any taxes owing in this regard should be factored into the deceased’s liquidity calculations. When nominating your estate as the beneficiary of a life policy, it is important to consider the impact that your marital contract has on your estate planning. Remember, if your marriage is in community of property, only half of the proceeds of such a policy will be taken into account when calculating estate duty as the other half will accrue to the surviving spouse. Naturally, in an out of community marriage which excludes the accrual, proceeds of a life policy paid directly into the deceased’s estate are not affected by the marriage contract. However, where the accrual is included, the proceeds of the policy will be included for the purposes of accrual calculations. If the deceased estate has an accrual claim against the surviving spouse, the claim is considered deemed property in the estate for estate duty purposes.
  • A policy registered against an antenuptial contract: For those legally married in terms of the Marriage Act or Civil Union Act who have a life policy in favour of their spouse or child registered against their antenuptial contract, such proceeds will be excluded for the purposes of estate duty and executor’s fees calculations.
  • Company-owned policies: In terms of Section 3(3)(a)(ii) of the Estate Duty Act, the proceeds of a correctly-structured company/employer-owned policies – such as buy & sell and key person assurance – are exempt from estate duty, although it is important that the policy meets the criteria in order to qualify for the exemption. In the case of a buy & sell policy, the policy must be owned by the deceased’s partner or fellow shareholder for the purpose of funding the purchase of the deceased’s business interest, and the premiums must not have been paid by the deceased. As the proceeds of such a policy are paid to a third party, no estate duty nor executor’s fees will be charged. In the case of key person assurance, the company that owns the policy must not be a family company in relation to the life assured, the company must pay the policy premiums and must be the nominated beneficiary in order to qualify for the exemptions. On the death of the key person, the proceeds will be paid directly to the company and will therefore avoid estate administration.
  • Approved and unapproved death benefits: Approved death benefits, which are policies held in the name of the deceased’s retirement fund, are distributed in accordance with Section 37C of the Pension Funds Act and, as a result, do not form part of the deceased’s estate. On the other hand, the proceeds of unapproved group life policies where the spouse is the nominated beneficiary, will not form part of the dutiable estate.

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