Life insurance policies are particularly useful when it comes to structuring one’s estate plan as they can be used effectively to create estate liquidity, ensure succession, and make financial provision for your loved ones. Depending on the type of policy, however, there may be estate duty implications for your estate that need to be taken into account when structuring your estate plan. In this article, we take a closer look at how estate duty works in the context of life assurance.
Your surviving spouse as beneficiary of your domestic life policy
While the proceeds of domestic life policies are generally considered deemed property in a deceased estate, and therefore estate dutiable, the proceeds of domestic life policies that accrue to the surviving spouse are deductible from the gross estate of the deceased spouse as per the provisions of section 4(q) of the Estate Duty Act. On the death of the first-dying spouse, the proceeds of such a policy will be paid directly to the surviving spouse (being the nominated beneficiary) and will not attract estate duty or executor’s fees. Note that in the context of the Estate Duty Act, the definition of ‘spouse’ includes a permanent life partner, and not only a legal spouse in terms of the Marriage Act or the Civil Union Act.
Where the life policy is held by a South African living abroad at the time of death, the proceeds of any South African life policies will be considered deemed property in the deceased estate but subject to the same exclusion rules. Thus, when a South African living in a foreign country nominates her husband as the beneficiary of a domestic life policy, those proceeds will not form part of her deceased estate. On the other hand, where her estate is the nominated beneficiary, the proceeds will be subject to estate duty.
Policies registered under an ante-nuptial contract
Where a domestic life policy is registered under an ante-nuptial or post-nuptial contract where the spouse and/or child are the nominated beneficiaries, the proceeds of such a policy do not form part of the deceased’s dutiable estate, and no estate duty or executor’s fees are payable on the proceeds. Because this type of policy would need to be registered against the couple’s ante-nuptial contract, this rule would only apply to couples married in terms of the Marriage Act or the Civil Union Act.
Policies owned and paid for by a third party
In circumstances where a life insurance policy is owned and paid for by a third party (i.e. someone other than the deceased), section (3)(3)(a) of the Estate Duty Act provides some relief in respect of the third-party payer’s premiums. So for example, where a daughter takes a policy out on her mother’s life and where the daughter is the owner, payer and nominated beneficiary on the policy, the proceeds of the policy will be considered deemed property in the mother’s estate less the total premiums that the daughter paid towards the policy, compounded at 6% per year.
Business assurance policies
The proceeds of business assurance policies are not considered deemed property in a deceased estate and therefore provide an exception to the general rule when it comes to calculating the dutiable estate. To qualify for an exemption, the buy-and-sell insurance must be taken out by a person who is a co-owner of a business with the deceased at the time of their death. In addition, the policy must be taken out with the specific purpose of purchasing the deceased shareholder’s business interests, with the added proviso that the premiums must not have been paid by the deceased person.
Key person assurance
To avoid having the proceeds of a key person policy considered deemed assets in the deceased’s estate, such a policy must be correctly structured. Key person insurance is typically a policy taken out on the life of the key person in order to minimise risk to the business if that person dies prematurely or becomes disabled. To be exempt from estate duty, the company that owns the policy must not be a family company in relation to the life assured, must pay the premiums and must be the nominated beneficiary on the policy. As such, if the key person passes away, the proceeds of the policy will be paid directly to the company and will therefore not be dutiable in the insured’s estate.
Endowment policies
Endowment policies owned by the deceased, including both local and offshore endowments, which do not pay out on death will be considered property in the deceased estate and, in such circumstances, the surrender value of the policy is included for estate duty purposes.
Policies where the estate is the nominated beneficiary
As mentioned at the outset, life insurance policies can be used to create liquidity in an estate and, in order to achieve this, the policyholder would nominate their estate as the beneficiary of the policy. Upon the death of the life insured, the proceeds of the policy will be paid directly into the deceased estate and will be taken into account when determining estate duty. As such, when determining the liquidity needs of one’s estate, it is important to take into account any potential estate duty that would be payable on the proceeds of the policy when determining the amount of cover required. The nature of your marriage contract should also be factored into the equation because, for instance, if you’re married in community of property and your estate is the nominated beneficiary, the proceeds of the policy in the event of your passing will form part of the joint estate, although only 50% of the value of the policy will be subject to estate duty. On the other hand, if you’re married with the accrual system, note that the value of the policy will be taken into account when determining the value of the accrual.
As is evident from the above, not all life policies are the same when it comes to estate duty and it’s important to understand the nature, purpose and structuring of the policy in the context of your estate plan to ensure that your succession planning goals are correctly achieved.
Have a great day.
Sue
