By: Erin White
Life insurance can make an excellent estate planning tool to ensure succession, make provision for loved ones, and to create liquidity in one’s estate. However, it is important to understand the estate duty implications when it comes to life assurance policies because getting it wrong can have severe consequences for your estate and your loved ones.
Section 4q deductions: In terms of section 4(q) of the Estate Duty Act, all property accruing to the surviving spouse is deductible from the deceased’s gross estate. This applies to both intestate and testate succession and includes proceeds from domestic life policies where the surviving spouse is the named beneficiary. These proceeds are paid directly to the surviving spouse, exempting them from estate duty and executor’s fees. The definition of ‘spouse’ under section 4(q) extends beyond legal spouses under the Marriage Act or Civil Union Act, encompassing permanent life partners as well, ensuring broader coverage in estate planning.
A policy registered under an ante-nuptial contract: When a domestic life policy is registered under an ante-nuptial or post-nuptial contract, with the spouse or child as nominated beneficiaries, the proceeds are excluded from the deceased’s dutiable estate. Consequently, no estate duty or executor’s fees are payable on these proceeds. Since the policy must be registered against the couple’s marriage contract, this provision applies only to couples legally married under the Marriage Act or the Civil Union Act.
A policy owned and paid for by a third party: When a life insurance policy is owned and paid for by a third party, section 3(3)(a) of the Estate Duty Act provides relief regarding the premiums paid by that third party. For instance, if a son takes out a policy on his father’s life, where the son is the owner, payer, and beneficiary, the policy proceeds will be deemed property in the father’s estate upon his death. However, the total premiums paid by the son, compounded at 6% per annum, are deductible from the estate.
Buy-and-Sell assurance: Business assurance policy proceeds when structured appropriately are excluded from a deceased estate’s deemed property, offering an exception in calculating the dutiable estate. For the exemption to apply, the buy-and-sell insurance must be held by a co-owner of the business at the time of the deceased’s death. The policy must be specifically intended for purchasing the deceased shareholder’s business interests. Additionally, the deceased must not have paid any of the policy premiums, ensuring that the insurance qualifies for the estate duty exemption under these specific circumstances.
Key person assurance: To ensure that the proceeds of a key person policy are not treated as deemed assets in the deceased’s estate, the policy must be properly structured. Key person insurance is designed to protect a business from the financial impact of the premature death or disability of a key individual. To qualify for estate duty exemption, the policy must be owned by a company that is not a family company of the life assured, the company must pay the premiums, and it must be the policy’s nominated beneficiary. Upon the key person’s death, the proceeds are paid directly to the company, avoiding estate duty.
Endowment policies: Endowment policies owned by the deceased that do not pay out on death will be considered property in the deceased estate. This includes both local and offshore endowments. As such, the surrender value of the policy is included.
Emigration: If a South African citizen is residing abroad at the time of death, the proceeds from any South African life policies will be included in their estate, subject to exclusion rules. For example, if a South African living overseas nominates his wife as the beneficiary of a domestic life policy registered under their ante-nuptial contract, the proceeds will be excluded from his dutiable estate. However, if his estate is named as the beneficiary, the proceeds will be subject to estate duty, in line with South African estate laws.
Policies where the estate is the nominated beneficiary:
Life insurance policies can provide essential liquidity in an estate, allowing for capital provision for a spouse and/or children, or the settlement of debt. In such cases, the policyholder may nominate their estate as the beneficiary, causing the proceeds to form part of the dutiable estate upon death. It is crucial to consider the estate duty payable on these proceeds when assessing the required cover for liquidity needs.
The marital regime plays a significant role in how these proceeds are handled. Under the accrual system, the policy proceeds will be included in the accrual calculation. If married in community of property and the estate is the beneficiary, the proceeds will form part of the joint estate. However, only 50% of the policy proceeds will be subject to estate duty, with the remaining portion accruing to the surviving spouse free from estate duty. This ensures proper provision and planning for estate liquidity and duty considerations.
Life insurance plays a crucial role in estate planning, but proper structuring is essential to ensure it meets your objectives. During your annual financial planning review, your adviser should reassess your life insurance policies to confirm that the structuring, coverage, and beneficiary nominations align with your current wishes and intentions.
* White is the director at Crue Invest.
