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In some instances, the relevant facts of a particular scenario are relatively simple, and the guidelines may provide clarity on the effects of your life insurance policy. However, in other instances a myriad of factors could influence whether or not the proceeds of a life insurance policy would be subject to tax on death, in the hands of the recipient or in your estate. The taxability of these policies can greatly affect your estate planning and understanding the net amount that your policy will ultimately yield, can potentially influence your estate planning strategy. The following outlines some basic guidelines to consider.

Policies that are estate duty exempt or deductible

Policies, that are considered to be South African domestic policies under our law, are subject to estate duty in the estate of the deceased whose life is insured, as life policies are considered to be deemed assets in the estate. Where policies are payable to third parties, they can even be actual assets in the estate and not deemed assets. The legislature has gone to great lengths to ensure that life policies do not escape the ambit of estate duty, unless the proceeds are specified exemptions or deductions that are provided for in the Estate Duty Act. Instances in which the proceeds may not be subject to the payment of estate duty include:

  1. Your spouse or partner is the sole beneficiary on the policy: The proceeds as such will be paid to your spouse, and no estate duty or executor’s fees will be payable on those proceeds. Should your partnership be of a complex nature, you are urged to seek specialist advice to assess the exact nuances of your circumstances.
  2. Your child is a beneficiary of a policy that was taken out as part of your antenuptial agreement in pursuance of a marriage recognised under the Marriages Act: The proceeds as such will be paid to your child and no estate duty or executor’s fees will be payable on those proceeds.
  3. The policy is a buy and sell policy for purposes of a co-business owner purchasing a deceased co-owner’s shares in a business and all business interest owners have abided by the legislation pertaining to buy and sell insurance policies: The policy must be taken out by a co-business owner, for the purposes of purchasing an interest in a business, and no premiums must be born by the person on whose life the insurance is taken.
  4. The policy is a key man policy for purposes of ensuring a company against key personnel loss, and the company conforms with the allowances provided by the legislation that ensure that the policy is not subject to estate duty. Strict requirements prevail regarding the ownership in such a business, and verification as to whether the relevant business is defined as a ‘family-owned company’ would need to be assessed. The business must also be the premium payor and beneficiary on that policy. If you or your business partner own more than 50% interest in the business, please seek specialist advice as there may be estate duty on the proceeds for the business owner with the larger share in the business.

These exclusions are as a result of either an estate duty exclusion or an allowable deduction, and strategic planning may be very advantageous as part of an estate plan. Each one of these exemptions or deductions should be examined in detail with your fiduciary specialist to ensure that the required protocol for the exemption or deduction is strictly adhered to.

Beneficiary nominations

One should pay careful attention to the beneficiary nomination as this in itself can have various tax outcomes. The nomination of your estate as a beneficiary vis a vis the nomination of an individual as a beneficiary will have bearing on whether the executor receives a percentage of those proceeds as well as on who ought to pay the estate duty, if any is applied.  Sometimes the taxability of the proceeds of the policy is not the primary consideration, and often such proceeds are used to create liquidity in an estate. In such instances the proceeds would be payable to the estate without regard for any tax exemptions or deductions, and the policy may be increased to factor in the anticipated estate duty.

Marital regime consequences

The consequences of your marital regime can have a bearing on the taxability of the policy. Where marriages are subject to the application of the accrual regime and the proceeds of the policy are payable to the estate, a portion of those proceeds will form part of the accrual claim against your estate. This will be an estate duty deduction as per point 1 above, as a spouse is the ultimate recipient of a portion of the pay-out.

Policies paid to children are estate dutiable

Another common misperception is that there is no estate duty payable on policies paid to non-spouse nominated beneficiaries. The general rule is that these type policies will be subject to estate duty, but of course qualify for the abatement of R3.5million on assets bequeathed to non-spouse beneficiaries (such as children).After applying the abatement, estate duty becomes payable at a rate of 20% up to your first R30 million of total assets including the value of the policy, and 25% on assets including the policy value in excess of R30 million.

Endowments are estate dutiable

Endowment policies, whether local or offshore, contrary to common misunderstanding, are assets in a deceased estate and are subject to estate duty but not executor’s fees if there are beneficiaries nominated.

Offshore life policies

Offshore life policies can be exempt from estate duty in certain instances. The reason for this is that a domestic policy that is deemed to be an asset in a deceased estate is defined to exclude “a life policy which has been made payable at a place outside the Republic at the request of the owner”. The resultant effect is that if  one nominates a foreign beneficiary, the proceeds may very well be exempt from estate duty. An added complexity is that different financial products on the market are structured differently, so advice will have to be attained in respect of a specific product under consideration. Other factors such the ability of the owner of the policy to cancel or surrender the policy on demand must be taken into account.

Conclusion

We recommend that if you are not sure of how the estate duty on your policy will affect the net outcome of the proceeds of your policy, that you engage with a wealth advisor or fiduciary specialist to determine the numerical outcome of your particular facts. You should also assess whether you have any options that may better suit your intended consequences.

About the Author

Sarah Simson
Head: Fiduciary, Sasfin Wealth