HARRY JOFFE: Five things to consider when taking out life policies via a trust
There may be good reasons for a trust to own a life assurance policy, but it needs to be done correctly
There may be good reasons for a trust to own a life assurance policy, but it needs to be done correctly. If this is something you are considering, make sure you are aware of these issues:
1. Estate duty
Many articles erroneously state that a trust-owned policy avoids estate duty. A trust-owned policy is still a deemed asset in terms of the Estate Duty Act, and the only estate duty benefit is if the trust pays the premiums on the policy, and is the owner and beneficiary, such premiums paid by the trust compounded at 6% will be allowed as an exemption against the eventual duty. Make allowance for the eventual duty when you do your estate and cash/liquidity planning.
2. Income tax
Unless the life assured is that of an employee of the trust, which is very rare, the premiums paid by the trust will not qualify for a tax deduction. However, the eventual policy payout will then be free of income tax.
It is vital that the trust has passed an authorising resolution authorising the trust to take out the policy and pay the premiums. This must be signed by all the trustees. The resolution can authorise one of the trustees to do the actual signing of the policy documents, but the original resolution authorising the purchase of the policy must be signed by all the trustees.
I have seen a few cases where the resolution was not properly signed by all the trustees, and later a few trust beneficiaries, or trustees that were not consulted, have taken issue with the policy. They have correctly alleged that the policy was not properly authorised and insisted on the whole contract being unwound back to the beginning. They are supported in this by South African case law.
This can make matters extremely complex if the policy is an investment policy, and even lead to prejudice to the insurer/investment company.
To avoid this, make sure all the documents are correctly signed from the very beginning.
4. Trust deed
Another issue to check is the trust deed. Does it allow the trust to take out a life insurance policy? If it does, does it only allow the trust to insure a trustee or beneficiary? I have seen a few cases like this, where there was such a clause only allowing the trust to insure a trustee or beneficiary. This caused problems when the trust was involved in a buy-and-sell agreement, to buy and sell shares, and wanted to insure a partner or co-shareholder to buy out their shares on death.
However, because such a partner/co-shareholder was not a trustee or beneficiary of the trust, the trust could not take out such a policy without first amending the trust deed. Check your trust deed before taking out a policy.
5. Trust bank account
When the trust takes out a policy, please make sure it has a separate bank account to pay premiums and receive benefits. If the trust does not have a separate bank account and does not pay the premiums, there could be trouble in claiming the premiums plus 6% estate duty exemption from the SA Revenue Service on an eventual death.
If the trust does not have a bank account, and there is a benefit that pays out from the policy, who will it pay to? Insurers will not pay to third parties given all the tax and money-laundering laws, and, in addition, the Trust Property Control Act, section 10, states that: "Whenever a person receives money in his capacity as trustee, he shall deposit such money in a separate trust account at a banking institution or building society."
This obliges a trustee of a trust to have a trust bank account to receive proceeds whenever the trust becomes entitled to receive money.
This could mean there is a delay in the trust receiving the proceeds of a policy while it arranges the opening of a bank account. Make sure such an account is opened when the policy is taken out and the premiums paid.
A final word
A trust-owned policy can have many benefits, particularly if the eventual beneficiary is a minor or incapacitated person, because the proceeds are protected and less likely to be dissipated. This is a benefit even if the beneficiary is a major, as they might not be able to handle such large sums of cash. It also ensures the proceeds do not end up in the estate of the beneficiary and assists them in estate planning.
Finally, if the intended beneficiary is insolvent or faces such risk, it ensures the proceeds will not be attached by creditors when the policy pays out. However, you must understand the estate duty and legal requirements around such a structure.
• Joffe is head of legal services at Discovery Life