Picture: 123RF/ZIMMYTWS
Picture: 123RF/ZIMMYTWS

Many people who take out life assurance are confused about whether the proceeds will be included in their estate estate for estate duty purposes when they die.

It is important to know, because it could affect your estate planning and the amount of liquidity you need in your estate for taxes and fees.

What the law says

The Estate Duty Act says that any policy on a person's life is a deemed asset in their estate when they die. It makes no difference to whom the proceeds will be paid.

Also, apart from a few exceptions (see below), it makes no difference if the person whose life was insured did not own the policy - that is, it is owned by a third party.

However, the act does provide some relief from estate duty on the proceeds when the policy is owned and paid for by a third party who is different to the person whose life is assured, and that third party is entitled to the proceeds of the policy.

The act says (in section (3) (3) (a)) that although the policy is still a deemed asset in the deceased estate when the person assured dies, the premiums paid by the third party, compounded at 6% a year, will be exempt from duty.

A simple example illustrates this: The John Smith family trust takes out a policy on the life of John Smith. The trust pays the premiums, owns the policy and is the beneficiary of the policy.

The life cover is R1m, and the trust pays premiums, compounded at 6%, to the amount of R50,000 over the policy's life.

When John dies, R1m less R50,000 = R950,000 will be a deemed asset in John's deceased estate.

Remember that although the trust does not die, John, the life assured, does, which triggers the policy payout and the proceeds being a deemed asset in John's estate.

It is most important to ensure that if a trust owns a policy on your life, that the trust pays the premiums and is the beneficiary, to enable the premiums plus 6% estate duty exemption to kick in.

There are some limited exceptions to this principle that a policy is a deemed asset in a deceased estate:

If a life assurance policy is taken out - by your co-partner or co-shareholder in a business - to fund the purchase of your interest in the business after you die, the buy-and-sell exemption may apply. For your deceased estate to qualify for this estate duty exemption, your co-partner or co-shareholder must own the policy on your life when you die and you must not have paid any premiums on the policy. This is known as the buy-and-sell exemption.

If a policy was taken out on your life, but not by you or at your instance, you paid no premiums on the policy, and no proceeds from the policy will either pay to your estate, or will be utilised for the benefit of any relative of yours, or will pay to a family company which is defined in the estate duty act, then the policy will be exempt from estate duty. This is known as the key man exemption and can be applied when a business insures itself against the loss of its key people.

Finally, although this is not an exemption, there is a deduction allowed if the policy pays to your spouse after you die. Although the proceeds will be a deemed asset in your deceased estate, the payout to your surviving spouse will be a corresponding deduction in your estate. This is because the Estate Duty Act (in paragraph 4q) allows an estate duty deduction for any property in the deceased estate that accrues to the surviving spouse. This is subject to some conditions.

Be aware that if you have a life policy, unless it falls under the very limited exceptions above, the proceeds will potentially attract estate duty in your estate. There is an estate duty rebate, but if your estate exceeds this, you need to make provision for this in your planning around how much cash your estate will need to pay the duty when you die.

The main exception is if your spouse is the beneficiary, but then your spouse will have control of the proceeds and it will not be available to benefit your estate.

• Joffe is head of legal services at Discovery Life

Would you like to comment on this article or view other readers' comments?
Register (it’s quick and free) or sign in now.

Speech Bubbles

Please read our Comment Policy before commenting.