At the time of one’s death, all assets and liabilities acquired during your lifetime are netted together in what is termed one’s ‘estate’. Once this has been assessed, an estate tax is levied at the appropriate level. It is charged at a rate of 20% on the first R30 million of the dutiable estate, and 25% on anything above R30 million.
If you have a life insurance policy, unless it falls under very limited exceptions, the proceeds will potentially attract estate duty. Usually when setting up your life assurance, you nominate people such as your spouse and children who will benefit from the payout. However, if for various reasons the policy has not been set up in this way, and mindful of the intricacies of the law, your life policy will be most likely included in the assessment of your estate.
Many people who take out life assurance are confused about whether the proceeds will be included in their estate when they die. It is important to know how the proceeds of your life insurance will affect estate duties, because it could affect your estate planning and the amount of liquidity you need in your estate for taxes and fees.
Some key points about Estate Duty
• The Estate Duty Act says that any policy on a person’s life is deemed an asset in their estate when they die. It makes no difference to whom the proceeds will be paid. However, there are always exceptions.
• Estate duty may not be levied on a life insurance payout when your spouse is a direct beneficiary and the policy falls outside of the estate in terms of an antenuptial contract.
• If the policy is to be paid out to your spouse, and the proceeds deemed an asset in your estate and included in estate duty, this may simply mean that the amount paid to your spouse will reflect as a deduction in the estate duty.
• Endowment policies owned by the deceased at the time of death, and which do not pay out on death, will be included in estate duty.
• If the person whose life was insured did not own the policy, the proceeds will still be deemed an asset in the deceased’s estate. Although the policy may be owned by a third party who has paid for the policy, and who is therefore entitled to the proceeds…only the premiums paid by this third party will be exempt from duty.
• If a life assurance policy is taken out by a business partner to fund the purchase of your share 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 partner must own the policy on your life when you die, and you must not have paid any premiums on the policy.
• If a policy was taken out on your life, but not by you or at your instance, and you paid no premiums on the policy – and no proceeds from the policy will pay to your estate, or any relative of yours, or be paid to a family company 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 against the loss of key personnel.
• Irrespective of citizenship, those individuals who have South African assets while residing in South Africa, will have estate duties levied on these assets at the time of death. Likewise, if a South African is residing in another country at the time of death, any assets held in South Africa will be included in estate duties. If these assets include life insurance policies, the inclusion rules are applicable.
The relationship between your life insurance policies and death duties is a complicated one, determined by the complexity of circumstances and the choices you make. Always consult your financial advisor, retirement planner or family lawyer on how to handle the tax implications of life insurance, policy regulations, and estate planning.
Check your policies, check your life
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