Estate life policies and estate duty

In Estate planning, the effects of life policies for Estate duty purposes always need to be taken into consideration. It should be noted that the proceeds of a life assurance policy will be subject to Estate duty, which is liable for the payment thereof.

Domestic Policies

According to the Estate Duty Act, an Estate includes all property of the deceased as well as deemed property. Property which is deemed to be property of the deceased includes the proceeds of an insurance policy which is a “domestic policy”, upon the life of the deceased. This means that the proceeds of any such policy are included as an Asset for Estate duty purposes and the Estate duty will be applicable. Endowments and Life policies fall under  “domestic policies”.

However, there are instances when Estate duty will not be levied on the proceeds of a policy, such as when the nominated Beneficiary on the policy is the surviving Spouse of the deceased.

Another instance is when the policy was taken out by a person or persons who, on the date of death of the deceased, were in partnership with the deceased or held any share or like interest in a company in which the deceased held any share or like interest, for the purpose of enabling such person/s to purchase the whole or part of the deceased’s interest in the partnership concerned or the deceased’s share or like interest in that company and any claim by the deceased against that company, provided that no premium on such policy was paid or borne by the deceased. An example of this would be buy-and-sell policies that are taken out on the lives of the partners by the other partner/s in order to ensure liquidity to purchase the deceased partners’ share of the company.

Key Man Policies

A Key Man policy taken out by a company on the life of a key individual is also an exception, provided that this policy was not effected by or at the instance of the deceased, that no premium on such policy was paid or borne by the deceased, that no amount due or recoverable under such policy has been or will be paid into the Estate of the deceased and that no such amount has been or will be paid to, or utilised for the benefit of, any relative of the deceased or any person who was wholly or partly dependent for his/her maintenance upon the deceased or any company which was at any time a family company in relation to the deceased.

Note: a Family company in relation to a deceased person, means any company which at any relevant time was controlled or capable of being controlled directly or indirectly, whether through a majority of the shares thereof or any other interest therein or in any other manner whatsoever, by the deceased or by the deceased and one or more of his relatives i.e., 51% Family owned. If a buy-and-sell comes into effect between partners of a Family company then the shareholding, as well the proceeds of the policy, will be dutiable in the Estate of the deceased.

In the event of the proceeds of a policy not falling into any of the above exemption and the proceeds being dutiable, the liability of the payment of Estate duty shall fall upon the Executor, provided that where the amount due under the policy is recoverable by any person other than the Executor, the person liable for the duty shall be the person entitled to recover the amount due under the policy.