Life Assurance Policies and Estate Duty: What You Need to Know

When planning your estate, life assurance policies are a key tool to provide financial security for your loved ones after you pass away. However, many South Africans don’t realize that these policies can affect the estate duty (a tax on your estate) that your executor must pay to the South African Revenue Service (SARS). Understanding how life assurance policies work in estate planning can save your family money and ensure your wishes are carried out smoothly. In this article, we’ll break down the essentials in simple terms, explain how estate duty applies to life assurance policies, and show how our expert team at Louwrens Koen Attorneys can help you plan effectively.

What is a Life Assurance Policy?

A life assurance policy (often called life insurance) is a contract between you and an insurance company. You pay regular premiums, and in return, the insurer pays a lump sum (called the payout or proceeds) to your chosen beneficiaries when you pass away. These beneficiaries could be your spouse, children, or anyone else you name in the policy. The payout is meant to support your loved ones financially, covering expenses like living costs, debts, or funeral costs.In South Africa, life assurance policies are common in estate planning because they provide immediate cash to beneficiaries, which can be crucial while your estate is being finalized. However, the way these policies are structured and who benefits from them can impact the estate duty your estate owes.

What is Estate Duty?

Estate duty is a tax that SARS charges on the value of your estate when you die. Your estate includes everything you own, such as your house, car, savings, investments, and even certain assets you don’t directly own but are considered part of your estate for tax purposes (called “deemed property”). Life assurance policies often fall into this “deemed property” category, meaning they can increase the value of your estate and, therefore, the estate duty owed.The estate duty rate in South Africa is currently 20% for estates valued up to R30 million and 25% for any value above that. However, not all life assurance payouts are taxed, and there are ways to reduce or avoid estate duty through smart planning. Let’s explore how life assurance policies are treated for estate duty purposes.

How Life Assurance Policies Affect Estate Duty

In South African law, life assurance policies are considered “deemed property” under Section 3(3)(a) of the Estate Duty Act. This means that even if the payout goes directly to a beneficiary (and not through your estate), SARS may still include its value when calculating estate duty. Here’s how it works in simple terms:

1. Policies Paid to Someone Else (Beneficiaries)

If you name a beneficiary on your life assurance policy, the payout goes directly to them when you pass away, bypassing your estate. This is great because it means your loved ones get the money quickly, without waiting for your estate to be finalized. However, SARS still counts the policy’s payout as part of your estate for estate duty purposes, unless certain exemptions apply (more on those below). For example, let’s say you have a life assurance policy worth R500,000, and you name your spouse as the beneficiary. When you pass away, your spouse receives the R500,000 directly. Even though this money doesn’t go through your estate, SARS includes the R500,000 in your estate’s value when calculating estate duty. If your estate is worth R3.5 million without the policy, adding the R500,000 makes it R4 million, and estate duty is calculated on that total.

2. Deductions for Premiums Paid by Beneficiaries

If the beneficiary of your life assurance policy paid some or all of the premiums, SARS allows a deduction for those premiums when calculating estate duty. This reduces the amount of the payout that’s included in your estate. For example, imagine your policy is worth R100,000, and your beneficiary paid R20,000 in premiums over the years. SARS would only include R80,000 (R100,000 – R20,000) in your estate for estate duty purposes. Keeping records of who paid the premiums is important, and our team at [Your Firm Name] can help you organize this documentation to ensure you claim this deduction.

3. Policies Paid to Your Estate

If your life assurance policy doesn’t have a named beneficiary, or if you name your estate as the beneficiary, the payout goes into your estate when you die. This increases the value of your estate, which could mean more estate duty. It also means the money is subject to executor’s fees (typically 3.5% plus VAT) and may be delayed while your estate is finalized. For example, if a R300,000 payout goes to your estate, it’s added to your estate’s value, increasing the estate duty owed. Plus, your executor might charge around R10,500 (3.5% of R300,000) in fees. Naming a beneficiary instead of your estate can avoid these extra costs and delays.

Exemptions That Can Reduce Estate Duty

Not all life assurance policies are fully taxable. South African law offers exemptions that can reduce or eliminate estate duty on these payouts. Here are the key ones:

1. Policies Under Antenuptial Contracts

If your life assurance policy was taken out as part of an antenuptial contract (ANC) with your spouse, the payout may be exempt from estate duty. An ANC is a legal agreement signed before marriage that outlines how your assets will be divided. If the policy was part of this agreement to provide for your spouse, SARS typically doesn’t include its value in your estate for estate duty.

2. Buy-and-Sell Agreements

If you own a business and have a life assurance policy as part of a buy-and-sell agreement, the payout may be exempt from estate duty. These agreements are common among business partners, where a policy ensures that surviving partners can buy out the deceased partner’s share of the business. If the policy meets specific requirements, its value isn’t counted for estate duty.

3. Policies Benefiting Your Spouse

If your spouse is the beneficiary of your life assurance policy, the payout may qualify for a deduction under Section 4(q) of the Estate Duty Act. This means the amount paid to your spouse is subtracted from your estate’s value before estate duty is calculated, reducing the tax owed. For example, if your estate is worth R3 million, including a R1 million policy paid to your spouse, the R1 million is deducted, and estate duty is calculated on R2 million instead. This can save your estate significant tax.

Tips to Optimize Your Life Assurance Policy for Estate Planning

Smart planning can minimize estate duty and ensure your life assurance policy benefits your loved ones as intended. Here are practical tips:

1. Name a Beneficiary: Always name a specific beneficiary (like your spouse or children) on your policy. This ensures the payout goes directly to them, avoiding executor’s fees and delays. It also simplifies the process for your loved ones.
2. Consider Your Spouse as Beneficiary: Naming your spouse can reduce estate duty through the Section 4(q) deduction. This is a simple way to lower the tax burden on your estate.
3. Keep Premium Records: If someone else (like a beneficiary) pays the premiums, keep clear records. These payments can reduce the taxable amount of the policy, as explained earlier.
4. Review Your Policy Regularly: Life circumstances change, and so should your estate plan. Review your life assurance policy every few years or after major events (like marriage, divorce, or the birth of a child) to ensure it aligns with your goals.
5. Work with Experts: Estate planning can be complex, especially when life assurance policies and estate duty are involved. Our team at [Your Firm Name] specializes in South African estate law and can help you structure your policies to minimize taxes and maximize benefits.

Louwrens Koen Attorneys is a leading provider of deceased estate administration services in South Africa. We help families navigate complex legal processes with ease. Trust us to handle your estate with care and professionalism.