Viewpoints: Domestic life policies on the life of the deceased

Estate duty is payable on property and deemed property. Any proceeds from a domestic insurance policy on the deceased’s life will be included as deemed property for estate duty purposes (subject to certain exclusions). The deciding requirement here is that the policy must be on the deceased’s life (section 3(3)(a)), regardless of who the owner or the beneficiary of the policy is. The policy proceeds can be reduced by the amount of any premiums on the policy that were paid by the person entitled to the proceeds, plus interest on the premiums, calculated at 6% per annum from the date of payment until the date of death. The Act does not specify whether simple or compound interest should be used. It is current practice to use compound interest. Premiums paid by the deceased cannot be deducted.

The proceeds of a life insurance policy on the deceased are not considered property deemed to be property in three scenarios:

1. When the proceeds are payable to the surviving spouse or child of the deceased under a duly registered ante-nuptial or postnuptial contract (proviso (i) to section 3(3)(a)). The term ‘child’ is defined in the Act to encompass any adopted person. In the event that policy proceeds are distributed to a surviving spouse without a registered ante-nuptial or postnuptial contract, the proceeds will be classified as property deemed to be property of the deceased. However, the deceased will be eligible for a deduction (section 4(q)) in the calculation of the dutiable amount.
2. If the proceeds are payable to an individual who was a partner of the deceased, a co-shareholder in a company in which the deceased also held shares, or a
   co-member in a close corporation in which the deceased also was a member
   at the time of the deceased’s death, provided that the deceased paid no premium on the policy and the policy was taken out to enable the individual
   to acquire the deceased’s share in the partnership, company, or close corporation (proviso (iA) to section 3(3)(a)).
3. 3 Where the Commissioner determines that the following conditions are met:
   1. The policy was not taken out by or at the instruction of the deceased
   2. The deceased did not bear or pay any premiums
   3. No amount is payable to the estate of the deceased, and
   4. No amount is payable to or used for the benefit of any relative or dependant of the deceased or any family company of the deceased related to him/her or his/her spouse within the third degree of consanguinity, or any spouse of anybody so related. An adopted child is deemed to be related to his/her adoptive parent within the first degree of consanguinity (section 1(1)).

A family company is defined as any unlisted company that at any time was controlled or capable of being controlled, directly or indirectly, by the deceased or by the deceased and one or more of his/her relatives (section 1(1)).

TO SUM UP

Careful consideration should be given to the tax implications of domestic life policies taken out on the life of the deceased as the proceeds of the policies may be subject to estate duty (even if it is actually received by beneficiaries).

Author
Dr Muneer Hassan CA(SA)

Chartered Tax Advisor (CTA); Deputy HOD Accountancy and Senior Lecturer Taxation at UJ; Lecturer on the Gauteng Board Course and academic member of SAICA National Tax Committee