A primary function of estate planning is to implement measures that reduce estate duty liabilities thereby enhancing liquidity and maximising the financial legacy for loved ones. Various products, when correctly structured, are exempt from estate duty, and in this article, we explore these mechanisms and how they can be incorporated to reduce tax in one’s estate.
Retirement funds
The proceeds from pension, provident, preservation, and retirement annuity funds do not fall into a deceased estate and, thus, do not attract estate duty. These retirement benefits fall under the Pension Funds Act, with their distribution tightly governed by Section 37C. While a retirement fund member can nominate beneficiaries, the trustees of the retirement fund hold the ultimate responsibility for determining the distribution of the deceased’s benefits among financial dependants. Trustees must first identify all financial dependants, including spouses, children, aged parents, siblings, and anyone else entitled to maintenance or considered financially dependent on the deceased. In their determination, trustees consider the nominees on the deceased’s policy as a guide. After the trustees complete their assessment, the funds are distributed to the identified dependants. Consequently, the capital bypasses the deceased’s estate, avoiding estate duty. This structured approach ensures that retirement benefits are allocated according to the dependants’ needs rather than being subjected to the estate’s liabilities, thereby preserving more of the deceased’s assets for their intended recipients. As such, when developing your estate plan, it is important to keep in mind that there are limitations on your ability to distribute your retirement fund benefits as you see fit, and it may be necessary to make use of other mechanisms to ensure that your loved ones have access to cash in the immediate aftermath of your death.
Living Annuities
Living annuities serve as excellent estate planning tools, allowing policyholders to freely nominate beneficiaries, ensuring that upon their death, the proceeds devolve directly to the chosen individuals. When the policyholder passes away, the proceeds of the living annuity bypass the winding-up process and become immediately available to the beneficiaries. This circumvents the deceased’s estate and avoids estate duty. Unlike retirement funds, anyone can be nominated as a beneficiary of a living annuity, without the requirement of financial dependence. The nominated beneficiaries can decide how to receive the funds from the living annuity. They can either make a full withdrawal, which is subject to tax, or transfer the entire amount into another living annuity in their own name. Alternatively, they can opt for a partial withdrawal, utilizing the deceased’s initial 0% tax amount of up to R550 000 (if not previously fully utilised), and transfer the remaining balance into a new living annuity. If no beneficiary is nominated, the policy’s proceeds will be paid into the estate however they remain exempt from estate duty. However, it is important to note that executors may charge fees on these funds. Therefore, if the goal is to create estate liquidity using the proceeds of a living annuity, it is crucial to account for potential additional executor’s fees.
Buy and sell assurance
While the proceeds of domestic life insurance policies are deemed property in a deceased estate, buy and sell cover is a notable exception. This insurance is taken out by business owners on each other’s lives so that, if one shareholder dies, the surviving shareholders can use the policy proceeds to purchase the deceased’s business shares. To qualify for an estate duty exemption, the buy-and-sell policy must be correctly structured and supported by a valid buy-and-sell agreement. The policy must be taken out by a co-owner of the business with the deceased at the time of death and specifically intended for the surviving shareholders to buy the deceased’s shares. The deceased shareholder must not pay, nor have ever previously paid, the premiums for the policy. The buy and sell agreement should detail the procedure following a shareholder’s death, including the funding mechanism (the buy and sell cover), the timeframe for the transfer, and details of the shareholders and business valuation. For optimal results, it is advisable to engage an experienced professional to set up the buy and sell cover and construct an agreement that is fully compliant and aligned with the necessary requirements. This ensures the buy and sell policy not only qualifies for an estate duty exemption but also facilitates a smooth and efficient transfer of shares, safeguarding the business continuity and financial interests of the surviving shareholders.
Key person assurance
Similarly, the proceeds of a key person policy, if correctly structured, can be exempt from estate duty. Key person assurance is typically taken out on the life of a key individual to mitigate business risk in case of premature death or disability. For the policy to qualify for this exemption, the company must be the nominated beneficiary and responsible for paying the premiums. Upon the key person’s death, the policy proceeds are paid directly to the company, bypassing the deceased’s estate and avoiding estate duty. To qualify for this exemption, note that the company owning the policy must not be a family company in relation to the life assured.
Domestic policy where your spouse is the named beneficiary
Section 4(q) of the Estate Duty Act allows for the deduction of all property accruing to the surviving spouse from the deceased’s gross estate, thereby avoiding estate duty. This includes the proceeds of a domestic life policy where the surviving spouse is the named beneficiary. The term ‘spouse’ here encompasses permanent life partners. In such cases, the life policy proceeds are paid directly to the surviving spouse or life partner without incurring estate duty or executor’s fees. Additionally, if a domestic life policy is registered against an ante-nuptial or post-nuptial contract with the spouse and/or minor child as beneficiaries, the proceeds do not form part of the deceased’s dutiable estate. This registration against the marriage contract applies only to couples legally married under the Marriage Act or the Civil Union Act and does not extend to life partners.
Strategic estate planning can effectively leverage policies and exemptions to minimise estate duty. As is evident from the above, proper structuring is crucial for maximising estate liquidity and preserving assets for beneficiaries.
Have a fantastic day.
Sue
