This is article two of a series of articles dealing with Estates. In this case it is Deceased Estates and Key-Man Policies. Note that this article is based on a SARS Guide and does not constitute a legal opinion. The Estate Duty Act is the overriding document in all cases.
Please read the previous article “Estates” for an initial summary of Estates and how they arise.
Estate Duty Act, 45 of 1955
Tax Administration Act, 28 of 2011 s
Trust Property Control Act, 57 of 1988
Source of information: SARS, External Guide – Estate Duty Implications on Key Man Policies
In terms of section 3(3)(a) of the Estate Duty Act, any amount due and recoverable under any policy of insurance which is a “domestic policy” (as defined in section 1 of the Estate Duty Act) upon the life of the deceased, is regarded as “deemed property” of the deceased. The requirement for inclusion in the estate of the deceased as deemed property, for estate duty purposes, is not based on whether the deceased was the owner of the policy or not, but whether it was his / her life which was insured.
Regardless of whether the proceeds of a policy are payable to the deceased’s estate or to a nominated beneficiary or were ceded to a beneficiary during his lifetime, if such proceeds flow from a “domestic policy on the life of the deceased” they fall within the ambit of section 3(3)(a) of the Estate Duty Act. It may, however, be mentioned that in cases where a Public Benefit Organisation or the surviving spouse is the beneficiary of the policy, the proceeds of the policy will qualify as a deduction in terms of section 4(h) or 4(q) of the Estate Duty Act, respectively. Except for the deductions as mentioned above, the only other exclusions available in terms of the Estate Duty Act are those listed in section 3(3)(a)(i), (iA) and (ii) of the Estate Duty Act. If one of the exclusions or deductions does not apply, the proceeds of the “domestic policy upon the life of the deceased” are subject to estate duty.
The relevant part of section 3(3) of the Estate Duty Act reads as follows:
i) “(3) Property which is deemed to be property of the deceased includes-
(a) so much of any amount due and recoverable under any policy which is a ‘domestic policy’ upon the life of the deceased as exceeds the aggregate amount of any premiums or consideration proved to the satisfaction of the Commissioner to have been paid by any person who is entitled to the amount due under the policy, together with interest at six per cent per annum calculated upon such premiums or consideration from the date of payment to the date of death: Provided that the foregoing provisions of this paragraph shall not apply in respect of any amount due and recoverable under a policy of insurance, if
(i) the amount due under such policy is recoverable by the surviving spouse or child of the deceased under a duly registered ante-nuptial or
post-nuptial contract; or
(iA) the Commissioner is satisfied that the policy was taken out or acquired by a person who on the date of death of the deceased on that date held any share or like interest in a company in which the deceased on that date held any share or like interest, for the purpose of enabling that person to acquire that whole or part of:
(aa) the deceased’s interest in the partnership concerned; or
(bb) the deceased’s share or like interest in that company and any claim by the deceased against that company, and that no premium on the policy was paid or borne by the deceased; or
(ii) except where the provisions of paragraph (i) or (iA) of this proviso apply, the Commissioner is satisfied and remains satisfied that such 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 utilized for the benefit of, any relative of the deceased or any person who was wholly or partly dependent for his maintenance upon the deceased or any company which was at any time a family company in relation to the deceased;
Policies which fall within the ambit of section 3(3)(a)(ii) are commonly referred to as “key-man” policies. Liability for income tax with regard to these types of policies is provided for in the definition of “gross income” (section 1) and section 11(w) of the Income Tax Act No 58 of 1962.
However, for estate duty purposes it does not matter whether the premiums payable in respect of the policy were claimed as a deduction for income tax purposes or not.
For the exclusion in terms of section 3(3)(a)(ii) of the Estate Duty Act to be applicable the following circumstances must be considered:
i) The Commissioner must be ‘satisfied’ that all the requirements of the section are met before the exclusion will be allowed. To enable SARS (on behalf of the Commissioner) to consider whether the proceeds of a policy fall within the ambit of the exclusion, all the relevant documentation pertaining to the case:
Copies of the resolution taken by company to take out such policy, application made for the policy and any other documentation to prove that the proceeds of the policy were not applied to benefit either the estate, any relative of the deceased or any person who was dependent upon the deceased for his/her maintenance or a family company of the deceased as envisaged in the relevant section of the Estate Duty Act.
ii) These documents must be submitted together with the Liquidation and Distribution Account to the estate auditor at SARS who will verify the documentation.
iii) A policy will have been ‘effected by the deceased’ if he was the person who contracted with the insurer for the issue of the policy, whether or not he was the beneficiary under the policy.
iv) ‘At the instance’ of a person is defined in the dictionaries as ‘at the request or suggestion’ of a person. A policy will be effected at the instance of the deceased if the proposor would not have effected the policy had he not been requested by the deceased to do so.
v) Premiums will have been ‘paid or borne’ by the deceased where it has been paid by him directly, or indirectly by someone else on his behalf out of funds provided by the deceased. If a company paid the premiums of a policy on the life of A and debited A with the amount thereof on loan account, it is submitted that A bore the premiums.
vi) The words ‘no amount has been’ or ‘will be paid to the estate,’ are capable of meaning that the condition is not fulfilled if there is an actual or future payment of any portion of the proceeds into the estate. The absence of some obligation linking the proceeds with the payment to the estate largely removes the basis for connecting any payment to the estate with the proceeds of the policy, a connection which must be present before it can be said that the condition has not been fulfilled.
vii) The connection or link between the proceeds and their payment to the estate applies equally to the payment or utilisation for the benefit of relatives, dependants or family companies. This condition also includes the use of any of the proceeds not merely paid to the persons falling into the above-mentioned categories, but also includes the utilisation of funds for their benefit flowing from such a policy. If any person in the above-mentioned categories was released from his/her liability or his/her liability was reduced by the whole or part of the proceeds of such policy, the condition would not be fulfilled and the proceeds of the policy would form part of the dutiable estate of the insured.
viii) If the company was ‘at any time’ a family company in relation to the deceased, the condition is not fulfilled and the proceeds will be dutiable even though at the time the policy was effected and, continuously thereafter, the company was not a family company in relation to the deceased.
Where the exclusion in terms of section 3(3)(a)(iA) of the Estate Duty Act deals with a partner/co-shareholder or co-member without referring to the blood relationship between the partners, co-shareholders or co-members, section 3(3)(a)(ii) specifically excludes scenarios where the funds have been paid to relatives of the deceased and any company which was at any time a family company in relation to the deceased. “Relative” and “family company” are defined in section 1 of the Estate Duty Act.