Will I pay less tax if my father’s life policy is paid into my trust?

Beneficiaries are not liable for tax on life assurance proceeds they receive, but there are a number of variables that need to be considered.

I am a beneficiary of my father’s life policy. The amount is currently about R2.2 million. At present, it will be paid out to me personally. Will I pay less tax if this is changed and my trust is made the beneficiary?

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Technically beneficiaries are not held liable for any taxes on life assurance proceeds they receive.

In other words, if the life cover was for R1 million then you will receive R1 million.

The payout will be made directly to you or your trust by the life assurer as long as you or your trust is noted on the life assurance contract as the beneficiary. If no beneficiary was nominated then the proceeds will pay to your father’s estate where the executor will have to deal with the distribution in which case executor fees will apply. No executor fees are applicable where beneficiaries were nominated on life assurance policies.

The life policy will however be seen as a deemed asset in your father’s estate and may be subjected to estate duty in his estate depending on the total value of the estate.

The following estate duty will apply:

  • If the estate dutiable value including the life assurance is less than R3.5 million then no estate duty will be payable.
  • For estates with a dutiable value of between R3.5 million and R30 million, an estate duty of 20% will be levied.
  • For estate values above R30 million estate duty of 25% will be payable on the amount above R30 million.

(See my comment below regarding spousal bequeathments in terms of the Estate Duty Act, which has a major impact on determining the estate dutiable amount.)

Should estate duty be payable in your father’s estate, the executor will approach you for the pro-rata portion that the life cover contributed towards the overall estate duty.

Neither you nor your trust will be liable for any other taxes so it does not matter whether you or your trust is the ultimate beneficiary.

Estate duty is applicable on any amount above R3.5 million that has been bequeathed to anyone apart from a spouse. Spousal bequeathments are non-estate dutiable under Section 4(Q) of the Estate Duty Act.

The proceeds of the policy will pay out in full to the nominated beneficiary but the executor has to account for the policy as a deemed asset in your father’s estate.

I would also like to touch on fund-owned life cover …

Many people belong to a company retirement fund which often includes risk benefits. Within the risk benefits there normally is life assurance which is determined by a multiple of the employee’s annual salary.

When setting up the fund the employer has the option of selecting the risk benefits as ‘approved’ or ‘unapproved’. Briefly, approved benefits belong to the fund and are subject to tax payable according to the retirement tax tables.

Since the life cover and the pension fund proceeds will be lumped together the tax can be as high as 36% on amounts exceeding R1 050 000.

In addition the proceeds will be considered a deemed asset and attract estate duty over and above the tax payable. Once again, if a spouse is a beneficiary, Section 4 (Q) will apply. Just like the benefits of the pension fund, the trustees will ultimately determine who benefits from the proceeds.

The payout can be a lengthy affair. Unapproved benefits are ‘standalone’ and pay out in a similar way as individually owned life policies. Payout will be according to the nominated beneficiaries and no tax apart from estate duty as in my explanation above will be applicable.

As can be seen from the above there are many variables that need to be considered. In order to determine if and what taxes will be payable it makes sense to have a proper risk analysis conducted on your father’s financial affairs.

I hope I have answered your question suitably.

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