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Category Life Insurance

What every broker should know about trust owned policies

19 November 2008 FAnews

The South African Receiver of Revenue, the Ministry of Finance and our courts have of late taken a keen interest in a number of areas pertaining to trusts. This has justifiably led to most advisers advising clients to avoid trusts, when the opposite is required. Advisors need to familiarise themselves with the latest developments pertaining to trusts.

Estate duty
Most insurance policies, save for certain specified policies, taken on the life of an individual will be deemed to be “property” forming part of the deceased’s estate for the determination of estate duty payable. The deceased estate will potentially be subject to estate duty at the rate of 20% on any amount in excess of the R3.5 million abatement.

There is, however, some relief as set out in section 3 (3) (a). Other than the section 4 (q) spousal relief, in the event that a policy is proposed by a person other than the deceased, e.g. a trust, then all the premiums paid on the policy plus a 6% interest per annum calculated from the date of inception of the policy to the date of death of the assured shall be deducted from any potential estate duty due.

This benefit is available if a person other than the deceased is the owner of the policy, pays the premiums on the policy and further is the person entitled to recover the proceeds of the policy, i.e. the beneficiary. The relief may be obtained by structuring the life policy to be owned by a trust.

Asset protection benefits
Very often advisers and their clients do not assess the impact of Capital Gains Tax, creditors and a host of other potential claims against the deceased estate, which could render the estate of the deceased insolvent or unable to pay the debts or estate duty. This could render any proceeds which would have been payable under the policy to the estate attachable by creditors.

For example, if the deceased had a life policy for an amount of R5 million rand, which would pay to a major child as a beneficiary, this would trigger estate duty on the R5 million less the R3,5 million abatement. The estate is clearly insolvent, but would be liable for any estate duty. The executor or SARS would be able to recover the duty from the beneficiary. If the proceeds of the policy are to be paid to the deceased estate, the entire proceeds of the policy would be absorbed by the CGT, estate duty and possibly any other creditors. This scenario can be easily avoided if the assets are properly structured and the policy is trust owned.

Implications for minors
If the beneficiary of a policy is a minor and both parents pass on in the same calamity, the proceeds, if any, will be held by the Guardians Fund until the minor reaches majority. Depending on how the policy is structured, any proceeds on such policy could be susceptible to a claim by a creditor and certainly SARS. This can simply be avoided by ensuring the policy is trust owned.

In the interest of beneficiaries
Many beneficiaries simply squander the proceeds or are duped into poor investment decisions. A properly structured trust can avoid this. The obvious issue is to avoid the proceeds of the policy, which would have provided for an intended beneficiary, being attached by a creditor of such beneficiary, simply by ensuring that the policy is correctly structured in a solid trust.

Another clear benefit of a correctly structured trust owned policy is that the proceeds will also be protected from any potential future estate duty in the hands of the would-be recipients.

A new policy may be required
Once a thorough financial needs analysis has been completed, and it is the interest of the client to restructure their life assurance, a new policy should be considered. The mere cession of an existing policy will result in CGT in the hands of the person who is entitled to recover the proceeds of the policy as the policy would be a second hand policy.

What to do with and elderly client or a client with a pre-existing condition, which makes it expensive, difficult or impossible to get a new policy? The benefits listed above would need to be weighed up against the CGT liability.

If the issue of a trust owned policy has not been canvassed, one needs to consider whether a proper financial needs analysis has been carried out.

Comments

Added by Asogan, 13 Mar 2011
Would you not achieve all of the above benefits if you simply changed payer and beneficiary to Family Trust? (not cession)
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Added by DAVID THOMSON, 27 May 2009
The info is sketchy but as far as I know, such a policy will not enjoy the exemption from estate duty conferred by sec 3 (3)(a)(iA) of the Estate Duty Act. However the arrangement is workable provided the deed of trust permits such a contract. I don't see any income tax problems, only estate duty on 'deemed property'.
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Added by BVV, 19 Nov 2008
What is the position when a family trust enter into a buy-and-sell agreement with the co-shareholder of a company, and subsequently take out a policy (one way) to cover the purchase price...and comply with all other requirements needed to qualify for this policy proceeds to be exempted from estate duty in the deceased’s estate, but where the life assured is a trustee of that same trust.. The law doesn’t refer to any “prevention” of this, ?specialy relating to “family business”, as is the case with a key-man policy.. Do you see any tax-problem in such “trust involvement” ?
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