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Estate duty and income tax implications of death benefits


  • pg 1
									                                         Estate duty and income tax
                                         implications of death benefits
“Too often, members
                                         Death benefits payable by retirement
                                                                                        This strategy will secure an estate duty
and Trustees are not                     funds and separate group life assurance
                                                                                        saving of R700 000 versus a situation
                                         schemes (GLAs) are subject to income
                                         tax and/or estate duty. High net worth         where the entire amount was allocated to
aware          of     the       tax      members      can     save  considerable        the spouse (assuming there was no
                                         amounts in taxes if they adopt                 need to utilise the capital) (R6m – R2,5m
implications             of     the      appropriate strategies.                        = R3,5m x 20% = R0,7m)

                                                                                        Income tax: All or a part of the death
allocation          of        death      Estate duty: On a person’s death, a
                                                                                        benefits payable on a member’s death is
                                         duty of 20% is levied on the dutiable
                                                                                        typically insured by way of a group life
benefits.”                               estate. For the purposes of estate duty, a
                                         member’s estate consists not only of the
                                                                                        insurance scheme (GLA). It is important
                                                                                        to distinguish between approved versus
                                         assets or property held by the deceased
                                                                                        unapproved GLAs. Approved GLAs are
                                         at the date of his/her death, but also of
                                                                                        death benefits payable in terms of the
                                         property deemed to form part of his/her
                                                                                        rules of the fund. They are taxable in
                                         estate. Deemed property includes the
                                                                                        terms of the Second Schedule to the
                                         proceeds from certain life policies (such
                                                                                        Income Tax Act. A small portion of the
                                         as GLAs) and retirement fund benefits
                                                                                        lump sum payable by a retirement fund
                                         payable or commuted by way of a lump
                                                                                        is tax free (usually the greater of
                                                                                        R120 000 and R4 500 x years of
                                                                                        pensionable service). The balance is
                                         Any benefit which became due and
                                                                                        taxed at the member’s average rate of
                                         payable by a fund as a result of the
                                         death of the deceased and is paid or
In broad terms, a person’s dutiable      commuted as a lump sum is subject to           Unapproved GLAs are death benefits
estate is determined as follows:         estate duty. Annuities or pensions are         payable in terms of a separate scheme.
                                         not subject to estate duty.                    The contributions are paid with after-tax
Add up All the deceased’s assets
                                                                                        money and, as a result, the proceeds are
       (referred to as property) as at   The most important deduction is section        tax free. (The contributions are often
       date of death                     4(q), that is: All property bequeathed or      paid by the employer but taxed in the
Plus     deemed assets (property)        allocated to the deceased’s spouse. If         hands of the member in terms of the
                                         the full death benefit is allocated to the     Fourth Schedule (perks tax).) Some of
Less     debts and other allowable
                                         surviving spouse no estate duty liability      the factors to be considered are:
         deductions (e.g. amounts that   will be incurred. However, members with
         accrue to the spouse)           estate duty problems should attempt to         • Lump sums paid to a trust on behalf of
Less     an abatement of R2,5 million.   utilise all the deductions available to          beneficiaries/nominees are subject to
                                         them at the time of their death, as the          income tax as well as estate duty.
Equals the dutiable estate               entire estate is dutiable on the surviving     • Compulsory pensions purchased by
                                         spouse’s death (subject only to the              retirement funds (be it spouse’s,
                                         R2,5 million rebate). Some alternatives          children’s or any other pensions) don’t
                                         are to:                                          have any tax or estate duty
Summary of the income tax and            • allocate at least R2,5 million directly to     implications,     but     the    monthly
estate duty implications for cash or        the children                                  payments      are     taxable   in   the
pension payments                         • request (on the nomination form) that          beneficiary’s hands.
                                            pensions be purchased for their             • It would be wise to limit lump sum
Retirement Fund     Lump       Estate       children (the final decision in this          payments to the benefits payable by
Benefit             Sum         Duty        regard will, of course, be made by the        the unapproved GLA and the tax-free
                     Tax                    Trustees and can only be executed if          portion of the approved death benefit,
Lump sum to          Yes        No          the rules provide for the payment of an       as any additional lump sums will incur
Spouse                                      annuity, as is typically the case).           tax at average rates (typically between
Annuity/Pension      No         No                                                        30% and 40%).
                                         Consider the situation where the
to Spouse
                                         deceased’s death benefit amounts to
Lump sum to          Yes        Yes      R6,0 million and the Trustees allocate
Children                                 R2,5 million to the spouse, the balance
Annuity/Pension      No         No                                                      Gawie du Toit
                                         to the children allowing them to commute
to Children                                                                             Branch Director
                                         up to R2,5 million, whereas the
Trust to Children    Yes        Yes      remaining R1,0 million is used to
                                         purchase pensions. This means that the
Group Life          Lump      Estate     full R6,0 million benefit will be deductible
Scheme              Sum        Duty      and therefore free from estate duty –
                     Tax                 both on the member’s death and on the
Lump sum to          No        No        death     of    the   surviving     spouse.
Lump sum to         No         Yes
Annuity/Pension     No         No
to Spouse
Annuity/Pension     No         Yes         Contact: Gawie du Toit
to Children                                Tel: +27 21 912 3303
Trust to Children   No         Yes         E-mail:

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