When a person dies his property, however comprised, constitutes his estate.

An estate usually consists of a house, furniture, motor vehicles, cash and investments.   Then of course there could be life assurance policies and annuities.

There is a perception that all policies and annuities bypass the estate but this is only partially true as this article will attempt to clarify.

For purposes of the Estate Duty Act the estate of any person shall consist of all property of that person as at the date of his death and of all property which is DEEMED to be property of that person as at date of death.   Property which is deemed to be part of the deceased’s estate includes inter alia, the amount due and recoverable under a policy of insurance, whether such proceeds are paid to the estate or to a named beneficiary.   In this context “property” means any right in or to property, movable or immovable, corporeal or incorporeal and includes the following:

(a)    …………………………….

(b)    Any right to an annuity (other than a right to an annuity charged upon property) enjoyed by the deceased prior to his death which accrued to some other person on the death of the deceased.

We must differentiate between an annuity and one which is available to members of retirement annuity and pension funds who are retiring) and which has its origin in a provident and pension fund.

A flexible annuity on the other hand does not originate from a registered pension fund as defined in the Income Tax Act.  A single contribution, e.g. before death is regarded as reducing the value of the estate and the ultimate beneficiary therefore receives a benefit free of estate duty.

The relevant section of the Income Tax Act reads as follows:

“Retirement annuity fund means any fund (other than a pension, provident or benefit fund which is approved by the commissioner and registered under the provisions of the Pension Funds Act.”

The single contribution referred to before death and the annuity benefits will in all probability be regarded by SARS as dutiable.

The net value of any estate for estate duty purposes is determined by making various deductions from the total value.   The deductions include amongst others, funeral expenses, charitable donations, book collections and administration costs.

A primary abatement of R3 500 000.00 is deducted in terms of Section 4A of the act and another important deduction is in terms of Section 4Q.   The latter section covers the deduction of the amounts accruing to the surviving spouse.

To illustrate:

If the policy payout is say, R3 500 000.00 this is an allowable deduction.  If, however, the payout is R7 000 000.00paid to the survivor and a child in equal shares, only the amount payable to the survivor up to R3 500 000.00 is an allowable deduction.   The remaining R3 500 000.00 will attract estate duty.

Payment of estate duty and Master’s fees will be discussed in a following article.