Estate Duty living annuities

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Estate Duty living annuities

• 02 September 2012
• Wills, Estates & Succession
• SAIT Technical

Important:

This article is based on tax law for the tax year ending 28 February 2013.

By Michael Stein

Section 3(2)(b) of the Estate Duty Act treats as property in an estate for estate duty purposes any right to an annuity (other than a right to an annuity charged upon property) enjoyed by the deceased immediately prior to his or her death that accrued to some other person on the death of the deceased.

Section3(2)(i), in turn, excludes from the property in an estate

‘so much of any benefit which is due and payable by, or in consequence of membership or past membership of, any pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund as defined in the Income Tax Act, 1962 (Act No. 58 of 1962), on or as a result of the death of the deceased [my italics]'.

The issue raised by a delegate at a recent seminar on estates is whether this exclusion applies to a living annuity that was in existence during the lifetime of the deceased that continues for his widow on after his death, since the annuity was in existence prior to death and did not become payable on or as a result of the death of the deceased.

I raised the matter with a senior official at sars to find out what the practice is on the matter and received the following response, which he characterised as a non-binding private opinion:

‘Section3(2)(b) of the Act is regarded as a general inclusion of all annuities, whereas the exclusion which is applicable in para (i) relates to a specific annuity from a pension-type fund. You will note that paragraph (i) was added by s2(1)(a) of Act No 60 of 2008. The Explanatory Memorandum in this regard clearly indicates that "Pension annuities are exempt from Estate Duty”. This is the likely approach as the living annuity is due and payable in consequence of membership of a fund and, although it was indeed payable before death, this does not appear to undermine the fact that it becomes payable to another person as a result of the person's death.

‘I am therefore of the opinion that section 3(2)(b) includes the living annuity in property for estate duty purposes, but that section 3(2)(i) specifically excludes it.'

Whether or not you agree with this view of the law, it is safe to accept that the practice is to exclude living annuities payable by a retirement annuity fund from property in an estate for estate duty purposes on the death of the member concerned.

FAQs

1. Are living annuities subject to estate duty in South Africa?

Yes. The value of a living annuity is generally included in the deceased person’s estate for estate duty purposes, depending on the structure and applicable legislation.

2. What happens to a living annuity when the annuitant dies?

When the annuitant dies, the remaining living annuity value is usually paid to nominated beneficiaries or transferred according to the annuity contract terms.

3. Do beneficiaries pay tax on inherited living annuities?

Beneficiaries may pay tax on income received from the living annuity, depending on how the funds are withdrawn or transferred.

4. Can a living annuity help reduce estate duty?

A living annuity may offer estate planning benefits in certain circumstances, but it does not automatically exempt the investment from estate duty.

5. Is a living annuity included in the deceased estate calculation?

Yes. SARS may include the value of the living annuity when calculating the dutiable estate for estate duty purposes.

6. How are living annuity beneficiaries taxed in South Africa?

Tax treatment depends on whether beneficiaries choose a lump sum payout, ongoing income withdrawals, or a transfer to another retirement product.

7. Can a living annuity bypass the estate administration process?

In many cases, the proceeds of a living annuity may be paid directly to beneficiaries, which can simplify and speed up the distribution process.

8. What is the difference between a living annuity and a life annuity for estate duty purposes?

A living annuity generally retains an investment value that may form part of the estate, while a life annuity usually ends upon death unless guaranteed terms apply.

9. Why is beneficiary nomination important for a living annuity?

Keeping beneficiary nominations updated helps ensure the annuity proceeds are distributed according to the annuitant’s wishes and reduces potential disputes or delays.

10. Why should taxpayers seek professional advice about estate duty and living annuities?

Estate duty and retirement fund taxation are complex, and professional advice helps ensure proper estate planning, tax efficiency, and compliance with SARS regulations.

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