Page 44 - Nexia SAB&T Estate Planning Guide 2024

be deemed a part of his estate when he dies. By letting the other partners
own the policy, the money falls outside the deceased partner’s estate.
n The proceeds of the buy and sell insurance will not be subject to estate duty
provided three requirements are met:
u The partners paid each other’s premiums. No premium on the policy must
have been paid by the deceased;
u The relationship (partner or co-shareholder or co-member) to the
deceased must have been in existence at the date of death;
u It must have been the intention of the parties to enable the partner or
co-shareholder or co-member to acquire the deceased’s interest at his
death. If there was a different intention, the deduction will not apply,
even if the policy proceeds are actually applied to obtain the deceased’s
interest.
n The reason for the exemption of such policies from estate duty is to prevent
the paying of double estate duties on the same interests. The actual business
interest (whether it be shares or a % ownership in the business) are generally
included as an “asset” in the estate, and thus for estate duty purposes,
however the proceeds used to purchase these interests are excluded.
n It is important to note that first and foremost, the buy and sell agreement
needs to be in place between the partners, which is then funded by life
insurance, so that the arrangement is legally enforceable, and the intention is
reduced to writing.
n The partners may also decide to propose for key man insurance, where
one partner is a “key” person in the business, whose particular skills and
knowledge are essential for continued success of the business.
n The life of that partner is insured by the partnership, which owns and funds
the policy. This insurance protects the partnership against financial loss
which may be caused by his /her untimely death. In attributing a value to
such key man policies, factors such as the cost of appointing and training
a replacement and the decline of profit of the business is taken into
consideration.
n When the policy is taken out the partnership can elect if the premiums are
tax deductible. If the election is made for the premiums to be tax deductible,
when the policy pays out the proceeds will form part of gross income.

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