Will Life Policy Assigned To Wife Still Incur Estate Duty?

Source : The Sunday Times, Nov 11, 2007

Q WHEN I reached 55, I withdrew $200,000 from my Central Provident Fund (CPF) Ordinary Account and bought an NTUC Income single-premium policy for $250,000 with a sum assured at $301,055.

Under this policy, if death or total disability occurs before the age of 60, as a direct result of bodily injury caused by violent, accidental, external and visible means, the insurer will pay a sum equal to two times the sum assured plus any bonus accrued.

I have nominated my wife, a full- time housewife, as the sole beneficiary.

As I intend to bequeath it to her as a gift, I am thinking of making an assignment, though I have nominated her as a beneficiary, for the purpose of estate duty planning. My questions are:

1) Is it true that once a policy has been formally assigned, the assured surrenders the interests and rights to the assignee, and the policy does not form part of the assets of the insured listed under the assets category and thus does not attract any estate duty?

2) For a policy with a named nominee and in the event of a claim, will the sum assured plus bonus be treated as an integral part of the assets of the insured and be subject to estate duty, if the amount exceeds the threshold of $600,000?

Is my decision to assign the policy to my wife as a gift to her a wise move?

A ALTHOUGH a policy that has been assigned does not form part of the estate, it will revert to the deceased’s estate for estate duty purposes if the death occurs within five years of the date of assignment as a gift.

You are correct in saying that, for an NTUC Income policy with a named nominee, the proceeds will form part of your estate and be subject to estate duty if the $600,000 CPF plus other assets exemption (excluding the $9 million exemption for residential property) has been utilised. The balance in the CPF account has unlimited exemption.

For estate duty planning purposes, you could have arranged for the policy to be for the benefit of your wife at the point of inception, under Section 73 of the Conveyancing and Law of Property Act. This would have provided separate duty assessment, and as the sum is likely to be less than $600,000, there might have been no estate duty payable.

Alternatively, you could have given the $250,000 as a gift to your wife to buy the policy on your life, with her as the applicant and owner. In so doing, you would have frozen the amount subject to estate duty in the event of your death within five years, to just $250,000.

In contrast, in a policy assignment, in the event of death within five years, estate duty would be levied on the value of the policy at the time of death.

For example, if the policy value is $400,000, the estate dutiable amount would be $150,000 more than the original $250,000 single premium.

You are also correct in saying that the policy assignment means you will relinquish all your rights and interests. Even in the event of a permanent total disability claim before age 60, the policy payout will be for the benefit of your wife.

For estates of less than $12 million, the estate duty payable, after the applicable exemptions, is at a rate of 5 per cent.

Leong Sze Hian President Society of Financial Service Professionals

Advice provided in this column is not meant as a substitute for comprehensive professional advice.