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The creditors will insist that all the members / shareholders sign surety and hold them jointly and severally liable for the full outstanding debt and not pro-rata to their membership or shareholding.

Without having first recourse to the business entity, the creditors tend to, if one of the sureties dies or becomes disabled, claim from his/her estate for settlement of the outstanding debt. This is due to strict enforcement of the Credit Act. The credit worthiness of the business entity is then affected because the risk changes for creditors due to the death or disablement of a member or shareholder as a key person in the success of the business.

The dire consequences become apparent when the estate of the surety does not have sufficient liquidity.

A possible solution using life insurance structured for contingent liability

The business entity can insure the life of the member/shareholder who has signed surety or provided personal security for the loan effected by the entity. The insured amount should preferably include disability cover and, together with the death value, be equal to the loan amount. The entity pays premiums and an agreement is entered into between the entity and the member/shareholder whereby the entity undertakes to apply the proceeds of the policy to the repayment of the debt.

Tax implications

A. Estate duty

No estate duty is payable if it complies with the requirements of section 3(3)(a)(ii) of the exemption. These requirements are:

  • that the policy was not taken out by, or at the instance of, the deceased,
  • that no premium on such policy was paid or borne by the deceased (the life assured), and
  • that no amount due or recoverable under such policy has been or will be paid into the estate of the deceased and that no such amount has been or will be paid to, or utilised for the benefit of, any relative of the deceased or any person who was wholly or partly dependent for his/her maintenance upon the deceased or any company which was at any time a family company in relation to the deceased.

A family business is a business that is controlled by, or capable of being controlled by, family members or relatives by way of majority shareholding (more than 50%). Family includes:

  • spouse,
  • the children, grandchildren and great-grandchildren of the deceased and spouse,
  • the parents, grandfathers and grandmothers, great-grandfathers and great-grandmothers of the deceased and spouse,
  • he brothers and sisters of the deceased and spouse,
  • the aunts, uncles, nieces and nephews of the deceased and spouse, and
  • the spouse of any of the above.

The requirements will not have been met for the exemption if it is a family company/CC; therefore the proceeds of the policy will be a deemed asset under policies in the estate of the surety. Cover will have to be increased by multiplying the cover amount by 1.25, to make provision for the estate duty payable at 20%. Further, being a ‘family owned entity”, there will be a saving in estate duty to the effect that the proceeds will be reduced for estate duty purposes by the total of the premiums paid, plus 6% compound interest over the term.

B. Income tax

The new section 10(1)(gH) (as amended with effect from 1 March 2012) exempts the following amount from tax:

“Any amount received or accrued in respect of a policy of insurance where –

  • the policy relates to death, disablement or severe illness of an employee or director, or former employee or director, of the person that is the policyholder, and
  • no amount of premiums payable in respect of that policy on or after 1 March 2012 is deductible from the income of that person for the purposes of determining the taxable income derived by the person from carrying on any trade.”

Once a policy’s proceeds have been included in the gross income of a company/employee under paragraph (m) of the definition of gross income, the only provision that can exempt it from tax is section 10(gH). For this exemption to apply no premiums paid under the policy on or after 1 March 2012 must have qualified for deduction against income.

It is clear that a “clean break” approach was taken by the legislator. Premiums paid before 1 March 2012 are not taken into account when determining whether or not the policy proceeds are exempt.

Surety in practice

A decision of an Income Tax Special Court (ITC1773 66 SATC 251) is of significance when considering surety in practice. The question arose whether the amount owing to the Bank, for which the deceased signed security, is deductible as a liability in terms of section 4(b) of the Estate Duty Act 45 of 1955.

It was stated that the surety is only liable to the creditor if and insofar as the principle debtor fails to honour the debt. The liability to the estate was depending on the Bank opting to claim. The debt will not be payable unless both conditions have been met. By the executor paying the debt without being called upon to do so, the appellant failed to prove that the amount paid was in respect of debts due by the deceased.

It was held further that if the estate was obliged to pay the debts of an entity, it would have the right of recourse against the entity on whose behalf the payment was done. The asset then created will be cancelled by the liability for estate duty purposes.

As stated before, the executor having to act in the best interest of the heirs will have a right to recover from the business entity, the amount paid on behalf of such entity. This right to claim will be reflected as an asset in the Liquidation and Distribution Account and unless dealt with as a special request in the Will, will always form part of the residue of the estate.

The residual beneficiary(ies) or legatee (depending on structure of beneficiating in the Will) can insist on repayment of the amount paid by the deceased estate. If the business entity is not able to repay, the business could be liquidated. It could be constituted as a donation and 20% donations tax payable by the estate if the executor does not recover the debt (an estate is not a natural person, therefore no exemptions for donations tax apply).


It is important that correct financial structuring is done, including structuring of the Will. Unfortunately in practice these facts are many times ignored. A comprehensive liquidity analysis should also be done regularly, to meet on-going changing circumstances. Ensure that the help of a suitably qualified specialist is sourced to ensure the right structure and cover for both the individual and the business entity.

Sanlam Life Insurance is a licensed financial service provider.
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