A relevant life plan (RLP) is a tax-efficient way for a limited company to provide death-in-service style life insurance for an employee or director.
Relevant life policies are normally written under a discretionary trust. This means that if a successful claim is made, the policy proceeds can be paid to the trustees for the benefit of eligible beneficiaries rather than being paid to the company or directly into the deceased person’s estate.
Holding the policy in trust can help keep the proceeds outside the estate for Inheritance Tax purposes and may allow the benefit to be distributed without waiting for probate.
If the insured employee dies while the policy is active, a claim is made to the insurer. If the claim is accepted, the proceeds are paid to the trustees, who deal with them in accordance with the terms of the trust.
To understand the overall structure of these policies first, see what is relevant life insurance?. This guide focuses specifically on the trust and the roles of the company, trustees and beneficiaries.
How does a relevant life trust work?
The exact documentation varies between policies, but a typical relevant life trust arrangement works broadly as follows:
The employer takes out relevant life cover for the director or employee and normally pays the premiums.
The policy is normally held under a discretionary trust, with trustees responsible for the trust arrangement.
If the insured person dies while covered, a claim is submitted to the insurer.
If the claim is accepted, the proceeds are paid to the trustees rather than to the employer or directly into the deceased person’s estate.
The trustees distribute the proceeds to eligible beneficiaries under the trust terms, taking the insured person’s expression of wishes into account.
What is a relevant life discretionary trust?
A discretionary trust is a legal arrangement under which trustees hold and administer the policy for the benefit of the people who fall within the potential beneficiary classes set out in the trust deed.
If a claim is made and accepted, the insurer normally pays the proceeds to the trustees. The trustees then deal with the money in accordance with the trust deed and exercise their discretion over which eligible beneficiaries receive the benefit.
When you arrange a new policy, the insurer will normally provide the appropriate trust documentation as part of the setup process. You can read more about the overall process in our relevant life setup guide.
What are the benefits of using a discretionary trust?
Using a discretionary trust can provide several practical and tax advantages:
- The proceeds of a successful claim will normally not form part of the deceased person’s estate, so they are generally outside the estate for Inheritance Tax purposes. See our guide to relevant life insurance and Inheritance Tax.
- The trustees may be able to deal with the proceeds without waiting for probate, which can make the money available to beneficiaries sooner.
- A discretionary structure gives the trustees flexibility over how the benefit is distributed between eligible beneficiaries, subject to the terms of the trust.
The trust is therefore an important part of the way relevant life cover is structured, rather than simply an administrative document added to the policy.
Who is involved in a relevant life trust?
The trustees
The trustees are responsible for administering the trust and dealing with the policy and any proceeds in accordance with the trust deed.
If a claim is paid, they decide how the money should be distributed among eligible beneficiaries. They will normally take account of the insured person’s expression of wishes, although a discretionary trust means they retain discretion rather than being automatically bound by those wishes.
The precise rules covering who can act as a trustee depend on the trust documentation. It is common for more than one trustee to be appointed.
The settlor
The settlor is the party that creates the trust. The exact structure and terminology can vary according to the policy and trust deed, so the documentation supplied for the particular arrangement should be followed.
The employer normally takes out the relevant life policy and pays the premiums. Those premiums may qualify for Corporation Tax relief where the relevant conditions are met. See our guides to relevant life insurance as a business expense, the tax benefits of relevant life insurance and the wholly and exclusively rule.
The beneficiaries
The beneficiaries are the people who may receive benefits from the trust. The trust deed defines the classes of eligible beneficiaries, which will commonly include members of the insured person’s family and other individuals.
Because the trust is discretionary, an expression of wishes can indicate who the insured person would like to benefit and in what proportions, but the trustees normally retain the final discretion under the trust terms.
What paperwork is involved?
The trust documentation will depend on the insurer and policy, but two documents are particularly important in many relevant life arrangements:
- the trust deed
- an expression of wishes or nomination form
The insurer, adviser or broker arranging the policy will normally provide the relevant documents and explain what needs to be completed.
Relevant life trust deed
The trust deed creates and governs the trust. It sets out matters such as the trustees’ powers, who can potentially benefit and how the trust is administered.
It is important that the trust deed supplied for the particular policy is completed and executed correctly rather than relying on a generic document.
Expression of wishes
An expression of wishes, sometimes described as a nomination form, tells the trustees who the insured person would like to receive the benefit and can indicate preferred proportions.
With a discretionary trust, this is normally guidance for the trustees rather than a binding instruction. This flexibility can be useful if family circumstances change between the policy being established and a claim being made.
What happens when a claim is made?
If the insured person dies while covered, the insurer will need to be notified and will assess the claim. Once a valid claim has been accepted, the proceeds can be paid to the trustees.
The trustees then consider the trust terms, eligible beneficiaries and any expression of wishes before deciding how the benefit should be distributed.
Our guide to relevant life insurance claims and payouts explains this process in more detail.
What if your circumstances change?
Trust arrangements shouldn’t simply be forgotten once the policy has been set up. Changes to your family or business circumstances may mean it is sensible to review matters such as your trustees and expression of wishes.
You may also need to consider the policy itself if you leave your employer or your company circumstances change. See what happens to relevant life insurance if you change companies?
Further information
For a wider overview of relevant life cover, see our 12 key facts about relevant life insurance or revisit our step-by-step setup guide.
If you have any questions about how a relevant life policy and trust would work for your company, our IFA can talk you through the options. Simply click on the button below.