Trusts and relevant life policies
A relevant life plan (RLP) is a tax-efficient way for a limited company to provide death-in-service style life insurance for employees and directors.
Relevant life policies are normally written into a discretionary trust. This allows the insurance payout to go directly to beneficiaries rather than the company or the deceased person’s estate.
Using a trust helps keep the benefit outside the estate for Inheritance Tax purposes and allows trustees to distribute the funds quickly to the intended recipients.
If the insured employee dies while the policy is active, the trustees receive the insurance payout and distribute it to the beneficiaries named in the trust documentation.
To understand the overall structure of these policies first, see what is relevant life insurance?.
This guide explains how discretionary trusts work and the roles played by the company, trustees and beneficiaries. For a quick overview of the policy itself, see 12 key facts about relevant life insurance.
What is a relevant life discretionary trust?
A discretionary trust is a legal arrangement that places the relevant life policy under the control of trustees.
If a claim is made, the insurer pays the proceeds to the trustees, who then decide how the funds should be distributed among the beneficiaries.
When you arrange a new policy, the insurer will usually provide a standard discretionary trust template as part of the setup process. You can read more about the process in the relevant life setup guide.
What are the benefits of using a discretionary trust?
Using a discretionary trust provides several practical and tax advantages.
- The proceeds of a successful claim normally do not form part of the deceased’s estate, meaning they are usually outside the scope of Inheritance Tax. See our guide to relevant life and inheritance tax.
- The funds can usually be paid out quickly, without waiting for probate to complete.
- The trustees control how the funds are distributed, giving them flexibility to support beneficiaries according to their circumstances.
These tax and timing advantages are key reasons many company directors choose relevant life cover instead of personal policies. See relevant life vs personal life insurance for a comparison.
Discretionary trust – who’s involved?
The trustees
The trustees are the legal owners of the policy and are responsible for managing the payout if a claim occurs.
Trustees must always act in the best interests of the beneficiaries, although they retain discretion over how the funds are distributed.
The employer is normally appointed as a trustee when the trust is created, although additional trustees can also be appointed. These might include family members, business partners or a professional adviser.
The settlor
The settlor is the party that creates the trust. In most relevant life arrangements this is the limited company that takes out the policy and pays the premiums.
Once the policy is in place, the settlor does not have access to the trust funds.
The company typically treats the premiums as a business expense and they may qualify for corporation tax relief provided HMRC’s rules are met.
The beneficiaries
The beneficiaries are the individuals who may receive the insurance payout.
They are listed in the trust documentation and are usually family members of the insured employee or director.
If your circumstances change — for example if you leave the company or close the business — see what happens if you leave your company.
What paperwork is involved?
Setting up a relevant life trust is usually straightforward.
Two key documents are normally completed when the policy is arranged:
- The trust deed
- A nomination or expression of wishes form
An independent financial adviser or insurance broker will normally guide you through the process and ensure the paperwork is completed correctly.
You can also check our frequently asked questions page for additional guidance.
RLP trust deed
The trust deed is the legal document that formally creates the trust.
It is normally signed by the settlor (the company) and the trustees. Signatures usually need to be witnessed for the document to be valid.
RLP nomination form
The nomination form, sometimes called an expression of wishes, indicates who the beneficiaries are and how the benefit should be distributed.
The insured employee signs and dates this document. Trustees normally take the nomination into account when deciding how to distribute the funds.
For a full overview of the policy process, revisit the relevant life setup guide.
For a general explanation of how life insurance trusts work, MoneyHelper also provides a useful overview of life insurance trusts.