A relevant life plan (RLP) is a tax-efficient way to provide death-in-service benefits for the benefit of company employees and directors.

If the employee dies while the plan is in place, the Trust will pay out a lump sum to the beneficiaries.

In this guide, we explain how a discretionary trust works. We also look at the roles of the limited company, the trustees and beneficiaries.

What is an RLP discretionary trust?

This is a legal arrangement which entrusts a relevant life plan to a group of trustees to look after the proceeds of a successful life insurance claim.

If you set up a new plan, you will typically use your insurance company’s discretionary trust.

The trustees have a degree of discretion over how the proceeds of a claim are distributed. They are nominated when the policy is first set up.

What are the benefits of using a discretionary trust?

A discretionary trust offers numerous benefits, including:

  • The proceeds of a successful claim do not form part of the deceased’s estate, so will not be subject to Inheritance Tax.
  • The funds can be accessed quickly, meaning there won’t be a lengthy delay in distributing funds to the beneficiaries.
  • The trustees are the legal owners of the Plan, which means they can exercise discretion and flexibility over how and when payments are made to beneficiaries. This may be useful if some of the beneficiaries are children, for example.

Discretionary trust – who’s who?

The trustees

The trustees are the legal owners of the RLP. and will be in charge of the funds if a successful claim is made.

Trustees must always act in the beneficiaries’ best interests, although they have some discretion over how the funds are used.

The employer is automatically made a trustee but can opt out of this role if they wish.

You can appoint other trustees who are collectively known as ‘additional trustees’. These should be people you trust, such as family members. You can also appoint a professional person.

The settlor

This is usually the company that sets up the policy and pays the premiums – often referred to as the ‘principal employer’. Once the RLP is in place, the settlor has no legal right to the funds or any legal status.

The beneficiaries

The individuals who receive the lump sum are the discretionary beneficiaries. The beneficiaries are listed in the Trust Deed and are typically family members of the employee.

Discretionary Trusts – what paperwork is involved?

It is relatively simple to set up a new RLP.

There are two key documents to complete – the Trust Deed and a Nomination Form.

Your IFA will guide you through the signing process and answer any questions you may have.

RLP Trust Deed

The Trust Deed is the legal document which sets up the trust. It is signed by the settlor (the limited company), and the trustees. All signatures must be witnessed.

RLP Nomination Form

The Nomination Form states who the beneficiaries are, and the proportion of the benefit they should receive.

The employee should sign and date the Form.

Categories: Guides

James Leckie

James is a professional finance and business editor. He founded some of the most popular small business sites in the UK over the past 25 years, including Bytestart, IT Contracting and Contractor UK.