Trusts and relevant life policies
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. To understand the overall structure first, see what is relevant life insurance?.
In this guide, we explain how a discretionary trust works. We also look at the roles of the limited company, the trustees and the beneficiaries. For a quick summary, see 12 key facts about relevant life insurance.
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. You can read more about the setup process in the setup guide.
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.
These tax and timing advantages are key reasons many directors choose relevant life over personal cover — see relevant life vs personal life insurance.
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. Premiums are typically treated as a business expense and may qualify for corporation tax relief if HMRC’s rules are met.
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. If your circumstances change — for example, you leave or close your company — see what happens if you leave your company.
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 independent financial adviser will guide you through the signing process and answer any questions you may have. You can also check our FAQs for common queries.
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. For a full process overview, revisit the setup guide.