One of the potentially difficult tasks that an HR team might need to deal with relates to the payment of death in service benefits. Often the Company will have set up under trust a stand alone death in service scheme to provide lump sum death benefits and the Company will be the sole trustee of that scheme. This usually results in the HR team being responsible for collating the necessary information and making appropriate recommendations to the Board so that the Company, in its capacity as trustee, can reach a decision as to whom to pay a lump sum death benefit. The decision can be complicated where the employee had several partners or there are several dependants in need of support. A decision could be hotly contested by someone who thinks they have not been fairly treated. The Pensions Ombudsman considers several such cases every year.
Inheritance Tax is not payable on death benefit lump sums if they are paid from a discretionary trust. Under discretionary trusts, a trustee has an absolute discretion to decide who to pay the money to from a list of recipients specified in the trust. Employees are usually given the opportunity to say whom they would like to benefit by completing an expression of wish form. The trustee must take such forms into account but must not treat them as binding instructions.
To ensure it administers the discretionary trust properly, a trustee must:
- read and understand the scheme rules and know:
- what is payable under the discretionary trust;
- whether the amount must be paid or whether the trustee can decide not to make a payment; and
- who is included in the list of potential recipients.
- take reasonable steps to identify every potential recipient. In some circumstances this might not be straight forward, for example, if the list includes relationships such as "persons who, in the Trustee's opinion, had lived with the employee as his partner". An added complication is that under the Data Protection Act information as to a living person's health (which might be relevant to determining whether they are a dependant) or sexual life (which might be relevant to determining whether their relationship with the employee brings them within the list of potential recipients) cannot generally be processed by the trustee without that person's consent.
- identify the relevant surrounding circumstances, which might include: whether there is an expression of wish form, whether it is still current and who is named in it; who benefited under the employee's will or intestacy; how dependent the potential recipients were on the employee; and the nature of the relationship between the employee and the potential recipients.
- give fair consideration to every potential recipient when deciding who to make payments to.
- not come to a decision that cannot reasonably be reached on the facts and circumstances before them.
- pay all the monies within two years of becoming aware of the death of the employee otherwise it will not be authorised for tax purposes.
- take legal advice if the scheme rules aren’t clear or they don't fully understand their duties.
If the HR team establishes appropriate procedures then they can be instrumental in ensuring that the Company, as trustee of any death in service scheme, administers its discretionary trusts properly, thus reducing the likelihood of complaints and putting the Company, as trustee, in a better position to resist any claims that might arise.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.