Relevant life policy trusts
A relevant life policy needs to be set up in trust . As the planshould not start until the trust form has been completed and accepted by the insurer
If the plan is placed in trust at a later date, once the plan has started, there may be a Capital Gains Tax liability in the event of a claim being paid.
The trust also demonstrates that the plan proceeds will be payable to individuals (the employee’s dependants) which is one of the legislative requirements to qualify as a relevant life policy.
The employer (as the settlor of the trust, known as the Principal Employer) will be a trustee. An additional trustee must be added to act with the employer. If the employee is to be the additional trustee,a further additional trustee should also be added to ensure that there would be two trustees available to act in the event of the employee’s death.
In addition to our administrative requirement that an additional trustee must be added when the trust is created, the trust requires there to be at least two trustees at all times, unless a corporate body is a trustee. An additional trustee may be a family member of the employee, such as a spouse, or perhaps an independent trustee, such as a solicitor.
The employee has power under the trust to change the trustees. Benefits are paid at the discretion of the trustees, who will decide which discretionary beneficiaries receive funds, when to pay and what amounts. It is possible for the employee to guide the trustees in their decision making and a nomination form is included in the trust to enable the employee to express their wishes. The nomination form does not bind the trustees, though it will usually be followed by them in making their decision.
: The trust includes a wide class of potential beneficiaries, known as discretionary beneficiaries. This includes the employee’s spouse, children and grandchildren.
The employee is also included as a discretionary beneficiary, to allow the trustees to assign the plan to the employee if he leaves the business. It is not recommended that the employer or a co-shareholder be added as a discretionary beneficiary (unless they are also a spouse or civil partner) as this may compromise the tax benefits of the plan.