In this article we address the tricky topic of death benefits. A morbid subject perhaps but when nothing is surer than death and taxes, employers, trustees and employees need to be prepared.
Lump sum death benefits are paid out from trust schemes – either occupational pension schemes or death benefit only schemes. Provided they are paid on the exercise of a discretion by trustees they are generally exempt from inheritance tax. Payment of these benefits is straightforward in uncomplicated cases, however, many situations are more complicated than first appear.
As well as the payment process itself, problems arise where insurance doesn't quite match the promised benefits or are held by the wrong person - quite commonly insurance is held in the name of the employing company when it should be the trustees of the scheme.
Our recommendations
1. Carry out a check of the insurance policy terms and cover and make sure it matches the benefits which need to be paid. The benefits may be in employment contracts and under the pension or group life scheme wording.
2. If you already have a collation of information and payment system in place for death benefits, is it still fit for purpose?
3. If you don't have an information gathering and payment system in place – as a minimum the following should be in place:
• a death benefits pack for the trustees (or those to whom they have formally delegated authority to deal) –death certificates for the members (and a will if available) and birth and marriage certificates for potential recipients are critical.
• details of the promised benefits, the insurance policy cover and a list of potential recipients of death benefits
• a comprehensive checklist of information which needs to be gathered and reviewed before payment is made – evidence is key to avoid making incorrect payments! A will, family report, bank statements to name a few.
• where members have young families it may be possible to pay benefits to separate trustees on their behalf (worthwhile including in scheme documentation) – make sure only the beneficiaries who are entitled can access benefits from the trust.
• sufficient time built into the timetable to allow proper consideration of all facts before payment.
4. Check data requirements for holding personal data for potential beneficiaries are met at all times.
Complicated family arrangements with a number of people having competing interests in the member's estate and death benefits are not unusual. Having a rigorous process will avoid those competing interests becoming claims by potential beneficiaries who have been overlooked.