Employers who offer group life cover to employees, making a lump sum available to a bereaved family, do so for a number of reasons. Demonstrating you care as an employer is certainly one, and providing a benefit that offers generous tax relief on premiums is another, but it’s also important to consider what needs to happen if one of your employees who is in the scheme dies.
This is where the scheme trustees, who will normally be senior people in companies who have taken on this additional role, comes to the fore. It is their responsibility to determine how lump sums paid out by the scheme’s insurer are to be distributed.
Often distributing benefits is as simple as it seems; if the deceased employee leaves behind a spouse or partner and children, it’s usually them who will receive the benefits provided by the scheme.
But what about more complex personal lives and situations? The late employee may have had children by more than one marriage or outside of the marriage. Or the employee may have died without leaving any obvious beneficiaries. When this happens, it’s the role of the trustee to decide upon the most equitable distribution of the benefit. And it can get complicated.
Of course, your first role as a trustee is to establish who may have a reasonable entitlement to the benefit. This is made more straightforward if employees are encouraged, as a matter of course, to complete a ‘nomination of beneficiary’ form (also known as an ‘expression of wish’) that names the people they would like to benefit and the proportions each person should receive. This is often done when employees join a scheme but almost as often then left alone. The result, if they’re not regularly reviewed, is that an employee’s wishes at the time of their death are completely out of line with what they would have actually wanted.
Although you may know someone as your colleague or employee, there’s no saying that you have any knowledge of their family or personal circumstances. This makes nominations of beneficiaries particularly valuable, because without them you start with a blank piece of paper when trying to establish who the beneficiaries should be. Even if you have a deceased member’s nomination, it’s important to realise that as a trustee, you’re not legally bound to distribute the benefits in accordance with their wishes. Group life schemes are set up under discretionary trusts, and the ‘discretionary’ bit relates to the trustees’ absolute right to exercise their discretion in determining who should benefit according to the scheme’s rules.
You may need to use your discretion if parties emerge who have valid claims of financial dependency on the deceased member of staff. Even if all the possible beneficiaries are known, there may be arguments among them regarding their relative entitlements. When this happens, it’s up to you, the trustee, to unravel the rival claims and do what you think is right.
A recent alternative to taking on the role of trustee and the responsibilities that go with it is a Master Trust as offered by many group life insurers and designed to accommodate a variety of schemes. They’re run by professional trustee firms with a wealth of experience, who also provide useful objectivity in settling on how best to distribute scheme benefits.
Whether you decide to use a Master Trust or set up your own trust and appoint your own trustees, being prepared before a death occurs so that benefits can be distributed quickly to families who may be in sore need of them is important. So encourage your staff to nominate their beneficiaries.
And, if you’re running your own trust, make sure it has a bank account ready to receive your insurer’s payments.
Although nobody really likes thinking about their own mortality, it is better to spend a little time on some basic preparation than being unready if a death occurs and adding to the pressure on families already suffering bereavement.