Many employers run their own group life trusts, dealing with death in service claims in house. Whilst this arrangement can work, there are six common mistakes that employers need to avoid to ensure they run effectively.

Not keeping the trust documentation up to date

If you set up your group life trust some time ago, it may not reflect any changes in relevant tax and trust legislation that have since been introduced. This creates a risk that the trustees might not be operating in line with up-to-date tax and trust legislation.

Using a group life master trust means that the monitoring of legislation, and adaptation to it, is dealt with by the trustee of the master trust.

Not having a segregated bank account

Imagine you, the employer, are processing the first claim from your own-trust death in service scheme. You ask the insurer to pay you the lump sum so that you can pay the beneficiary(ies) as agreed by the Trustees. However, the insurer says it cannot payout to an employer and insists the insured lump sum is paid into a segregated trustee bank account – which does not exist!

Death in service insurers usually will only pay proceeds into a segregated account or directly to the beneficiary(ies).  If you need to set one up, the process of identifying a suitable bank, then going through the account opening and anti-money laundering process takes time. This could delay the payment of death lump sums, creating financial issues for the beneficiaries.

Joining a master trust removes the need to set up your own segregated account or make sure things like signatories are kept up to date.

Inappropriate discussions with potential beneficiaries

Individuals often mistakenly believe that the proceeds from a group life policy held under trust are automatically paid to the next of kin, or in line with the deceased wishes (as set out in an Expression of Wish form). Employers shouldn’t give potential beneficiaries the impression that they will definitely receive a certain amount of money

Potential beneficiaries may press for information about any amounts to be paid out, often for very valid reasons. But it’s important to be clear that the trustees will only decide who will receive any amount payable after a full investigation of the deceased member’s circumstances.

Details of the amount and timing of any lump sum should not be disclosed until the insured amount has been received from the insurer, and the trustees have made a documented decision. Even then, relevant information should only be given to the actual beneficiary(ies) about their share of the lump sum.

Not following appropriate decision making process

Courts and/or an ombudsman will not typically overturn a trustee decision as long as it is not perverse (i.e. one that no reasonable trustee would have reached) but, can ask for a decision to be looked at again if due process was not followed. So, it is important that the decision on the beneficiary(ies) of a death lump sum:

• Is made by the right people – by the trustees or in line with an appropriately documented delegation.
• Is in accordance with the trustees’ powers as set out in the trust deed governing the life assurance scheme.
• Takes into account all relevant (and no irrelevant) factors – this includes identifying all potential beneficiaries and their relationship with the deceased.
• Is documented appropriately.

Not undertaking a thorough investigation of the circumstances

If a member of a life assurance scheme has died and left an Expression of Wish form, it’s important to take those wishes into account. However, any amount due should not be automatically paid out in line with that form. When deciding on the appropriate beneficiaries, a full investigation of the surrounding circumstances should be made. This includes:

• Making sure all potential beneficiaries are identified (within reason) – this might mean asking the deceased’s HR/line manager to confirm their understanding of the deceased’s personal circumstances and if they are aware of any matters that the trustees should take into account.
• Asking for a copy of the deceased’s will.
• Not assuming that information provided by a family member in an information gathering questionnaire is full and complete – in some circumstances it might be appropriate to make wider enquiries or ask someone else to also complete the form.

If there is an expression of wish form, investigating and judging the extent to which the deceased’s circumstances has changed since it was completed (e.g. relationship status, birth of any children, change in relationship with nominees) is crucial.

No HMRC registration

Registered group life schemes must be registered with HMRC as they fall within the pensions taxation regime, even though they typically only pay death lump sums. Failure to register the scheme with HMRC could have tax implications for the employer and any beneficiaries receiving payment from the scheme. Additionally, the Trustees must notify HMRC of some payments in some circumstances and this could be missed.

If you’d like to discuss the benefits of moving to a master trust for your death in service arrangements, why not get in touch with Shaun or the life assurance trustee services team.