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Relevant Life Cover

Discretionary trust

All Relevant Life policies must be written into a discretionary trust. Unlike most other types of trust, discretionary trusts offer flexibility if a new discretionary beneficiary needs to be added at any point. If circumstances change it can be altered by the trustees to make sure it’s still effective.

When a discretionary trust is set up, the employee will name all of the people that may want to benefit from it in the future. This can be specific people or groups (such as children or grandchildren). The employee can use a nomination form to specify how they’d like the assets to be split. However, the trustees can decide if they want to follow these instructions or not.

This information is about our discretionary trust for Relevant life Cover. For other types of trusts, please visit our trusts section.

Discretionary trust questions

Click on the question to read more.

About the trust

When can a discretionary trust be used?

You'd normally use a discretionary trust if flexibility is needed to add new discretionary beneficiaries to the trust.

The trustees have the power to choose which of the discretionary beneficiaries will benefit, and how much they'll get. For this reason trustees must be selected carefully to make fair and reasonable decisions about who should benefit from the trust. For this reason, a discretionary trust isn't for everyone.

For Relevant Life Cover to be valid, it must be placed into trust at the outset.

What should be placed into trust?

Anything can be put into discretionary trust, but our discretionary trust forms are designed specifically for use with the LV= Relevant Life Cover. Nothing else can be put into it.

Who controls the assets?

Once something is put into trust it's owned by the trustees. The employer who takes out Relevant Life Cover is automatically included as a trustee, but if their employee (the member) wants to keep some control over what happens to the contents of the trust, they should appoint themselves as a trustee.

How many trustees should there be?

If all the trustees die before the trust contents are paid out, there could be a delay in getting the money quickly to the people who need it. So it makes sense to appoint at least two trustees. For Relevant Life Cover, the principle employer will automatically become a trustee when the trust starts. At least two other people should be appointed as well.

What changes can the trustees make to the trust?

The trustees can choose which of the discretionary beneficiaries will benefit from the trust assets, and how much they’ll receive. The employee can let the trustees know who they’d like to benefit by completing a nomination form.

However the trustees don’t have to follow their wishes. The employee can change their nomination at any time by making a new one. If they do this, they must let the trustees know. The advantage of giving trustees the power to choose who will benefit is that if circumstances change, the trust can be altered to make sure it’s still effective.

The trustees can be changed with permission from all the trustees. This trust also gives the employee the power to change trustees, even if they are not a trustee themselves.

When can trustees make changes to the trust?

The trustees can make changes to the trust at any time during the employee's lifetime, or after the member’s death.

What happens if the employee no longer works for my client?

If Relevant Life Cover is gifted into trust and the employee leaves employment there are three options:

  1. Cancel the plan and the trust will end. Please remember that if the plan ends, there's nothing to pay back.
  2. The employee can continue their cover under a new plan and get their new employer to complete a new trust form.
  3. The member can continue their cover on a personal life insurance basis however it won’t be eligible for tax relief.

If the member wishes to take over the plan with a new employer, they'll need to let us know within 90 days of leaving your client's employer.

About taxation

This explanation of trusts and taxation is based on our current understanding of legislation. Please remember that this could change and taxation always depends on your client's personal circumstances.

Will inheritance tax apply?

The lump sum paid out on death will not be included in the member’s estate for inheritance tax planning purposes.

However, there are some situations in which there could be some inheritance tax to pay on the assets held in trust.

  • A periodic charge may apply from the 10th anniversary the trust was created.
  • An exit charge may apply when anything is paid out from the trust.

These charges are based on the value of the trust assets at the time. They’re unlikely to apply unless the lump sum paid out on death is held within the trust rather than being distributed straight away.

Is inheritance tax payable when trustees change beneficiaries?

No, there isn't.

Is there any inheritance tax to pay if the beneficiary dies?

No, as the trust assets aren’t legally owned by any of the beneficiaries. So if money hasn’t been paid out from the trust, it won’t be included in any beneficiary’s estate when they die.

Who's responsible for paying the inheritance tax?

Normally, the trustees are responsible. They can use the trust contents to pay it.

Can Scottish clients use a discretionary trust?

Yes, they can. Scots law will apply to this trust if the address of the principle employer who takes out Relevant Life Cover on their employee is in Scotland when the trust is created.

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