Death-in-Service benefits – what are your duties as a Trustee when a claim is made?
Many employers offer senior employees Death-in-Service as part of their competitive package of benefits. Typically this entitles the employee to a lump sum payment to the employee's beneficiaries if the employee passes away whilst still in active service for the company. Whilst the benefit is common place, not many employers understand what their obligations as Trustees are or what to do when a claim is made. In this guide we take a closer look at this benefit, the duties it creates for Trustees and steps to take when a claim is made.
What is a Death-in-Service Benefit?
Death-in-Service benefits are a discretional entitlement considered by the Trustees of a company which would be included in the employment contracts of senior employees of that company.
This entitlement sets up a trust of a tax free lump sum figure that would be payable to the employee's beneficiary or beneficiaries should that employee pass away whilst still in active service with that company. The lump sum figure is generally equivalent to 3 or 4 times the employee's salary and the specifics of such payment would be detailed within the employment contract.
The Trustees exercise their own powers and discretion to apply this benefit. The Trustees are usually senior members of the company e.g. board members and/or directors. However, because claims of this nature against the benefit are rare, many Trustees are not aware of their obligations.
Who are the Deceased's Beneficiaries?
The definition of a 'beneficiary' for the purposes of these benefits is often determined by the Benefits Scheme of the company in particular. Generally, the term 'beneficiary' of the deceased is wide and will include:any person who is a close relative;anyone financially dependent to any extent on the deceased;anybody who has been named in the Expression of Wishes form; andco-habiting relationships due to some form of dependency.
The Expression of Wishes form is a document that allows an employee to specifically nominate a beneficiary or beneficiaries to receive such benefit should it be applied. It should be clear that this document is not binding upon the Trustees and is just one consideration of such claims.
Does this Benefit attract Inheritance Tax?
A common question we're asked is 'Does death in service benefit form part of an estate?'. As this benefit sets up a trust, the lump sum payable does not form part of the deceased's estate and does not attract Inheritance Tax for that reason; it is instead a discretional payment considered by the Trustees of the company. Although the Trustees have the full discretion to make any decision they see fit when considering these claims, it is important that the Trustees are considering all aspects of the claim, which would include the deceased's personal circumstances and family.
What happens if a claim is made and how can we help?
If a claim is made, Trustees will need to review the documents to determine eligibility for payment. At Foot Anstey, our team can assist Trustees with the assessment process of the claims received from family members regarding a deceased employee. Typically this involves:
- Reviewing the contract and employment paperwork specific to the deceased employee.
- Confirming the entitlement of the deceased in light of the employment contract and pension policy taking into consideration:
- the Expression of Wishes;
- any Will that is in place;
- the likely Intestacy rules with regards to this specific deceased; and
- any other relevant information.
- Making contact with the chosen beneficiary or beneficiaries directly to confirm the decision and collecting the necessary bank/payment details and relevant identification.
- Carrying out bankruptcy searches on each beneficiary for payment of the benefit.
It should be noted that the Death-In-Service is a discretional payment and is outside of the administration of the estate for Inheritance Tax purposes. Therefore, any information supplied regarding the Will, Intestacy, Expression of Wishes, and other relevant information is to assist the Trustees only in using their own discretion to make a decision. Trustees need to make their discretionary decision themselves and legal advisors cannot advise the Trustees of the decision to make.
We have also been reviewing the documents and procedures currently in use by companies in relation to Death-in-Service benefits to advise on any appropriate adjustments to the paperwork and policies for maximum protection for the Company.