31 March 2017
Unfortunately, it is only human nature to give little thought to the possibility of meeting an untimely end. But forward-thinking employers should be encouraging employees to take some straightforward steps to check that, should such a dreaded scenario occur, their estates pass to their intended beneficiaries and do so in as prompt and tax-efficient manner as possible.
Offering employees access to a will writing service is certainly one of these. According to recent Prudential and Unbiased.co.uk research, 59% of UK adults don’t have a will. Even amongst the over 55’s the proportion is 36%.
Ensuring that employees have completed and updated the nomination forms on their group life assurance schemes is another very important step. Completing such a form should enable the lump sum death benefit to be paid to the employee’s intended beneficiary or beneficiaries by the scheme trustee – which would normally be the employer or, in the case of a master trust, the provider.
Although it is not actually legally binding for the trustee to follow the instructions on the nomination form, they will give every consideration to the wishes expressed there and is only likely to depart from these if there are unusual circumstances. For example, if an employee has been divorced and has not updated their nomination then the trustee must use its own discretion.
If an employee forgets to fill in the nomination form it is not necessarily the end of the world as the trustee could very well end up identifying the right beneficiary or beneficiaries, especially if a will has been made. But the process will be much more time consuming and complex as the trustee will have to do a lot of work with the personal representative of the deceased’s estate to find out who should be considered suitable beneficiaries.
If a situation is very complicated such due diligence can take as long as one or two years. But, even if it takes a lot less, any delays are worth avoiding at a time that is likely to be unpleasant enough as it is.
Completing the nomination form will also ensure that the lump sum death benefit remains outside the employee’s estate, which is important both for bypassing time-consuming probate procedures and for avoiding or minimising Inheritance Tax (IHT) liabilities.
IHT is being made less punitive this April for homeowners through the addition of a £100,000 “residence nil rate band” (rising by £25,000 each tax year until reaching £175,000 in 2020/21). So a single employee can soon be exempt on the first £425,000 of their estate (£325,000 nil rate band + £100,000 residential nil rate band) and those who are married or in civil partnerships can be exempt on the first £850,000.
Nevertheless, with even relatively modest homes in certain areas now often worth in the region of half a million pounds, someone enjoying four-times-salary life cover on a decent salary could easily create a significant IHT liability if the lump sum death benefit payment formed part of their estate.
Trustees will always look to pay lump sum death benefits outside the estate if possible but in the absence of a nomination form there are circumstances in which they might not be able to do so.
It is therefore good practice for employers to encourage employees to fill in nomination forms at outset and to review them annually in case their circumstances change, because having an out-of-date form is next to useless. I’ve certainly come across employees leaving their death benefits to a relatively short-term partner but forgetting to update their nomination when entering a new relationship.
Additionally, employers – unless they are using master trusts – should ensure that they fully understand the roles and responsibilities they have as trustees in terms of accessing and paying benefits from a group life scheme. Fatalities tend to occur at times when they are least expected, so it is important to be fully prepared for such eventualities.
If you would like any advice on the responsibilities you have as a trustee or on dealing with group life nomination forms or offering will writing services then please do not hesitate to contact Chase de Vere on 0345 300 6256.
The Financial Conduct Authority does not regulate Will Writing or Estate Planning.