The Family Business: Death-in-service schemes for family businesses

You are an owner and maybe a director, but are you also a trustee? You may be one for your business death-in-service scheme.

As a family business owner, it is likely you offer a death in-service benefit. Typically this entitles an employee to a lump sum payment to their beneficiaries if they pass away while in active service. So, in addition to your business responsibilities, you may also be a trustee of this scheme.

A typical scheme

The most common scheme is a death-in-service lump sum payment. This is normally restricted to a group of potential beneficiaries and held under a discretionary trust arrangement outside the deceased employee’s estate. The amount is usually calculated by reference to a multiple of the employee’s earnings or salary and possibly length of service, and is often insured through a separate insurance policy.

What does it mean to be a trustee?

As a trustee, you have fiduciary duties of acting honestly and in good faith, as well as duties of care and skill in the administration of the scheme. You will need to act with prudence, in accordance with the scheme rules and in the best interests of the beneficiaries. You have a duty to be familiar with the terms of the trust and take advice on technical and investment matters.

If you breach your duty of care and skill and cause the scheme to suffer loss, then you may be liable to pay compensation. The Pensions Ombudsman has made a number of determinations on the issue of such benefits, so it is important that trustees follow a sensible and properly organised approach for the administration of the scheme and their decision-making.

Who are the beneficiaries?

If an employee sadly passes away, then the lump sum remains under the overall discretionary trust. As a trustee you are under a duty to ascertain the objects of your discretion and so you should consider the scheme’s trust deed and the rules. You should identify and make an accurate assessment of the range of potential beneficiaries.

It is important to consider any nomination the employee made and establish whether they made a Will, as the contents of these will give significant guidance as to who should benefit.

Matters will often be fairly straightforward, but more complex situations can arise and in such cases it will be necessary for trustees to make more extensive enquiries. It will be important for example to liaise with the deceased member’s immediate family and friends, their solicitor, colleagues and HR personnel at any former place of work, as well as using any personal knowledge that the trustees have. Sometimes there may be times where the information is conflicting and it can be necessary to request sworn statements and/or documentary evidence.

How to benefit them?

Once the beneficiaries have been identified, the trustees have to use their discretion to decide how the lump sum should be paid. They may pay everything to one beneficiary or distribute it equally or unequally between a number of beneficiaries, but they must not take into account any relevant irrational or improper factors in doing so.

With regard to beneficiaries, they need to consider factors such as financial status, relevant circumstances such as age and needs, whether they were nominated and so on. Care should be taken if it appears the deceased made an unusual or bizarre nomination.

There are potentially complex tax issues too, which are beyond the scope of this article, but they are of course another matter to be carefully considered.

If children have been nominated, then you will need to make a decision about how to apply their benefit to them in their best interests. It may be sensible to consider a trust and there are a variety of appropriate trusts and professional advice should be taken.

What should you do now?

If you are a trustee of a scheme, we can help with making sure everything is reviewed and properly in place. We can also advise you should any payment sadly fall due under the scheme. Please contact our Family Owned Businesses Team for more information on death-in-service schemes.