Benjamin Franklin said that in this world nothing is certain except death and taxes. Trustees of pension plans and death-in-service trusts often find themselves managing both – often at the same time.
When a member dies, the trustees should check whether a lump sum death benefit is payable and, if so, who should receive it. They must act quickly, but be sure to act sensibly. A mistake can lead to disputes with potential beneficiaries, as well as negative tax treatment. We’ve outlined four simple steps to help trustees make decisions with confidence.
1. Check the program rules
The first step is to check the rules of the diet. Is a death benefit payable? What is the extent of the discretionary power of the trustees? What categories of people can be taken into consideration? Are there time limits or other restrictions on the payment of death benefits? Do the current rules apply or are previous sets of rules relevant? If you have questions about how a plan’s rules should be interpreted in a particular case, seek advice.
2. Educate yourself properly
Once the trustees have determined which categories of people are eligible to receive a lump sum death benefit, they need to find out which people fall into those categories. There is no hard and fast rule as to who trustees should contact for information, but the list might look like this:
- The person who notified the Trustees of the member’s death.
- Next of kin, if different.
- The executor of their estate, if different.
- The lawyer appointed by the member or his family.
- The member’s family, friends, co-workers or even the trustees themselves.
Generally, trustees will want to collect at least the following information, depending on the member’s circumstances:
- application/expression of wishes form;
- details of the member’s will;
- death certificate;
- marriage certificate or proof of civil partnership;
- divorce decree or proof of dissolution of the civil partnership;
- birth certificate of spouse, children or other dependents;
- proof of financial or other dependence; and
- details of the member’s family and personal circumstances from reputable sources.
The definition of eligible beneficiaries in a set of plan rules can be very broad and cover a wide range of people. Trustees are not obligated to compile an exhaustive list of all possible beneficiaries within a class, or of all possible classes of beneficiaries. However, they are required to gather enough information and evidence to allow them to assess the position and get a clear picture of the member’s situation.
3. Consider the information collected
Members might think that by filling out an expression of will form, they can choose who will receive a lump sum in the event of death. In reality, while the administrators will certainly take this into account, it is only a snapshot of the member’s wishes at any given time. Trustees should consider the whole situation, including any changes in circumstances since the form was completed.
Similarly, a member’s will does not bind the trustees. This can help guide directors in exercising their discretion, but directors can also choose to distribute a lump sum in an entirely different way.
Trustees must assess the needs of each potential beneficiary – financial, educational or personal. Were they financially dependent on the member? Were they dependent for other needs because of their age or disability?
When there is a complex family situation, trustees must take extra care to establish and understand all the facts. They may need to review information from a number of different sources and use their judgment to determine which information is most reliable.
4. Use discretion
Once the trustees have checked the rules, gathered information about the member’s situation, and reviewed all the evidence, it’s time to make a decision. In doing so, trustees must act reasonably, consider all relevant circumstances, and beware of a number of potential pitfalls:
- Delegation: Some trustees choose to delegate death benefit decisions to a committee. If applicable, it should be ensured that there is a power to delegate under the rules of the plan and that it has been properly exercised.
- Conflicts of interest: if a fiduciary personally knows the member or any potential beneficiary, he must consider whether he can act impartially. In most cases, the safest course would be for a trustee with personal involvement to refrain from taking part in the decision.
- Irrelevant factors: directors should put aside their own political, religious or moral opinions or prejudices.
- Record keeping: decisions must be fully recorded, including the reasons for the decision and the factors that influenced the administrators (and those that did not influence). Although there is no obligation in trust law to give reasons for a decision, the Pensions Ombudsman places a greater burden on trustees to explain their decision-making process to complainants.
- Hourly: Certain plan rules impose a strict two-year limit on the payment of death benefits. Other rules are silent, but taking more than two years can have negative tax consequences for death benefits paid out since 2016. Trustees must act quickly in the event of death or risk beneficiary complaints. If they are nearing the end of the two-year period or have passed it, they should seek advice.
If in doubt…
There are countless pension ombudsman complaints on file regarding the improper or improper exercise of discretion to pay lump sum death benefits. This is an area where trustees must exercise judgment, often in complex circumstances, and make decisions that can significantly affect people’s financial futures. If trustees are in any doubt about the rules of their plan or how to exercise their discretion in a particular case, they should seek advice.