Under our Declaration of Trust for a relevant life policy, what are the options when the employee leaves the employment of the employer funding the policy?21 October 2016
There are three options:
1. The employee could choose to let the policy lapse, or
2. The life policy could be maintained by the employee personally. However, under the terms of the policy, the terminal illness cover will terminate.
When the employee changes jobs, they'd normally take over the payment of the premiums personally. If their former employer were to continue to meet the premiums, there would be tax implications to consider.
The employee could decide to leave the policy within the Declaration of Trust for a relevant life policy for the benefit of the discretionary beneficiaries. A Deed of removal of beneficiary would have to be completed if the IHT benefits of the trust arrangement are to continue. When the employee pays the premiums, they'll be deemed to be a settlor of the trust and therefore there will be gift with reservation of benefit implications if they remain as a beneficiary under the trust. The ongoing payment of the premiums by the employee may be covered by an IHT exemption such as normal expenditure out of income. To the extent they're not, they'll be chargeable lifetime transfers. In this situation, if the employee’s new employer wants to pay the premiums, the policy could still qualify as a relevant life policy.
Alternatively, the trustees could complete a Deed of Assignment and transfer the ownership of the policy to the employee so that they can use it for their own personal use eg as security for a loan. Or,
3. The employee's new employer could pay the premiums to maintain the policy under the Declaration of Trust for a relevant life policy.