Pilot Trusts

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    Note: As of December 2013 Pilot Trusts are no longer useable as a tax planning tool due to new legislation.

    A pilot trust is a simple discretionary trust. It is set up during your lifetime, usually with a nominal start up fund, for example £10. The trust deed then remains with your will, and the trust lies dormant until it is needed to receive funds ……..


    Why might a pilot trust be needed?

    Any assets can be placed into a pilot trust. However, the most common and beneficial are cash lump sums such as death in service benefits. Therefore, if you have any such schemes that will produce a lump sum payment on death, a pilot trust could be highly tax effective.

    How does a pilot trust work?

    With most death in service schemes, a nomination can be given as to where the funds should be directed. Therefore, instead of nominating a specific person such as a spouse, the pilot trust is nominated. The funds move straight into the trust where they can be dealt with by whoever you have chosen to be trustees. You choose who can benefit from the trust – beneficiaries can include your spouse, children, grandchildren and anyone else you would like to include.

    Why is a pilot trust beneficial?

    Pilot trusts have numerous benefits, for example:

    ● Death in service benefits usually pass to a surviving spouse, and are then taxable on the death of that spouse. Funds in a pilot trust will not form part of the surviving spouse’s estate and will therefore not be liable to inheritance tax on their death.

    ● As a pilot trust is a discretionary trust, the funds can be made available to named beneficiaries. A spouse can be named as a beneficiary and can therefore still benefit, both from income and capital. Provided the trust has been written with the appropriate powers, money can even be loaned to the spouse which can then be recalled as a debt on the second death, reducing the inheritance tax liability on the spouse’s estate.

    ● Pilot trusts also provide more flexibility due to their discretionary nature. Instead of passing straight into a specific person’s estate, the funds can be distributed to a number of different beneficiaries.

    ● Funds will pass outside the settlor’s estate, and are readily available without the need for probate.

    ● **The trust, although subject to its own ongoing tax regime, has its own nil rate band (currently £325,000).
    Therefore keeping the trust fund below this figure will minimise tax. If the funds to pass are substantially more than this, a number of trusts can be set up, provided they are set up on different days to ensure they are not ‘related settlements’.

    How is a pilot trust set up?

    Pilot trusts are simple to set up. They are set up by a trust deed being drafted, and the settlor then gifts a small amount of cash, for example £10, to the trust which is often stapled to the trust deed itself. The trust is effective from that point onwards, for a maximum of 125 years. As the trust is not income producing at this stage HMRC do not have to be informed.

    **NOTE: that in May 2013 HMRC launched a consultation document proposing a change to the rules on multiple trusts with regards to the £325,000 nil-rate IHT allowance and how it applies to the 10 yearly 6% charge.

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    Matt Walkden Will Writer

    About Matt Walkden

    I am a Professional Will Writer and I offer a small number of other products that complement my Will Writing such as Lasting Power of Attorneys (LPA’s), Fixed Price Estate Administration, often called Probate and some Property Products such as changing a family home from Joint owners to Tenants in Common.

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