The use of pilot trusts in estate planning is a simple, yet often overlooked, method of passing assets on to chosen beneficiaries more effectively and minimising the on-going taxation implications.
Pilot trusts are often seen as vehicles for receiving death in service benefits or insurance policies to avoid these payments being made directly to a surviving spouse and therefore forming part of their taxable estate on death (while allowing them access to the funds as a beneficiary during their lifetime).
It is becoming more common for people who do not have such policies to still create a, or several, pilot trusts to receive their estate on death. The settlor creates the discretionary lifetime settlements with a nominal amount of cash (normally £10) with the intention that further assets are left to the trust under the terms of their Will.
This is particularly useful where the funds that will be left by the Will are in excess of the nil rate band. If this is the case a number of trusts are created during the settlor’s lifetime to each receive a sum below the nil rate band and allowing for growth of the assets. The trusts are set up on different dates to avoid them being classed as ‘related settlements’ under the Inheritance Tax Act. By doing this you ensure that each trust will then have its own nil rate band and will not be subject to on-going anniversary and exit charges to IHT.
If a testator did not create the trusts during his lifetime and instead just left his estate to one, or a number of trusts created under the terms of the Will, the trusts would be classed as related settlements and there may be substantial IHT anniversary charges. This is because the trusts would be created on the same day, the date of death.
The amount of IHT payable on a discretionary trust’s ten year anniversary depends on three factors:
• The cumulative total of the settlor at the date of creation (ie how much he has already given away in a seven year period)
• The value of assets after creation in any related settlements
• The value of the assets in the trust before the anniversary
Because the amount transferred into each pilot trust on creation is a nominal fee (£10) the cumulative total transferred should fall within the settlor’s annual exemption.
Pilot Trusts can be set up easily and quickly and it can be done at the same time as a Testator drafts their Will.
HMRC will need to be notified of the trust’s existence but whilst the property in the settlement is comprised of cash below £1000 and all the trustees are UK resident, no further Inheritance Tax returns will need to be submitted. The Pilot Trust documents can therefore be stored with the settlor’s Will until such time as it is needed.
