Pilot trusts are helpful if you are concerned about the safety of your family after you pass away or if you want to make sure that as many of your assets as possible go to the people you care about rather than HMRC.
If so, then you should consider the use of a pilot trust in your financial and estate planning arrangements. You can establish these trusts in your lifetime and pay only a nominal amount initially to establish them. This provides immense flexibility and allows you to make further contributions to the trusts you establish at a time and date that are convenient to you.
What is a Pilot Trust?
A pilot trust, also known as a ‘family trust’, is a legal arrangement where assets are held by trustees for the benefit of beneficiaries. They have been used as an estate planning tool for decades.
Trusts cannot exist without assets, but the flexibility of using a ‘pilot trust’ is that it is possible to establish one using only a nominal amount. In the past, a low-value premium bond was used, but these days, a £10 note is attached to the trust deed.
Unlike a will trust, which is established at death, pilot trusts are established in your lifetime. Not surprisingly, they are referred to as lifetime settlements, but that does not mean they end when you die. The Law of Perpetuity governs the duration (or lifetime) of a pilot trust. This has changed over the years; it is now 125 years from the date the trust was established.
It may suit your circumstances to not make any further contributions in your lifetime and allow your will to direct assets from your estate into one or more pilot trusts. The assets in the trusts are safeguarded by the trustees you have appointed, – helpful if your children were to inherit at a young age (no Ferraris around lampposts) and would prove beneficial if any of the beneficiaries were to divorce or fail at a business venture.
Who should you appoint as trustees?
The selection of trustees is a critical step, as they must be reliable, trustworthy, and capable of managing financial matters effectively. Professional trustees will require payment of annual fees, and that can prove expensive in the long term. So, we prefer to use family members wherever possible.
The benefits of a pilot trust
Pilot trusts offer several advantages, which include means of control over how assets are distributed and, if used in conjunction with inheritance tax planning, provide significant tax benefits. Here are 8 reasons you should consider their inclusion in your financial planning:
- Avoids lump sums directly going into the survivor’s estate: It prevents the value of the lump sum payment from being received into the survivor’s estate.
- Asset Protection: In essence, the assets in the trust are protected from the changing circumstances or whims of any of the potential beneficiaries.
- Tax Benefits: If the payment is not in the survivor’s estate, then under normal circumstances it will not be taxed on the death of the survivor as part of his or her estate.
- Long-Term Care Assessment Protection: As the trust is discretionary, there is no absolute benefit to the beneficiary; therefore, the capital is protected from assessment for long-term care.
- Protection from Future Relationships: Should the survivor remarry, the new partner has no right to the assets of the trusts; only the potential beneficiaries do (subject to trustee discretion).
- Bankruptcy Protection: Depending on the circumstances, trust assets would normally be protected from creditors. (Unless this was done to deliberately deprive creditors after a debt was known to exist.)
- Divorce Protection: The trust assets are, in general, protected from any divorce proceedings by the beneficiaries.
- Flexibility and Inheritance Tax Planning: Flexibility in the trust for payments and loans to be made may assist with inheritance tax planning for beneficiaries.
Can I use a pilot trust for my pension?
Before you consider taking this step, take advice. The Finance Act 2015 provided an extremely flexible route for your beneficiaries by way of a nomination form. It is very important to word the nomination form correctly for the best effect.
There are circumstances in which a pilot trust can be helpful (see my article on Asset Preservation Trusts).
Expert, Professional Advice
Establishing a pilot trust can be complex, and seeking professional advice is highly recommended. We can provide the guidance you need to ensure the security of your family and can combine that with inheritance tax planning if requested.
How Much Do Pilot Trusts Cost?
The cost of setting up a pilot trust can vary depending on the complexity of the arrangement and the professional fees involved. While there may be initial costs in establishing the trust, the long-term financial benefits, such as tax savings, often outweigh these expenses. Comparatively, pilot trusts can be a more cost-effective solution than other estate planning tools.
Do pilot trusts have to be registered?
Broadly, all UK resident trusts and some non-UK resident trusts will have to be registered with the Trustee Registration Scheme unless they are included in the list of “excluded trusts”. Make sure you check the list of excluded trusts, including “pilot’ trusts. It does not apply to those created before October 6, 2020, and where the value of the property held by the trust is less than £100.
Conclusion
Pilot trusts offer control, tax benefits, and protection of assets. With careful planning and expert advice, pilot trusts can be an invaluable part of securing your financial legacy.
Reference:
Finance (No. 2) Act 2015 – SDA’s
Finance Act 2015: Pension Freedoms
CIR v Rysaffe Trustee Company (CI) Ltd [2003] STC 536 is concerned with the creation of a number of pilot trusts on different days.
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Ray Best
Like his academic development, writing came late to Ray. He has written several published works, “Inheritance Tax Planning – My Way” and “Shareholder Protection & Partnership Protection” and has had four feature articles published in Tax Adviser magazine, but the publication he is most noted for is the joint collaboration with Tony Granger “Inheritance Tax Simplified”.
