Setting up a Pilot Trust is often done for tax planning purposes and is set up with a small amount of cash with the intention of further assets being placed in it at a future date.

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What Is A Pilot Trust?

A Pilot Trust is a trust (usually discretionary) set up in a person’s lifetime to receive further assets at a later date.

Pilot Trusts are often set up as “spousal bypass trusts” to receive lump sum pension payments and/or death in service benefits. It is established with a nominal sum i.e. £50.00. Very simply this is a trust which is very flexible.

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A list of potential beneficiaries is included within the trust which may include the widow/widower, surviving civil partner, children, grandchildren and so on. These beneficiaries are not guaranteed to benefit from the trust as it is a decision for the trustees as to who benefits, when they benefit and in what proportion.

A letter of wishes is usually drawn up to assist these trustees in making their decisions. The trust will sit dormant until such time as the settlor (the person making the trust) either adds assets or dies and the lump sum payments are made to the trust. When a Pilot Trust is established to receive lump sum death benefits the scheme provider is notified and a nomination is completed requesting that any future payment is paid directly to the trust.

Who Are The Trustees?

When the trust is established two or more trustees need to be appointed. They are often members of the family or friends. A professional may be appointed but they can charge for the work that they undertake.

The benefits of a Pilot Trust

In essence, all of the assets in the trust are protected from the changing circumstances or whims of any of the named beneficiaries
It prevents (in the case of lump sum death benefits) the value of the lump sum payment being received into the survivor’s estate
If the payment is not in the survivor’s estate then it cannot be taxed on the death of the survivor as part of his or her estate
As a survivor does not have a guaranteed right to receive money from the trust, the capital is protected from assessment for long term care

Should the survivor remarry, the capital is protected from any future relationship and remains within the family
The trust assets may be protected from any bankruptcy proceedings of the beneficiaries
The trust assets are in general protected from any divorce proceedings of the beneficiaries
Flexibility in the trust for payments and loans to be made which may assist with Inheritance Tax planning for beneficiaries

Can I still use a Pilot Trust if I have a Pension in drawdown?

The simple answer to this question is yes.

If a pension is in drawdown and the person receiving the benefit dies then there may be an option for the surviving spouse to receive an annuity, continue in drawdown or, alternatively, a lump sum benefit can be paid to the Pilot Trust.

It needs to be borne in mind that if death occurs above 75 years a lump sum paid to a trust is subject to a tax charge of 45%.

Expert, professional advice

The use of a Pilot Trust for receipt of a lump sum death benefit from a pension is complex. The length that the trust can operate is a technical legal area. Specialist advice is recommended. Our expert Wills, Trusts and Wealth Management lawyers are able to provide practical and effective advice and can work with a financial adviser to provide the most effective solution