The Goodwills Pilot Trust
A Trust specifically designed to receive lump sum payments from a pension scheme or life insurance policy, which must be set up before a Settlor has died, and before the Will has been Executed.
Why might I need a Pilot Trust?
If you are a member of a pension scheme or have a life insurance policy that will pay out a lump sum on your death you may wish to consider setting up a Pilot Trust, or multiple Pilot Trusts to receive this benefit, instead of the lump sum being paid to your spouse or children.
You would first need to check to see if the policy can pay the lump sum to a Pilot Trust. You would then need to arrange for the Trust or Trusts to be set up. Finally, you would nominate the Trust or Trusts (which you would name, such as The Smith Family Pilot Trust 1) with the insurance company or the trustees of the pension plan.
On your death, the proceeds of the pension plans or life insurance policies can be paid to the Pilot Trust or Trusts, but this needs to be done with exactly the right timing. If done correctly, the Pilot Trust can provide both Inheritance Tax benefits, and protect the assets in the Trust should the any of the nominated beneficiaries die, must go into residential care, get divorced or are made bankrupt.
What are the Inheritance Tax Benefits of a Pilot Trust?
You can have multiple Pilot Trusts; however, they must be set up on different days, and not have proceed paid into them on the same day as other Pilot Trusts you own either.
If these rules are followed, then each Trust will have a full Nil Rate band attributed to it, and periodic or exit charges will not apply, unless the value of the trust goes above the Nil Rate Band, which is currently £325,000.
If for example, you had a life insurance policy which paid out £3,000,000 on your death which wasn’t in trust, then a 40% Inheritance Tax charge might be due on this, which could amount to £1,200,000. However if you had ten £300,000 policies, and ten Pilot Trusts set up on the different days, and the pay out to the trustees of the Pilot Trusts for each policy were all made on different days then it could be the case that no inheritance tax is due immediately, and there will potentially be no 10 year period charge or exit charge depending on the balance and withdrawals relative to the Nil Rate Band at the time.
What are the Protective Benefits of a Pilot Trust?
When a Pilot Trust is set up, the person setting up the Trust will be the Settlor. The Settlor can write a letter of wishes.
They will also appoint trustees who will oversee managing the assets of the trust and deciding on when assets might be distributed or loaned to potential beneficiaries. They can also allow income to be received by potential beneficiaries too.
Decisions will be based on the trust wording, and the letter of wishes. The Settlor can be a trustee, as can the beneficiaries, but it is important that the trustees can act impartially.
Whilst the assets are in the trust, they are not owned by the beneficiaries, but are instead held for the beneficiaries. This has the following benefits:
- If a beneficiary dies, then no part of the Pilot Trust forms part of their estate and will not be distributed in accordance with their Will or the laws of Intestacy if no Will is made. However, the beneficiaries’ spouse and children will be beneficiaries of the trust and can receive assets if agreed by the trustees in accordance with the trust deed, and your letter of wishes.
- If a beneficiary goes into residential care, then the assets in the Pilot Trust will not normally be assessed for care home fees. The trustees can however use some funds to enhance the level of care provided to the beneficiary over and above the amount the local authority will pay.
- If a beneficiary gets divorced, then the assets in the Pilot Trust will not form part of the divorce settlement as the assets do not belong to the beneficiary.
- If a beneficiary is made bankrupt, then the assets in the Pilot Trust will not have to be used to clear the bankruptcy, but the trustees can choose to do so, should it be the right decision in their opinion.
What else do I need to know about Pilot Trusts?
When a Pilot Trust is set up, it needs to have a nominal amount transferred to the Trustees. This is usually £10 and is usually attached to the Trust Deed.
If a gift is to made by Will to an existing Pilot Trust, it must be set up before the Will is executed. It is important that any Trust is created. Of course, a codicil can be executed, or a new Will drafted.
There are circumstances where a Pilot Trust might have disadvantageous tax advantages if you die after the age of 75 and the proceeds come from a Self-Invested Pension Plan (SIPP). It is important that you seek advice on this from a pension advisor.
There is a 10 year periodic review on Pilot Trusts to see if any inheritance tax is due. The review date is based on the date the pension or life insurance policy was started, not the date the Pilot Trust was created or added to. If you have multiple pension plans, it is a good idea to have one Pilot Trust for each policy, so that you do not have multiple 10 year anniversary dates for a Trust.
Assets can be added to a Pilot Trust however, it is important to note that these are treated as separate to the payment from the Pension or Life Insurance Policy and will have separate anniversary periods based on the date added. Also, apart from the initial transfer, you should not add to a Pilot Trust until after the gift from the life insurance policy or pension plan is made to the trustees.
How can I set up a Pilot Trust?
The Goodwills head office legal team has long term experience of creating Pilot Trusts. Speak to Goodwills wo can put you in contact with your local Estate Planning Practitioner or Independent Financial Advisor. Call us on 01234 802 391 or email at firstname.lastname@example.org for further details.