All About Pilot Trust

What are Pilot Trusts?

Pilot trusts are trusts set up during the lifetime of the Testator and which receive property on the death of the Testator via a specific legacy in the Will.

The pilot trust would normally be discretionary in format and are created with a trust fund as little as £10. The Trustees could be the Testator and their spouse or civil partner or whomever is suitable to act as a Trustee in the circumstances.

The Will would then have a specific legacy which would ‘feed’ assets in to the trust, i.e ‘I GIVE the sum of £200,000 to the Trustees of the Patel Settlement dated 1st January 2009’. The Testator should also leave a Letter of Wishes with the trustees of the pilot trust explaining why the trust was created and whom it should primarily benefit.

When To Use A Pilot Trust?

If you wish to create trusts to benefit different sections of your family (for example you wish to have a discretionary trust of your residue (to benefit your children and grandchildren) and would also like a smaller amount to be held for the benefit of a specific niece who has capacity issues. It would be wise to create a pilot trust for the benefit of your niece which could also benefit any family she may have. The pilot trust could also have different trustees to your executors if that was suitable (for example the niece’s parents).

If you have a substantial estate you may wish to consider creating multiple pilot trusts simply to increase the availability of nil rate bands across the trusts. This would have to be offset by the increased administrative workload and compliance requirements that multiple trusts would involve.

Consider the grandparent leaving £600,000 on trust for her three grandchildren at 30. Following the Finance Act 2006, the trust shall be subject to ten-yearly IHT charges and a final IHT exit charge. If the grandparent had created three pilot trusts (each set up on separate days) and left the trustees of each £200,000 then each trust would have its own nil rate band going forward and significantly reduce the overall IHT exposure. The £200,000 is well below the prevailing nil rate band.

The formalities for setting up a Pilot Trust?

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.