Trusts FAQ

If you have the potential for large death benefits to become payable, such as employer-based life assurance or accrued pensions then you may wish to consider a Pilot Trust for the following reasons:-

• To ensure your intended beneficiaries receive these death benefits.

• For the ability for any large sums payable to your beneficiaries to remain in your bloodline.

• The reduction of Inheritance Tax (IHT) that may become payable on the subsequent deaths of the intended beneficiaries once they have received any large lump sums.

• To appoint people to manage and distribute funds so that they may be utilised in the manner that you intend after your death.

On the death of a member/pension holder the scheme administrator must exercise their discretion but each individual is asked to complete an expression of wish form to provide guidance to who they ‘wish’ to receive any death benefits, e.g. to a surviving partner/spouse. Any established Pilot Trust can also be nominated.

The administrator would usually pay to the nominated beneficiaries or trust (unless the trustees believe that the situation warrants a differing course of action). It’s important to remember that the expression of wish where a scheme has discretion over the death benefits is just that.

Yes you certainly can, however upon receipt of any death benefits, the proceeds will belong to that person and can be used as they see fit, possibly not as you would intend. Furthermore they shall also form part of their assets on subsequent death, both for the assessment of IHT and under the distribution of assets in their own Will, or via intestacy laws applicable to the individual.

As children are minors and cannot take valid receipt of any lump sum payments until they are aged 18 or over, it is likely that any death benefits nominated to them would be paid to someone else on their behalf, at the discretion of any scheme administrators. This could result in someone you did not intend holding capital on their behalf, and at their discretion as to what they do with it and how it is used.

There may be many reasons why you would want more control and protection over large death benefit sums in the event they become payable. A Pilot Trust gives a degree of control over the use of and ultimate destination of the funds. For death benefits nominated to a Pilot Trust, you can appoint and instruct the trustees of your choosing and the distribution will be at the trustee’s discretion. Careful selection of trustees is imperative.

This is not provided where an individual has been nominated. For any death in service payment, their Will or law of intestacy would determine the next beneficiaries to inherit and on what basis. Regarding pensions, the individual will then nominate a successor via their own expression of wish form.

In addition to the protection offered, if your family situation is more complex then it could be beneficial to make sure that any death benefits stay within your bloodline. It could also be the case that you do not feel that a beneficiary should be given the option of taking a cash lump sum and that they would be better looked after if a regular income was to be paid. If a partner/spouse receives any large lump sums and then ended up in long term care then the funds could be considered by the local authority. This would not happen if the money was held in a Pilot Trust.

Alternatively, it could also be because you would like your child, once they are an adult, to benefit but you are concerned about their current or future relationships and if a marriage becomes unstable and as a result a divorce happens, then any lump sum or pension draw down could be considered matrimonial property.

As mentioned above, death benefits are usually not liable to inheritance tax on the death of a member/pension holder. One of the main reasons that Pilot Trusts have been used is to receive the payment of lump sum death benefits so that they do not become part of the inheritance tax assessable estate of the intended beneficiaries, often referred to as second death IHT planning.

If the trustees make payments to a beneficiary they can do so without it forming part of the beneficiary’s estate for inheritance tax purposes.

If a partner/spouse desires funds from a Pilot Trust, e.g. to repay a mortgage or to pay for a child’s education then any monies can either be paid outright to them or alternatively the capital can be loaned, the latter of which will avoid increasing the value of the beneficiary’s taxable estate. Therefore the Pilot Trust may be used to minimise IHT on second death by keeping any death benefits outside of the surviving spouse’s estate while still allowing them access to the funds.

Trustees are people of your choosing that you believe shall best follow any wishes that you leave them as to how any trust assets should be used for your intended beneficiaries named within the trust.

The trustees responsibilities also include managing the trust assets with a duty of care to ensure capital is protected but consideration to the growth of any money. Trustees may seek professional guidance whilst administering a trust or you may feel a professional trustee should be appointed from the outset.

The Pilot Trust is a discretionary trust which means by nature your appointed trustees have full discretion as to how the capital held in trust shall be used for the benefit of your named beneficiaries.

It is advisable to keep a statement of wishes alongside the trust outlining any direction to the trustees as to how you would like them to manage assets and/or how you would like your intended beneficiaries to benefit and on what basis. Such a statement of wishes is not legally binding so the careful appointment of your trustees is critical.

Not at all, James McKenzie specialise in establishing trusts of this nature and provide not only expert guidance during the consultation but additionally provide explanation notes alongside the trust. These outline any complex clauses in plain English so that you fully understand all aspects and how they operate.

The trust is established with just £10 attached to the trust and awaits any payment of death benefits nominated to the trust. Assuming family and friends are appointed as trustees, then there should be no additional costs unless professional guidance is sought to administer the trust but only once the trust receives any payment.

The Pilot Trust, like an individual, has allowances for Capital Gains Tax and income tax and pays tax at the highest rate on any gains or income generated from the capital held in the trust. If any funds are paid to an individual whose own marginal rate of income tax is lower than that which the trust has paid then the beneficiaries can reclaim the difference in the tax paid.

The trust also pays ongoing Inheritance tax charges once capital is held in trust, this is payable every 10 years at the rate of 6% above the value of the Nil Rate Band (currently £325,000). Any withdrawals from the trust are also subject to a charge at a maximum amount of 6%.

The above taxation of the trust is intended as a brief overview and shall be considered and explained fully by your consultant during your individual meeting.

Yes, once the Pilot Trust is established then it is possible to vary the terms of the trust such as adding and removing beneficiaries or changing the trustees by deed of appointment. Likewise, the trust can be closed before or after receiving any death benefits if all acting trustees are in agreement by paying out any money held in trust.