Pilot Trusts

[maths]

Typically, when a life policy is taken out it is often the case that it is put into trust so that on death of the life assured the proceeds do not fall into his estate for IHT; thus IHT is avoided thereon.

Eg Father takes out policy on own life. He settles benefits under the policy on discretionary trust for say wife plus kids.

Re Lee's comments, (if i understand him correctly) it is not possible I believe to assign (ie settle) a life policy into more than one pilot trust ie a legal assignment of part of a policy is not possible.

It is for this reason that so-called "cluster" policies are issued which are in effect comprised of separate segmented policies; separate segments could then be settled on different pilot trusts.

[In Search Of Knowledge]

Thank you all for the time and trouble you have taken to reply.
Would the following be a good summary so far?
Pension fund: I need to get both advisors to check the policy carefully. May be that this can pay out into one Pilot Trust. May be able to "split" into 3.
Death in Service: Set up 2 Pilot Trusts to keep each one below the nil rate band.
Life Insurance: Set up 2 Pilot Trusts to keep each one below the nil rate band.
Finally, would you have the time to explain something else that I mentioned earlier. There has been some discussion about payment by regular premiums being important. But neither of my advisors can explain why. Can you help please?
I am really grateful to each of you for your assistance and in appreciation I shall be making a suitable donation today to ParalympicsGB.
Regards.
In Search Of Knowledge.

[tax_schmax]

If you proceed on the basis that you are going to set up a number of pilot trusts that can be used in future, fine. If you don't get to use them all for whatever reason, you'll have lost very little, if you have none, your family could potentially lose a lot. Don't get too caught up in deciding what goes where at this stage. Just arm yourself with the tools to allow some planning with your estate in the event of your death. One thing I'll stick my neck out on is that your situation will change. For example, death in service won't travel with you if you change your job. Keep it relatively loose.

As for the regular premiums; I'm stumped. I've always established pilot trusts with a single payment of £10.00. I think I'm about to learn something!

Nice gesture with the donation by the way.

[Lee Young]

I agree with tax_schmax!!

[maths]

If my comments are correct I don't see how you can settle the life policy on two separate pilot trusts.

[In Search Of Knowledge]

Thank you for continuing feedback.
I have been told about the £10 note on the trust. That is agreed. My comment about the regular premiums was badly worded - apologies. Let me try and explain more clearly.
What I have been told is that to reduce IHT one can give funds to children from regular income providing it does not reduce one's capital. Such "giving" can be above the annual limits. I understand that. But one advisor has said that if I buy life insurance (actually more life insurance) then because the premiums for the life insurance are "payments from regular income" then any policy (if it pays out) can be split into multiple Pilot Trusts because the Life Insurance policy was funded by "payments from regular income". I am trying to ascertain if THAT is the reason why life insurance can be spread across several Pilot Trusts whereas some Pension policies cannot be. Is the "payments from regular income" the factor that determines whether a policy, when it pays out, can be split across more than one Pilot Trust (with the benefits outlined in earlier posts). Have I explained the point more clearly this time?
Once again thanks to those taking time and trouble on this.
Regards.
In Search of Knowledge.
PS: Donation to ParalympicsGB made, as "promised".

[tax_schmax]

A pilot trust is a vessel to be used in future. You set it up to potentially receive funds from your estate without necessarily specifying which assets might feed it. In regard to the life policies you arrange yourself, I think I'd advise you differently. I'd be writing policies into trust now. Then I'd agree with the regular payments strategy. To avoid any confusion about how to (or the ability to) segment the £400K life policy, I'd simply write two £200K plans, each into a discretionary trust now. Under these terms, the premiums you pay would be a series of settlements into a discretionary trust, and if these are from normal income, they would be free of IHT. You would not own the policy, the trustees would and if set up on different days with "different" features, would be more obviously Rysaffe friendly. Pilot trusts would be unnecessary in this case. You can write life policies into trust immediately as there is no chance of you personally needing the proceeds! Pensions are entirely different.

Maths points about one large plan written into trust now, being assigned to two or more pilot trusts in future are true. You would have difficulty making this work, or more accurately HMRC would perhaps have cause to treat the trust differently to how you are envisaging. The settlements would almost certainly appear to be related, and therefore not have separate nil rate bands, but this is an arguable point.

If the plans are not written into trust now, they will pay out into your estate (assuming you are buying plans in your own name on your own life). Your estate has only one nil rate band, any settlements into trust from your estate that add up to more than the available nil rate band will attract IHT. Pensions are most often excluded due to their nature, although there are circumstances where this is not true.

Much of what your advisers have said separately is true. The problem with tax is that where you join things together, logic may not follow.

[maths]

But one advisor has said that if I buy life insurance (actually more life insurance) then because the premiums for the life insurance are "payments from regular income" then any policy (if it pays out) can be split into multiple Pilot Trusts because the Life Insurance policy was funded by "payments from regular income". I am trying to ascertain if THAT is the reason why life insurance can be spread across several Pilot Trusts whereas some Pension policies cannot be.

1. No; settling life policies in different trusts has nothing to do with funding the premiums out of income.

2. If you take out a new life policy on your own life you could settle it on one trust for wife plus kids, say. On you death policy proceeds not subject to IHT (Option1).

3. Or, you could ask insurance company for a segmented policy. Each segment could then be settled on its own trust (Option 2). This has the advantage of minimising IHT as and when following your death the trustees pay out the policy proceeds to the beneficiaries.

4. Under either Option if you continue to pay the premiums these are in principle within the IHT net. However, if it can (as usually the case) be argued that the premium payments are out of normal income they are exempt ie IHT is completely irrelevant with respect to them.

5. No pilot trusts are involved.

6. Pilot trusts are more commonly used by setting them up in life in order that on death more property can be added into them; this mitigates further IHT for the trusts.

Not sure that your advisors have explained things very well or you have misunderstood or both.