Pilot Trusts

by **In Search Of Knowledge** on Mon Sep 19, 2011 9:50 am

Good morning.
Help please!
I have a Pension pot of £800k a Death in Service benefit of £410k and a Life Insurance policy of £400k. I am considering creating Pilot Trusts to pass assets to the children directly and by pass my wife. I understand this will save considerable IHT on second death.
How many Pilot Trusts should I create? Do I need 3 for the pension, 2 for the Death in Service and 2 for the Life Insurance policy? Is it advantageous to set up each one so that assets in each Pilot Trust remain below £325k? (I understand each Pilot Trust must be created on a separate day). I am receiving some information that there is no benefit in "splitting" the payment from each source into separate Pilot Trusts as they are "related". In other words one Pilot Trust for the Pension, one Pilot Trust for the Death In Service benefit and one Pilot Trust for the Life Insurance policy. Could you please advise if I need 7 Pilot Trusts or 3 Pilot Trusts.
I hope that the above makes sense!
Thank you in advance to anyone who can assist.
(I am married, in my forties, with three children)
Regards.
In Search of Knowledge

by **tax_schmax** on Mon Sep 19, 2011 4:53 pm

There are good reasons for making more trusts, some of them relate to tax, others relate to choice.

This question pops up fairly often on this site. The devil is in the detail. Two things;

You'd need to die to make use of the trusts in the way you have envisaged. Have you thought about your will and your main residence and other assets separately? I ask because this is an area where joined up advice will work best.

You don't say what type of pension you have. Is it occupational or personal. The scheme trustees may have the final say. Indeed, there are certain benefits occupational schemes can offer in addition to bypassing that may be more advantageous.

You're on the right track though. If you don't make good plans, bad things can happen at just the time you don't want it too. I believe that is called "Sod's Law". The other thing to remember is that most people live to use their pension funds. Don't let the tail wag the dog.

By the way, you might have an issue with the lifetime allowance. If you manage growth of 7% p.a. for the next 10 years, you could end up with a pension fund larger than is currently permissible without any penalties or other charges being applied. I realise 7% p.a. seems a bit ridiculous at the minute, but you never know!

by **maths** on Mon Sep 19, 2011 6:51 pm

I am considering creating Pilot Trusts to pass assets to the children directly and by pass my wife. I understand this will save considerable IHT on second death.

Why do you say this?

by **In Search Of Knowledge** on Tue Sep 20, 2011 9:04 am

Thank you tax_schmax for your detailed reply.
As you suggest I am currently looking at the overall plan. I am getting information from two advisors which is broadly the same. Except on the question of the Pilot Trusts. One is advising "one policy = one pilot trust" is the best option. The other is advising "numerous pilot trusts keeping each one below £325k". Both advisors are well qualfied! The advisor that is advising "one policy = one pilot trust" refers to the policy (pension, Death in Service, Insurance) being in trust already and so even if one of these policies pays out into multiple Pilot Trusts (created on different days) they will be related and "added together". There was also some discussion about payment by regular premiums. It all got very complicated. You have very kindly advised that "there are good reasons for making more trusts". Do you have time to expand on this advice please?
Again thank you for your assistance.
Regards.
In Search of Knowledge

by **tax_schmax** on Tue Sep 20, 2011 9:34 am

You should not be joining up your advisers thinking. They should be working together, that will ultimately solve your problem.

Anyway.

Rysaffe Trustee Co (CI) v IRC (2003) created a ruling that trusts created on different days could be treated as unrelated, and thereby each having their own nil rate band. This has the effect of reducing the period or exit charges. As I said in my reply, the devil is in the detail, and that is where your advisers are currently thrashing this point out. This is a huge simplification of the details of the case and the progression of the law since the final ruling.

To say any more would be for me to say which one was right, and this would be imprudent without having complete understanding of the facts.

by **Lee Young** on Tue Sep 20, 2011 9:45 am

There is in fact no real issue with all the pilot trusts being set up on the same day provided you then fund each with a say £10 initial payment. The reason for this is that although they will then be related to the others you have set up on the same day, when calcualting the IHT figures (exit charges and periodic charges) it is only the initial investment that is aggregated as part of the calculations. Therefore setting them up on the same day only loses £10 x however many trusts you set up. Not a big deal in the grand scheme of thngs.

by **maths** on Tue Sep 20, 2011 8:44 pm

Has the life policy not already been settled?

by **In Search Of Knowledge** on Wed Sep 21, 2011 8:41 am

Tax_schmax - you are right. My two advisors should be working together but on this topic of the Pilot Trusts they are not. That is why I turned to this forum. I accept I am a difficult client. I do not just accept advice - I like to know WHY it is the best advice. So I have much sympathy for my advisors! I note, and fully understand, your comment "To say any more would be for me to say which one was right, and this would be imprudent without having complete understanding of the facts". However I was hoping that this forum might give me general guidance in relation to Pilot Trusts and this question of whether 1 Pilot Trust per policy is best or whether it is best to split policies that have a value greater than the Nil Rate Band thus keeping each Pilot Trust below the value of the Nil Rate Band.
Thank you to Lee Young for your reply. But that has confused me even more! Are you able to comment on the issue of whether it is best to have 1 Pilot Trust per policy or not or whether it is best to split policies that have a value greater than the Nil Rate Band thus keeping each Pilot Trust below the value of the Nil Rate Band?
Could maths please explain the comment regarding the life policy being settled?
I really appreciate the time and trouble you are all taking to reply.
Regards.
In Search Of Knowledge

by **tax_schmax** on Wed Sep 21, 2011 9:21 am

I'll do my bit. And I think Lee is alluding to this in his answer also.

More trusts, more choice, not much more admin and importantly more tax efficiency if deemed to be unrelated as per Rysaffe. You might never need the extra trusts, but it might be useful to have them there.

One of your advisers is stating that splitting the assets to add funds to the trusts in the event of your death would negate the Rysaffe principle I referred to in my previous answer. This is because your adviser understands them to be treated as related. If correct, this would hold true even though the pilot trusts would be set up as to appear to be unrelated. This is a specific point where the structure of your financial plans will give an absolute answer. As it is, they could both be correct. The devil is in the detail. Pension plans in particular come in many varieties despite pension simplification. Some are individual trusts, some are under master trusts. This will be key. Have both advisers seen the plan documents and the underlying trust deed? This should remove any doubt. If the pension should not be split post death, you could segment it now by making partial transfers.

by **Lee Young** on Wed Sep 21, 2011 12:53 pm

Tax schmax has set out the real issue as regards the pensions policies, in that there are many ways that these can be set up, before you do your clever planning, and it will only ever be the advisers who have seen the paperwork who can advise properly.

For death in service or life policies it is generally much easier (now waiting to be told otherwise by someone with greater knowledge than I!). If the payout exceeds the nil rate band have more than one pilot trust to receive it, particularly if the trustis likely to continue because this segments the payout into tranches worth less than the nil rate band, which will help to avoid the IHT that would otherwise arise on the trusts every 10 years and whenever capital is paid out.