A pilot trust is set up during the lifetime of the testator/settlor ready to receive funds and/or property upon their death from a legacy in the Will, a pension fund, a life insurance payout or death-in-service benefit. Also known as feeder trusts or family bypass trusts they are normally discretionary and can be created by attaching a £10 note to the trust document.
A pilot trust is useful when the testator/settlor wishes to benefit different members of the family, future generations and/or children from a previous marriage. The trust may also offer protection from creditors, divorce claims, future care costs or financial abuse by or of beneficiaries.
Unmarried couples may find pilot trusts useful. As there is no spousal exemption to utilise they could leave their nil rate band to the trust with the residue to a cohabitee with a significant inheritance tax saving.
If death-in-service benefits, pension funds and life insurance payouts pass into pilot trusts they will not form part of the estate of the deceased, they are readily available without the need for probate and there could be considerable tax savings. Multiple trusts may also be created, (as long as they are not formed on the same day) and if each fund is limited to £325,000 (the present IHT threshold) there will be moderate 10 year anniversary charges and exit charges.