Pilot Trusts

The term “Pilot” or “Spousal Bypass” Trust is commonly used in the context of members of pension schemes directing by way of nomination death benefits into a trust, thereby enabling that scheme member to retain some control over the monies and benefit a range of persons according to their needs.

Use of such a trust enables any lump-sum death benefits payable under a Registered Pension Scheme to be held for the benefit of the family of a scheme member whilst minimising the potential charge to Inheritance Tax (IHT).

Commonly, on death of a member, death benefit distributions will be made to a surviving spouse/civil partner and an IHT charge may therefore arise on the death of that surviving spouse/civil partner when the property is passed to the next generation. At this point the charge to IHT can be significant. There is a tax-free allowance of £312,000 for the tax year 2008/09 (in addition to any unused portion of the IHT “nil rate band” transferred to the survivor) but over this tax-free amount the estate is taxable at a fixed rate of 40%. The Pilot Trust can help minimise the 40% charge to tax whilst ensuring that the surviving spouse/civil partner (or indeed other family members) may benefit under the Trust.

The Trust is discretionary in form and the beneficiaries will include the surviving spouse/civil partner and children. Hence during the spouse’s/civil partner’s lifetime he or she can benefit from income and capital distributions (and from a loan of the Trust property). The assets in the Trust will not, however, form part of the spouse’s/civil partner’s estate and will not therefore be taxed on his or her death. The Trust may simply continue for the benefit of the next generation or if the spouse/civil partner has need of all the Trust Fund it can simply be distributed to him or her.

Your client’s own solicitor may be able to arrange this, if they are versed in this specialist area of law. Otherwise Organon Group has a very competitive fixed-price arrangement with a leading law form in Manchester.

For further details please contact Marc Gwynne on 07764 603158 or