Pilot Trusts

The other names for this type of trust are Family Trusts or Spousal By-pass Trusts. It’s nothing to do with airline pilots!

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A Pilot in this sense is the one that goes before, the forerunner, like this tug guiding the Concordia. Hence the Pilot Trust is set up during your lifetime with a notional £10, say, attached to it as the asset. This is the forerunner, as it is added to later on. Maybe on death, from a Will, a life cover, or a pension plan death benefit.

What is the point of a Pilot Trust?

The Pilot trust is a discretionary trust with a list of potential beneficiaries contained within. So the assets of the trust do not belong to any one individual beneficiary.

Say you are traditionally married with a wife and children, but your wife is unlikely to need all the life cover or pension fund on your death. You can arrange for the life cover or pension to be directed to the trust on your death. This could save the monies going to your wife’s estate and increasing the Inheritance Tax bill on second death should you die first. She could however still benefit if she was a potential beneficiary. The monies could be distributed or held depending on circumstances. The children could benefit immediately on your death free of Inheritance Tax or monies could be held for wife, children, grandchildren etc.

There are many other circumstances and reasons where this makes sense and it’s not always to save Inheritance Tax.

This is where you need to concentrate. Each trust created on a different day has it’s own Nil Rate Band (currently £325,000). Any assets over that value will be subject to the 10 yearly inheritance tax charges under the “relevant property” tax regime.

So if you had a pension Death in Service benefit to redirect to a trust like this of £900,000 you are likely to be advised to create 3 trusts on different days so as to avoid the 10 yearly inheritance tax charges. So £900,000 divided by 3 = £300,000 into each trust and a little space to allow for some growth. If it grows beyond the Nil Rate Band any excess will be subject to the 10 yearly charges.

 

 

 

New EU Succession Regulations

Let’s assume you live in England and have a villa in Spain. Like all things from the European Union you know it’s going to be complicated. However this is good news for UK residents. It will allow you to avoid Spanish succession law and choose the law of, say, England and Wales.

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The impact is enormous. Succession Law in much of continental Europe is based on Napoleonic Law which means that any children must inherit, whereas in the UK we largely have testamentary freedom to benefit whoever we wish.

These regulations have been brewing for some time and (EU) 650/2012 came into effect from 16 August 2012 and apply from 17 August 2015.

So how do you choose to elect UK law for the Spanish villa?

You can make a declaration of choice under EU regulation 650/2012 choosing the Laws of England and Wales for example.

If you have an English Will covering worldwide assets and no Spanish Will then you can include it in your English Will.

If you have both an English Will for your UK property and a Spanish Will for your Spanish property you can include it in your Spanish Will or make a declaration in Spain. You should take advice from your Spanish lawyer.

“Just a minute”, I hear you say,  the UK opted out of this regulation along with Ireland and Denmark, so it doesn’t apply.

This is where many people are confused. The UK opting out means that the Spaniard with habitual residence in London cannot elect in his Will for his London property to be administered in Spain, or at least it is not binding on the UK to allow this.

Conclusion: This is a complex advice area and much is uncertain as no one has tested it in practice. Are some European Courts going to dispute cases? This will need time to settle down before the muddy waters clear.

Footnote: This does NOT affect Inheritance Tax which for UK domiciles is payable on your worldwide assets.