Before the Finance Act 2006, grandparents provided for their grandchildren by way of a favourable form of trust known as Accumulation and Maintenance Trusts. They allowed for income to be paid to young people whilst the capital was looked after by the trustees. Since 2006, these trusts have all but disappeared, having lost their tax advantages following the Act.
Now, the more common way of leaving assets in trust has been through a Discretionary Trust, although these are liable to Inheritance Tax charges every tenth anniversary and also exit charges.
Pilot Trusts could be the answer to the above problems being encountered by clients. A trust is entitled to its own nil rate bands for IHT, as long as each trust is created on different days. If small Pilot Trusts were formed now, and then a further trust on death, each trust would only be holding a relatively small sum of cash with nothing further to be added during the grandparents’ lifetime.
Their Wills then leave a gift between the Pilot Trusts and the trust formed upon death created through their Wills. This is therefore an effective way of ensuring that the overall gift to the grandchildren largely protected from IHT charges and the young beneficiaries are provided for.