Trusts were invented by the Courts around the time of the Crusades: Crusaders left their property in the hands of “friends” or family, only to return then find out they had taken the property as their own. Fortunately, the Courts exercised their discretion (under the doctrine of Equity) and threw out the usurpers. Everyone knew that they were supposed to be acting as caretakers (“trustees”) to look after the absent Crusaders lands (and often their women!)
So now we have trusts which can be used to shelter assets or property against misuse, to maintain control long after death, shelter from creditors and taxation.
Trusts can protect assets if beneficiaries are in unstable marriages, in financial difficulties and especially if they are on social services benefits.
Trusts can be created during a persons life time, or in their Will when they die. People often use lifetime trusts when there may be Inheritance Tax issues as you can re-use your Nil Rate Band for gifts every 7 years, so a well off couple could give away £650,000 tax free every 7 years. This is often put into lifetime trusts so that givers can retain control over how it is used and who gets to benefit from it. The Family Bank summarises the benefits of such trusts.
Trusts are also used to shelter the death benefits of life insurance policies, pensions and death in service benefits. Why? Because the cash will otherwise go either into the estate of the person who has just died, and be immediately subject to Inheritance Tax at 40%. Even if it is directed to the partner of the deceased, that is still going to swell their estate substantially, and attract IHT on their death.
So what a Pilot Trust does is to receive the death benefits and (often) LEND them straight out again to the widow/er interest free. So the partner is in exactly the same cash situation as they would have been otherwise, but their taxable estate has not increased, so the Inheritance Tax payable on death will not be increased because the money has to be repaid to the Pilot Trust, which can then repeat the process for the net generation and beyond.
A trust is managed by trustees guided by the terms of the trust and often by what is called a Memorandum of Wish (= a letter) from the person who set up the trust. Clearly, appointing sensible trustees is crucial.