Personal Injury Trusts
What is a Personal Injury Trust?
A Personal Injury Trust is a trust to hold money for an award of damages or compensation for any personal injury, including injuries caused by an:
- medical negligence,
- industrial disease, or
- criminal injuries.
The trust is set up for the benefit of the injured person and its primary purpose is usually to enable the injured person to claim, or continue to claim, means-tested benefits. It is also an advantage in case the injured person may need to claim benefits in the future.
If an injured person has capital above the capital limit they will not be able to claim means-tested benefits until all their capital has reduced below the upper limit. Placing any funds from a personal injury award into a trust means that these funds are ignored when assessing how much capital the injured person has.
Also any income that is generated from the damages placed in trust is also disregarded, even if it is paid out to the beneficiary.
52 weeks to act
A person who receives a compensation award is given a statutory ‘breathing space’ of 52 weeks from the date of receipt of the first compensation payment for them to decide what to do with the funds. After that time the funds will be assessable as available capital. Compensation is often paid in instalments, however, and it is important to note that the 52-week period runs from the date of the first interim payment.
Capital is based on households
Assessment of capital is based on a household. This means that the circumstances of the whole family need to be carefully considered when setting up a personal injury trust, even if the injured person does not intend to claim means-tested benefits , it may be necessary to set up a personal injury trust in order to preserve a partner’s eligibility to claim.
For example, if a couple living in the same household claim means tested benefits, then any damages held for personal injury - if they are held in a trust - are disregarded when assessing their eligibility for those benefits.
Don’t mix your money up
The capital disregard for funds held within a trust only applies to funds derived directly or indirectly from the personal injury. If money is placed in a trust that is not connected to the damages award, and monies become mixed up, then the trust becomes ‘tainted’ and it can be taken into account when an injured person’s capital resources are assessed.
Reasons for setting up a Personal Injury Trust
There may be more long-term reasons why an individual may want to transfer an award for personal injury damages to a trust, beyond the advantages of claiming means-tested benefits. Such reasons might include:
- Funding care home fees in later life;
- Changes in mental capacity - either as a result of the personal injury or because of a pre-exiting or anticipated condition;
- To protect assets from divorce or bankruptcy in the future;
- To claim means-tested benefits in the future as a result of ill health;
- To manage large sums of money effectively;
- To ring-fence the damages award from friends and relations.
Alternatives to a Personal Injury Trust
A trust may not be suitable in some circumstances for one or more of the following reasons:
- A trust may be too complicated for the individual to understand and administer;
- The cost of setting up the trust and running it may be too expensive;
- It may be difficult to find suitable trustees (although at LCF Law we can act in this capacity for our clients);
- The individual may prefer to not claim means-tested benefits in which case a trust may be unnecessary;
- There may be better alternative solutions which are more attractive to the injured person. These might include:
- Investing a damages award into one of the other types of disregarded capital which include: a home, personal possessions, an investment backed by Life Assurance, or investing in a business;
- Using a Deputyship Account to hold the funds in cases where the injured person lacks mental capacity and a Court of Protection Deputy has been appointed.
Other types of trust
Bare Trust: a Bare Trust is the simplest form of trust that can be used, with trustees looking after the money for the person establishing the trust. Any income or gains generated within the trust are treated as belonging to the beneficiary and the assets in the trust form part of his or her trust for inheritance tax (IHT) purposes on the death of the trust beneficiary.
Life Interest Trust: a Life Interest Trust (also known as an ‘interest in possession trust’) splits entitlement to capital from entitlement to income. The injured person will be entitled to receive all the income generated from the damages award during their lifetime. After their death the damages award itself (the trust capital) will then pass to another beneficiary such as a spouse or partner, or to a class of beneficiaries, such as the children of the injured person.
Discretionary Trust: a Discretionary Trust gives trustees wide discretion to distribute or retain trust income and capital for the benefit of beneficiaries. Typically a wide class of potential beneficiaries will be selected by the injured person, with the trustees deciding which beneficiaries should benefit and to what extent.
Disabled Person’s Interest Trust: these only apply to injured persons who fall within the definition of a disabled person. They are quite limited and we recommend that specialist advice should be taken if these are being considered.
Choosing trustees for a Personal Injury Trust
The following point should be considered when choosing trustees:
- The optimal number of trustees for a personal injury trust is between two and four.
- It is possible, though not always advisable, to appoint the injured person as one of the trustees.
- A sole individual trustee is rarely advisable. Sole individual trustees, for example, cannot give good receipt when selling land that may form part of the trust fund. If the sole trustee is the injured person, then:
- the trust could be attacked as a sham, for the purposes of disregarding capital for means -tested benefits, or
- in the case of a Bare Trust, it can be argued that a trust will not exist at all.
- To avoid conflicts of interest, or arguments that the trust is a scam, it is advisable to appoint at least one trustee who is not the injured person or a member of his or her family or household.
- Trustees must be adults and have mental capacity. It is possible, however, for a mentally incapacitated person to set up a personal injury trust through his deputy (with approval from the Court of Protection) with the deputy acting as one of the trustees.
- Professional trustees are not always required, although trusts for mentally incapable injured persons that must be approved by the Court of Protection and trusts for minors, where court approval is required, may have to include at least one professional trustee at the direction of the court.
- The size of the fund is often a crucial factor in deciding whether to employ professional trustees. A relatively small damages award will not usually support the fees charged by a professional trustee.
- If a Discretionary, Life Interest or Disabled Person’s Interest Trust is selected then a professional trustee may be able to provide useful advice on tax and trust management issues.
Managing income and capital distributions from the trust
Income and capital that remains in the trust will not be taken into account when assessing the injured person’s eligibility for means-tested benefits. Once funds are paid out of the trust, however, to the injured person they become part of the assessment when considering whether the injured person’s capital is in excess of the capital threshold.
Consequently, if trustees are aware of planned expenditure, they can pay for it directly by making payments to third parties from the trust out of either capital or income. This avoids large payments flowing into the hands of the injured party and it becoming assessable for means-tested benefits purposes. For example, such direct payments could include a specially adapted car, a TV, personal possessions, paying credit card debts or a holiday. While the rules now allow for payments for general housekeeping, we advise against this. We advise setting up a trustee bank account to make housekeeping payment so that is not seen to be part of the beneficiary’s money.
Making a Will
If a damages award is placed in a bare trust, the trust automatically comes to an end when the injured person dies. The trustees will be obliged to transfer the trust assets to the injured person’s personal representatives to be distributed according to the terms of any will. Or, if there is not a will, according to the intestacy rules.
Individuals who receive personal injury damages awards may never have considered making a will before, often because before the award their assets were negligible and their circumstances straightforward.
As a result we advise clients to take advice and prepare a suitable will in order to ensure that their wishes are carried out and to protect any trust assets for their beneficiaries.
A collaborative approach to trusts and trust management
AT LCF Law we work in close cooperation with other professional advisors, in particular accountants and IFAs, to ensure the injured person’s aims are met and their interests are protected. Many of our solicitors are STEP qualified and are experts in this field.
The Society of Trust and Estate Practitioners (STEP) is the worldwide professional body which promotes high professional standards and education for its members. Becoming a Full STEP Member is a benchmark many solicitors strive for: it is the top professional qualification for a wills, trusts and probate solicitor.
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