What are the pros and cons of a personal injury trust?
When a person receives compensation as a result of a personal injury that they have suffered, they will often be in receipt of a significant amount of money. This money will need to be very carefully managed so it lasts the injured person for the rest of their life, particularly if the person is unable to work as a result of the injury.
It is for this reason that many people choose to set up what is known as a ‘personal injury trust‘ when they receive compensation. The trusts are sometimes also known as a ‘Compensation Protection Trust’, however, they are both the same thing. Whilst it may sound scary, a trust is essentially a form of umbrella that protects the compensation from the outside world.
What is a personal injury trust?
From a legal point of view, a personal injury trust is a legal entity created by a person that receives the award (‘the settlor’), or by the Court if the settlor is a child. To set it up they need to sign a special document which is the personal injury ‘Trust Deed’. The trust will have assets, which can include money and property, under its umbrella, and the trust is the legal owner of these assets. In order to set up a trust, the settlor must understand what it means to put a trust in place, and how the money will be managed. If they do not, then the Court of Protection will need to make a decision as to whether a deputy or a trust would be the best way to manage the money.
The people who look after and make decisions about the money in the trust are called ‘trustees’. The person who sets up the trust can choose who the trustees of the trust are going to be. They can be trusted friends or family members, and / or a professional. The settlor can be a trustee, but only if there are two other unrelated people as trustees.
By setting up a trust, the settlor transfers legal ownership of the money to the trustees, but the trustees can only use the trust money for the benefit of the settlor. This means that the trustees have control of the money, but they have an absolute duty to only think about the needs of the person that received the compensation when they make decisions. The money cannot be used to benefit anybody apart from the settlor, with very few exceptions.
When the trust is in place, the settlor can receive day to day money from it into their bank account, and manage this day to day money to pay bills and for leisure just as they would have previously managed a way.
A personal injury trust may be brought to an end at any time that the settlor has capacity to bring it to an end.
What are the pros and cons of setting up a personal injury trust?
There are two major advantages to setting up a personal injury trust. The first is that by placing funds awarded as a result of a personal injury claim or clinical negligence claim into a personal injury trust, they will be ignored for the purposes of means assess benefits and Local Authority funding. It is not a loophole, it is just an unusual situation that the government recognises.
The law is set out in paragraph 12 of schedule 10 to the Income Support (General) Regulations 1987, and it states that following a payment as a result of personal injury, this payment will be ignored for 52 weeks. After this period, the funds will only be ignored for the purposes of means assessed benefits if they are in a trust, or held by a Deputy.
Great care must be taken however to ensure that the funds are placed in a trust within 52 weeks of the receipt of any payment as a result of the injury, including any interim payment or charitable payment, and also that the funds are not mixed up with any other funds during the time that they are not held in a trust. If they are mixed with other funds, it can make it really hard to tell which money is award money and can go into the trust, and which money is the compensated person’s ‘normal’ money.
The second major advantage to setting up a personal injury trust is that it takes the burden of managing what can be substantial sums of money away from a person that has already been through a lot, having first been injured, and then been through the rollercoaster of litigation. Many people find that asking trusted friends, relatives and / or advisors to take on the responsibility of managing the money for them is very appealing.
There is no advantage or disadvantage from a tax point of view. The funds in the trust are taxed just as if they belong to the settlor personally. They also form part of his estate when he dies.
It is also worth bearing in mind that a person can have both a Lasting Power of Attorney and a trust. The trustees will deal with the compensation funds, and the attorney will deal with all parts of a person’s funds that are outside of the trust.
In terms of the disadvantages, there is usually an initial cost in setting up a trust, which usually ranges from around £500 to £900 plus VAT, depending on the level of advice that the person needs. However, the set up cost is very small compared to the significant financial advantages that retaining means assessed benefits and local authority care funding may bring in due course. If a professional trustee is chosen, then there will also be professional costs to bear in mind. However, many people find that the advantages of having an experienced, professional trustee on board are often very valuable, particularly if there are complex packages of care, personal injury trust investments or property adaptations to manage.
The other disadvantage that causes concern for many people is that the funds don’t legally belong to the compensated person anymore. They belong to the trust. However, the fact that the funds can only be used to benefit the compensated person, will be managed by the people that the compensated person trusts and chooses, and the trust can be brought to an end at any moment, do balance this out.
In summary, whilst setting up a personal injury trust may seem a little scary at the start, it is a quick, easy, and efficient way to ensure that your compensation is protected and that the compensated person is able to continue to receive support from the state for their lifetime.
Help with setting up your personal injury trust
Our mental capacity team have helped many clients and their families to safeguard their future with a personal injury trust. If you would like help setting one up, please contact us today.