What is a Personal Injury Trust?
A trust is an arrangement where assets are transferred to a small group of people for them to hold for the benefit of others.
A personal injury trust is any trust that holds money or assets that came from an award of damages or compensation for any personal injury. This can include injuries from an accident caused by another person, the criminal act of another person, an industrial disease and medical negligence.
This type of trust must be set up wholly or partly for the benefit of the injured person. For example, if you have been injured in a road traffic accident caused by another party and have been awarded compensation, you may have the option to set up a Personal Injury Trust to manage this money effectively.
It is important to note that personal injury compensation does not have to be placed in a trust, however, there are benefits of doing so which we’ll explore here.
Why should I set up a trust?
If you have been injured and have been awarded a sum of money for the injuries, a personal injury trust may ensure you are eligible or continue to be eligible, for means-tested benefits.
Currently, a person with assets worth £16,000 or more would not be entitled to any means-tested benefits. A person with assets worth between £6,000 and £16,000 would be entitled to some means-tested benefits but the amount is reduced on a sliding scale as the value gets closer to £16,000.
If compensation for a personal injury were to increase the total value of your assets above £6,000 then you could lose some, or all, of your means-tested benefits or you, would not be eligible to claim such benefits.
The compensation will also not be taken into account if you require any local authority care funding in future.
So how does a trust avoid this?
If the compensation is transferred into a trust then the value will not be taken into account when assessing your entitlement to benefits. In addition, any interest or income generated from the award placed in trust is also disregarded even if it is paid out to you from the trust.
This is often the main reason to establish a trust as the means-tested benefits are retained and the compensation can be used to support you in other ways.
Why else may I want to set up a trust?
There may be other reasons why you may want to transfer your award to a trust. Many of these are longer term considerations that need to be considered, for example:
- Fluctuating mental capacity, possibly as a result of the personal injury. A person who is injured may not always be able to manage their financial affairs in the right way so they would like others to take on this function;
- Financial vulnerability. If the injured person is vulnerable to financial abuse then the trust offers a way of protecting their compensation;
- The possibility of needing means-tested benefits or local authority care funding in the future;
- Ring-fencing the damages awarded from family and friends who may see it as available funds to be used for their benefit.
When should a trust be set up?
There are strict rules about when a personal injury trust can be set up. It must be set up within a 52-week period that starts on the date that the first compensation payment is made and the award must be transferred to the trust during that period. During the 52-week period, the compensation will not be included in any financial assessment for means-tested benefits.
Compensation is often paid out in instalments and the time period runs from payment of the first instalment, even if this is only a small part of the total award.
What type of trust can be a personal injury trust?
There are many types of trust that can be a personal injury trust but the main ones are:
- Bare trust – this is the simplest form of trust that can be used, where the trustees are essentially acting as nominees for the injured person but the injured person ultimately retains control over the assets and can ask for them to be transferred back to them at any time.
- Life interest trust (also referred to as an ‘interest in possession trust’) – this trust splits the entitlement to capital from the entitlement to income. The injured person will be entitled to receive all the income generated from the damages awarded during his or her lifetime but they may not have any access to the capital.
- Discretionary trust – this trust gives trustees wide discretion to use the income and capital of the assets for the benefit of a number of beneficiaries, including the injured person. Read more about discretionary trusts here.
- Disabled person’s trust – this type of trust can be used for an injured person who falls within the definition of a disabled person for tax purposes. This trust is similar to a discretionary trust but may offer preferential tax treatment, particularly if the award is significant. Read more about disabled person’s trusts here
There are a number of factors that will need to be considered before the type of trust is decided on.
Who should I choose as Trustees?
When setting up a personal injury trust you need to carefully consider who you want to act as the trustees as they will be responsible for managing the trust and ensuring that the terms of the trust are followed.
The following points should be considered when choosing trustees:
- You can have between two and four trustees.
- It is possible, in the right circumstances, to appoint yourself as one of the trustees.
- Trustees must be adults and have the mental capacity to manage the trust.
- You can choose family members, trusted friends, professionals or trust companies to act as trustees.
What if the injured person is under the age of 18 or doesn’t have the mental capacity to set up the trust?
In these circumstances, it is likely that a court will need to decide whether a trust can be set up and will usually determine the type of trust and who the trustees are.
For further information about setting up a trust, or if you are thinking about setting up a personal injury trust for yourself or on behalf of a loved one, please contact us for a confidential consultation.