Sandy Lamb, Partner in our Private Client team, provides guidance on some of the frequently asked (and less frequently asked) questions about Personal Injury (PI) trusts.
What is a personal injury trust?
A PI trust allows someone who has received payment as a result of injury to hold and manage their funds to ensure that it is not taken into account for assessment of means-tested benefits or care contributions.
PI trust law marries a variety of legislation and is an area where specialist advice is required to ensure clients are not disadvantaged by payments, and to ensure their interests are protected.
A trust can also help people who might be vulnerable, young, old or simply unfamiliar with managing such a sum of money. The trust may not be necessary for everyone, however consideration of its advantages and the implications of not using one should always be considered.
What payments are included?
A PI trust can be used for your personal injury payments following an accident, but it is not limited to court awarded damages and negotiated settlement sums, it might also include insurance payments, other forms of compensation and even charitable donations.
It’s essential that only funds received for the injury make up the trust funds as ‘mixing’ can render the PI trust ineffective.
Why should I set up a PI trust?
In most cases where an award is large enough to impact upon benefits, a PI trust can be a sensible way to manage your new assets. There is a 52 week grace period where, for the first year, the initial payment received cannot be included in means testing for benefits or care contributions. If after 52 weeks you want your payments for injury kept out of account of Department for Work and Pensions (DWP) and local authorities means testing you can hold the funds in a PI trust.
There are circumstances where the size of the payment and the intended use of the money mean that a trust will not be necessary, for example if, after one year, your overall capital position will be below the relevant threshold.
When considering whether you want to use a trust, you should consider the thresholds for benefits and care contributions and what that means for you.
The advantages of using a PI trust are not limited to maintaining benefits, some injured parties will not be receiving benefits but don’t want their injury fund to be consumed by care costs, and others will want to protect the fund from third parties. Some will just want help managing it.
Why don’t I just spend it in the first year?
It’s your money and you can do what you want to with it, but if you do intend to just spend all or some of it you should be mindful of what you spend it on. The DWP and local authorities can treat amounts that they consider to have been ‘alienated’ (whether by spending or gifting) as still forming part of your assessable estate. You could end up having benefits stopped, interrupted or reduced, even after spending your award funds.
Much of the advice that we will give in relation to setting up a trust will be guided by the value of the award, and your intentions for it and your current circumstances, as well as your long-term needs.
What if I don’t get benefits?
Benefits protection is a common reason for using a PI trust but there are other reasons including care costs, protecting money from third parties (including relatives), and help with managing finances. It may also be the case that although you do not receive benefits now, you may do in the future and if that is likely or possible a trust should be considered.
When should I set up a PI trust?
Ideally, the trust should be set up before the expiry of the 52 week ‘disregard’ period, but it can be set up at any time subject to the personal injury funds still being available and identifiable. A trust can also be set up before the first payment.
You should also keep in mind that if you set up a trust after the injury funds have been properly taken into account, the DWP will not let you recover ‘lost’ benefits.
Can anyone set a PI trust up?
Usually, anyone who has received a payment for a personal injury can create a PI trust. However, in the case of adults with incapacity someone may need to do this for them, either by having Power of Attorney or a Guardianship order, and the authority of the Office of the Public Guardian will sometimes be sought.
Where the injured party is a child, the child’s parent can often set up a trust for them, although the Court might insist that the Office of the Accountant of Court is involved to ensure the child’s best interests.
How many trustees should I appoint?
Assuming you are capable, you can be a trustee but you should not be a trustee on your own as for most PI trusts this will have the result of making the trust ‘not a trust’. For the same reason, you should avoid two trustees where the chances are that the other trustee may be likely to die before you. Three trustees represent safety in numbers and allow decisions to be made by majority.
Your trust should be managed by people you can rely on. Family members often fill this role but it is usually wise to avoid anyone with a history of financial problems or anyone who is either overseas or unresponsive. It’s not uncommon for families to disagree, so professional trustees can be used alongside family members. A professional trustee will usually be experienced and can enable smooth trust management and provide key advice. Usually, a professional trustee will be held to a higher standard of care in terms of trust administration and benefit from professional indemnity.
How many types of PI trusts are there?
There are two common types of personal injury trusts and the most frequently used is a bare (or absolute) trust. A bare trust is transparent which means that the trust property, in every meaningful sense except for the purposes of means-testing, is treated as your own. The fund is taxed as if it is in your hands and, when you die, the property forms part of your estate and will be dealt with in terms of your Will. A bare trust is usually administratively straightforward and is capable of being invalidated by you. However, it won’t provide protections from third party creditors or claimants on your personal estate.
The other standard option is a discretionary trust. The use of discretionary trusts should only follow specialist legal advice and consideration of your circumstances. The trust fund is managed and held entirely separately from your estate which means that it is protected from third parties and claimants. In addition, trustees will have some discretion regarding benefitting other parties and in terms of distributing the trust estate after your death. However, the tax treatment of discretionary settlements is complex and can be made more difficult where the injured party is both settlor and beneficiary and specialist advice should be taken. The settlement is also irrevocable meaning you must give up absolute control over the trust fund.
Some PI trusts may qualify as trusts for vulnerable or disabled beneficiaries. These are discretionary trusts which can have certain tax advantages as the relevant property regime does not apply. They are not without their disadvantages and should be treated with caution.
Does a trust make it difficult for me to get my money?
It should be straightforward, but access to funds will require the trustees to ensure that the trust is correctly set up, whether funds are invested or simply held by a bank. Trustees in Scotland make decisions by majority; however, most banks and investment brokers will accept instructions allowing a nominated trustee or solicitors to instruct on behalf of the trustees. There may be some administrative requirements attached to releasing funds, but they rarely cause significant delay.
For larger awards, it would be common to hold a cash account alongside investments which helps ensure the trustees can make funds available to you quickly.
Can I withdraw money from the trust?
You can, but it is not best practice. Part of the effectiveness of the trust is that it very clearly separates the personal injury funds from your own. You should avoid using trust funds for general use as it can lead to mixing. Instead, it is recommended that the trust is used to pay for things directly.
What happens when I die?
If you used a bare trust, your trust fund will be dealt with in terms of your Will (if you have one), if not it will be handled by rules of intestacy. For more information see our article on the importance of having a Will.
The more complex discretionary trust does not cease on your death. However, it’s common for the trust deed to identify other beneficiaries and for the trustees to then begin the process of distributing the funds to those beneficiaries. This would usually be done in line with an expression of your wishes made when the trust was set up (or updated).
Should my injury payments be invested?
The trustees will have extensive powers in relation to the trust fund and investment is common. When considering whether they should invest, the trustees should consult with a financial advisor who will take into account the size of your payments, your current and future requirements, and other relevant circumstances.
When trust funds are invested the trustees are required to take appropriate advice unless they are suitably qualified.
How much does a PI trust cost?
The costs of setting up and managing a personal injury trust will vary from case to case.
Firstly, there will be a cost for setting up the trust. Depending on the complexity of the arrangements this will involve registration and initial reporting to HM Revenue and Customs, along with legal advice and preparation of the trust deed and associated work.
Costs are determined by the circumstances of the case, and if they are complex there may be additional expense. We can meet clients for a free, no-obligation initial meeting and after the discussion provide you with a fixed fee for the trust formation.
Secondly, in some circumstances the trustees will not be or feel able to administer the trust and seek legal assistance. In those circumstances the day-to-day work of administering the trust can be completed by a solicitor. The extent of legal work required in administering a PI Trust can vary considerably and we can provide the trustees with our expectations of what those costs might be.
How much does a professional trustee cost me?
A professional trustee is not entitled to charge for his, her or its acting as a trustee. However, professional trustees are often used where a law firm has been instructed to deal with the administrative requirements of the trust (i.e. reporting, accounting, compliance, management of distributions and payments, keeping records, and liaising with other advisors). In those circumstances, the firm will charge the trustees for its time, advice and work.
Where a professional trustee is asked to be the sole trustee of a PI trust, it is our practice to have its legal fees set annually by independent audit.
If you would like some more advice on personal injury trusts please contact Sandy Lamb, Partner in our Private Client team or complete our contact form and one of the team will be in touch with you shortly.
