There has been a lot of press coverage about changes to the personal injury claim system recently, much of which has been focused on relatively small claims. Over the years there have been many large claims settled in court running into hundreds of thousands of pounds and sometimes millions of pounds. These are predominantly awarded where there are life changing injuries and expensive medical care may be required for the rest of a person’s life. Personal injury trusts are not often discussed but where relatively large amounts of money are awarded they are certainly worth considering.
What Is A Personal Injury Trust?
In simple terms this is a trust which is used to hold funds received from a compensation claim in the UK or abroad. The funds are held away from the assets of the beneficiary and while there are a number of different types of trust, it is the ability to separate a person’s personal assets and compensation award which is most useful.
Once the funds have been transferred into the trust they are effectively controlled by the trustees of the trust, one of which can be the person involved in the claim, and all trustees must agree to any payments made from the trust fund.
Professional financial advice should be sought when looking to set up a personal injury trust and many people prefer to include a professional trustee for their advice and guidance going forward. There may be tax issues to consider – some of which may change in the future.
Who Can Set Up A Personal Injury Trust?
If it is decided that a personal injury trust would be of use to an individual, for one of many reasons, this can be set-up by the person who will receive the claim, their parents if they are a minor or their legal guardian. Where the person receiving the claim is incapacitated then the decision would be taken by either their legal guardian or their legal representative. This is an important issue because very often large personal injury claims revolve around life changing injuries.
Separating Personal Assets From Compensation Awards
If you sit back and consider the situation from a distance, compensation awards cover for example medical treatment going forward and should where possible be separated from personal assets. This effectively takes the compensation award out of the equation when looking at potential eligibility for means tested benefits and any support a local authority may offer, now and in the future. If the compensation payment was held in the recipients own name then this would be taken into account when looking at means tested benefits going forward. When the funds hit a personal account it is impossible to determine in the future what are personal assets and what are the remnants of any compensation award.
It is also worth noting that amalgamating personal assets and compensation payments can impact the ability of a partner to claim means tested benefits. This is an issue which is often overlooked when considering financial planning after a relatively large compensation payment has been awarded.
Lack Of Experience In Managing Funds
Very often when we read headlines about multi-million pound personal injury awards we forget that the money awarded very often needs to last a person’s lifetime. If these large awards, or even smaller awards, were handed to a person with a lack of experience in managing funds, or perhaps some kind of impairment, would they be used for the purpose for which they were awarded?
This is one more reason why personal injury trusts are becoming more popular because taking away the everyday administration, the pressure of managing relatively large funds and ensuring everything is in order can be a godsend. There may also be occasions where the funds are awarded to minors with their parents, guardians or appointed trustees put in charge of looking after their funds. There will be a monetary cost with regards to the administration of a personal injury trust but when compared to the value of advice from a professional trustee this seems negligible.
When To Set Up A Personal Injury Trust
If you receive guidance that your claim will be successful and you could be awarded a substantial amount of money, you might then want to consider setting the wheels in motion to set up a personal injury trust.
In a perfect world the compensation will be paid directly into the trust’s account, where the signatories would be the trustees, never touching the claimants’ personal bank account. If you receive a compensation payment directly into your bank account you can still transfer this to a personal injury trust. As the law stands, any partial or full compensation awards received will not be taken into account for means tested benefits within the first 52 weeks of receipt – starting on the day you received the funds.
There is a slight confusion where assets are bought and sold within the 52 week period using proceeds from the compensation payment. On occasion these can be included in your personal asset calculation although again it is advisable to take professional financial advice on this issue. So, whether you decide to set up a personal injury trust immediately after your award has been agreed or during the preceding months, it is vital that all funds are paid into the personal injury trust bank account within the 52 week period.
Appointing Trustees And Their Role Within The Trust
The trustees have effective administrative control of all funds and assets held within the trust – the details of which will be made clear when the trust is created. The decisions they will face in the future will revolve around the investment and distribution of the funds. It is a very responsible position looking after funds within a personal injury trust and you should choose your trustees with caution.
In a perfect world the trustees would work together in perfect harmony for the benefit of the beneficiary although sometimes professional advice might be required. As we touched on above, this is one of the main reasons why many people choose to appoint at least one professional trustee who can call upon their experience to give impartial guidance.
Managing Funds Within A Trust
Managing the funds and assets within a trust is fairly simple, all assets are held in the trustees name and the trustees are the sole signatories to the bank account. Approval will be required from all trustees before any funds or assets are distributed and they will be obliged to take professional financial advice to ensure that capital limits are not exceeded where, for example, means tested benefits may come into effect.
Where funds are required to pay for services and equipment they should be paid directly from the trustees bank account and not pass through the beneficiaries personal bank account. Managing the funds within a personal injury trust is relatively straightforward although there may be various intricacies depending upon the type of trust and the way in which it is legally created. It is also worth noting that no additional non-compensation funds can be added to the trust assets and the recipient of the compensation award does not have to place all monies within the trust.
Allocating Trust Funds On Death
Upon the death of a beneficiary the funds are traditionally amalgamated with their personal assets to form their estate for inheritance tax purposes. However, it is possible to set up a trust where the assets are reallocated to a third party upon the death of the beneficiary. This is an area which should be considered in great detail when setting up the trust even though it may be many years before you need to face this particular issue.
The rules and regulations surrounding trusts, taxation and means tested benefits will change from time to time and it is highly advisable to take professional financial advice when looking to set up a personal injury trust.