PERSONAL INJURY TRUSTS & FINANCIAL PLANNING - ALL YOU NEED TO KNOW

If you or a member of your family has had a personal injury or have been the victim of medical negligence then you many be entitled to compensation.  At some point you may receive a significant amount of money to help you to deal with your ongoing medical conditions.  This can be a long and arduous process, and your specialist solicitor will help you through this.

But what happens when you reach the end and actually receive your compensaation?  Your solicitor may give you the option of a personal injury trust.  This is an alternative to receiving the money in your own name, and can have some major advantages to you, as well as some potential drawbacks.  We help clients to manage their money in situations like yours, so we have produced a straightforward guide to personal injury trusts.

What is a personal injury trust?
A personal injury trust is a special kind of trust, which will allow you to hold your compensation money.  This trust will legally own the money placed into it, and you or your family will be able to access the money contained in the trust according to how it is set up.  Your legal adviser can recommend a particular structure for the trust.

From a financial perspective the personal injury trust allows you to legally ring-fence your money so that the compensation is ignored when assessing you for means tested state benefits.  Therefore, if you are currently in receipt of means tested state benefits you should consider using a personal injury trust.

Which state benefits are means tested?

  • Income Support
  • Housing Benefit
  • Council Tax Benefit
  • Working Families Tax Credit
  • Disabled Person’s Tax credit
  • Income Based Jobseeker’s Allowance

If your payout or settlement is greater than £6,000 your benefits could be affected; if the amount paid is more than £16,000 you could lose your benefits entirely.

What happens to the money in the trust?
Your solicitor will draft the trust in such a way as to allow for flexibility when the money is placed into the trust.  However, there will be some restrictions on what you can and can’t do with the money. The Benefits Agency will need to be informed of the trust, and will sometimes misunderstand the implications of the trust, so make sure you do things properly.

You will need to appoint trustees to manage the money in the trust.  This means that you might not always get your way with the money, but you will probably appoint yourself and/or family members.

If the trust is in your name then the income will be taxed based on your situation.  This income would need to be included on your own tax return.  If the trust is a more complex arrangement, such as a discretionary trust, you will need to think about completing a tax return for the trust; you will need an accountant for this.

You will need to be careful how you spend the money in the trust, as this can have an effect on the way you will be taxed, and assessed for benefits.  In general terms the money should be spent on specifics rather than as a regular monthly income. You should also be careful not to keep more than £6,000 in your personal account at any point, as this may affect your benefits claim.

You can decide to have all the personal injury trust money paid to you at any point if you no longer want to use the trust, although this would likely affect your means tested state benefits.

Why might you choose not to use a personal injury trust?
You may decide that the use of a trust would overly affect your ability to use the compensation money as you see fit.  For example, if you receive a sizable sum, this might need to provide you with an income.  This income may be inconvenient to control given the restrictions stated above.  Also, there are extra expenses associated with running trusts, and it can sometimes be difficult to convince trustees to agree to your requests.  All aspects should be considered before you make your decision.

Financial planning and personal injury trusts
If you receive a significant award of compensation you may well need financial planning advice and help with your investment management.  For example, you may want to work out whether to take a particular decision (such as to use a personal injury trust).  The process of financial planning can help you to determine which course of action is right for your future lifestyle.  In addition, investment management can help you to control the risks you take with your money and hopefully maximise income and/or capital growth. In addition, financial planning could help you to work out how much you can sensibly spend without fear of running out of money.

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Dan Woodruff

Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.

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