Key points covered in this article:
- About personal injury trusts
- Setting up a personal injury trust
- Practical considerations when setting up your personal injury trust
- Financial planning and personal injury trusts
- Personal injury trust investment
About personal injury trusts
Personal injury trusts were created as a way for those who receive compensation to continue to be allowed to receive means-tested state benefits. Without a personal injury trust, your compensation award is likely to be greater than the amount of capital permitted under state benefit rules. This means that if you receive your compensation directly to your bank account you are likely to lose your means-tested state benefits.
A personal injury trust should protect the following state benefits:
- Housing Benefit
- Council Tax Benefit
- Jobseeker’s Allowance
- Income Support
- Employment and Support Allowance
The solution to avoid the award affecting your state benefits is to arrange for your compensation to be paid into a trust. A trust is a way for you to legally hold money separately from your own affairs, so that your award does not affect your state benefits (and those of your close family). The downside of this approach is that you have more controls and rules to follow if the compensation award is held within a trust.
Most personal injury trusts are bare trusts (and this article assumes that this is the case with your trust). This means that the trust is set up in the name of the person who was injured, and that they can access any or all of the capital held in the trust at any stage. It also means that the trust is not subject to inheritance tax rules (which is good), and that any tax paid on trust assets is paid by the injured person. Bare trusts are the most simple trust arrangements, but they still come with a variety of legal complications and potential pitfalls.
Setting up the personal injury trust
Your personal injury solicitor should arrange for the personal injury trust to be set up once your compensation award is agreed. From there, the compensation money will be paid into the trust, and you will need to appoint trustees to manage the assets on behalf of the injured person. Trustees are legally responsible for the management of the trust money, and have strict duties to look after the interests of the person who is to benefit from the trust. The personal who is to benefit from the trust is called the beneficiary. In most personal injury trusts this person can claim capital from the trust or wind it up at any stage.
Practical considerations when setting up your personal injury trust
If you are responsible for a trust, you are known as a trustee. You will have the legal right to deal with assets according to the terms of the trust, and to legislation. Your main role is to look after the interests of the beneficiaries – those who are entitled to receive benefits from the trust. With this in mind, your choice of trustees is an important one. Most people choose trusted family members or close personal friends. You can also choose a professional trustee, such as your solicitor, but in most cases this is not necessary. Bear in mind that a professional trustee will charge you fees for the service.
Setting up a trustee bank account
Most trusts will need a trustee bank account, although this is not a requirement. This will hold some or all of the compensation payment, at least until you are ready to distribute the proceeds or invest them. The trustees will need to set up the account as they are the legal owners of the compensation payment.
This can be a frustrating process as many banks have complex administration when dealing with trustee accounts. The trustee bank account will be used to receive any cash of the trust, and to make payments such as expenses of the trustees.
How will the personal injury trust be used?
By placing your compensation money into a personal injury trust, you naturally place certain restrictions around the use of the money. The primary reason for setting up the trust is to shield assets from calculations in means-tested state benefits. This means that you must be careful in how you spend any trust money, or you may risk losing state benefits.
You may need to inform the Benefits Agency that you have a personal injury trust, to avoid any future misunderstandings about your assets.
The income in the trust will usually fall on the injured person, so you need to be careful that this does not affect your state benefits. You should be careful to avoid income in any investments made by the trust (see below).
The capital belongs to the trust until it is distributed to the injured person. While this capital sits in the trust, you do not need to worry about it affecting your state benefits calculations. However, if you withdraw any capital from the trust, this is when you have the potential to cause problems with the state benefits. You should aim to have no more than £6,000 in your personal account at any stage.
If you take withdrawals from the trust this money should be used to fund specific items of expenditure, and should be for your own benefit. Payments should be for one-off items, not regular expenditure. This could include any of the following:
- Buying equipment to help with your disability
- Making improvements to adapt your home
- Medical treatments
Trustees can make payments directly to suppliers to avoid money passing through the beneficiary’s bank account.
Provided that you are an adult with no mental incapacity there should be no reason for trustees to refuse any request for a withdrawal from the trust.
Financial planning and personal injury trusts
If you are considering a personal injury trust, then it is likely that you have received a substantial award as a result of your claim. No doubt, the issue underlying the claim will mean that you have unique personal circumstances, and will need to adapt to these changes for the rest of your life. This will come at a personal cost, and also a financial coat. Of course, this is the reason that you have received your compensation award.
When we speak to people who have received a compensation award, they are typically concerned about a number of issues, such as:
- Will you have enough money to live the life you expect, without ever running out?
- How long will the compensation last?
- Tax and state benefits
- How do you structure your personal injury trust to ensure that you do not pay more tax than is necessary?
- Will your trust investments affect your state benefits?
- Lifestyle spending
- How much can you afford to spend from your compensation?
- Will large scale spending, such as a new home affect your future security?
Our Prosper service aims to deal with all of these questions, and whatever else is of concern to you after a serious illness or injury. We help you to understand how your financial life after the receipt of your compensation, and examine how you can remain secure no matter what happens.
Personal injury trust investment
If you have more than £150,000 awarded to you, you may wish to consider investing this money to ensure that you can maximise the income and capital from your compensation. If you leave the award in a bank account then this will lose money compared to the cost of living each year. Also, a bank account is not likely to help your funds grow you want to help the money to provide for your needs for as long as possible it makes sense to consider a trustee investment.
- Compliance with strict rules
Trustees are subject to strict rules around investing money in trusts. For more information see our article on the Trustee Act 2000.
- Getting the right tax structure
We help trustees to understand the best investment wrapper according to the needs of the trust and the beneficiary. In many personal injury trust cases we recommend investment bonds, since these allow us to avoid income on the trustee investments. This can be an important factor when sheltering money from state benefits calculations.
- Managing risk
Many trustees are family members with little experience of managing large sums of money. We can help you to structure trustee investments using a professional approach, within stated levels of risks.
- Maximising returns
You will want the trust’s money to last as long as possible, so we aim to help your funds grow over time allowing for the flexibility required to take withdrawals as necessary.
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