Personal Injury Trusts – A Brief Overview
Sadly life does not always go to plan and trips, slips, accidents and incidents can happen at any time to any one of us. Sometimes the accident is not due to the fault or negligence of any person or organisation but there are times when they do happen due to the fault of a third party or contributed to by the actions of a third party. In these circumstances advice should be taken from a reputable Personal Injury or Clinical Negligence lawyer to ascertain whether a claim for compensation is an option.
If a compensation claim is an option it is vital that as soon as, but preferably before, the offer is made and accepted or awarded through the court, advice is taken as to whether the damages should be placed into a Personal Injury trust. This is because the monies received from the award, if they are held by the injured person without the ring fence of a trust, could affect entitlement to means tested benefits both now and in the future. This is the case whether the injured person was already in receipt of welfare benefits prior to the injury or had to claim them as a result of not being able to work because of the injury or negligence.
By placing the monies into a Personal Injury Trust, they are ring-fenced from being regarded as capital in any means assessment for welfare benefits. This means that the injured person can still claim those benefits if in other respects they are entitled to them ie they don’t already have capital that would negate their entitlement. Furthermore, even if for other personal financial reasons the injured person is not claiming benefits currently, they may do so in the future meaning that the protection of the Personal Injury Trust is still relevant. This provision applies no matter where the injury occurred ie the injury did not have to have happened in the UK.
Entitlement to welfare benefits may not be the only or primary reason for placing injury compensation into a trust. It can also offer protection for the monies themselves, particularly if the injured person is not good with money or they may be pressured by family or friends to hand over sums of money that they were awarded due to an injury. Families can sometimes view the award as a windfall or akin to a lottery win when in actual fact the money was paid to compensate the person who has suffered and may have to be protected for future care and support rather than general spending.
The Personal Injury Trust may also offer some protection should the injured person get divorced as they are clearly segregated from the injured person’s estate to provide a fund for care or therapy and not part of the general matrimonial “pot” for division.
Provided the injured person can understand the concept of the trust and its implications and administration requirements, they are able to self-settle the monies into the trust. However care must be taken to ensure that the type of trust is right for the injured person. The most common type of personal injury trust is a bare trust where other than the virtual ring-fence of the trust the monies within it are the absolute property of the injured person. Provided this is the case then there are no tax consequences of placing the monies into the trust and no Inheritance Tax liability is triggered if the amount exceeds the nil rate band (currently £325,000) entering the trust. Neither at the present time does a personal injury bare trust have to be registered on the HMRC Trust Registration Service register.
If the injured person lacks the mental capacity to understand a Personal Injury Trust then an order from the Court of Protection would be required in order to place the funds into trust. A court order is also required should the injured party be a minor child.
Although the usual tax and administrative burden that generally applies to trusts do not apply to Personal Injury Trusts which are bare trusts, there is no tax benefit to them. This is because the money remains in the “estate” of the injured person for inheritance tax on their death. They are also personally liable for any income and capital gains tax that may be payable on the income/capital growth produced if the monies in the trust are invested but this would have applied anyway if they had been invested for the injured person in their own name.
There are other types of Personal Injury Trust other than a bare trust which can provide the injured person with a life interest or the trust can be a discretionary one. These trusts are less used for personal injury awards and are more complicated in terms of the taxation and succession provisions. Further, the Court of Protection would not generally approve a Personal Injury Trust that is not a bare trust – the exceptional circumstances of the case would need to persuade the court that a more complicated trust was necessary.
Compensation awards from other kinds of injury can also be channeled into a Personal Injury Trust such as criminal award damages, undiagnosed or wrongly diagnosed medical condition damages or clinical negligence or industrial disease or accident payments.
In conclusion, Personal Injury Trusts can be an excellent protection vehicle for monies awarded due to injury or negligence but it is essential that timely advice is sought as there is a 12 month time limit from when the payment, or first payment in a larger award, is received. Advice from a solicitor specialising in Personal Injury Trusts is crucial to ensuring that maximum benefit from the award in terms of legal protection is achieved and any necessary permissions from the court are obtained.
Ann-Marie Aston, a solicitor and partner in our Private Client team, specialises in Court of Protection practise as well as trusts for the vulnerable and injured persons. Ann-Marie’s client base is nationwide. Ann-Marie can be contacted on [email protected] or 0121 733 4336.
