Personal Injury Trust — Most frequently asked questions
None of us like the thought of suffering a personal injury that could seriously and indefinitely impact our quality of life. The reality, however, is that this can happen to anyone, whether through a road accident, an industrial accident or an act of negligence. Through no fault of your own, you could be left disabled or with a form of brain injury unable to live independently.
If the injury was someone else’s fault, you are likely to be awarded compensation to cover the costs of ongoing care, equipment or adapting your living environment. This could well be a large sum — in some cases measured in hundreds of thousands or even millions of pounds — but it also creates problems.
If you have a large amount of money, either sitting in a bank account or invested, it could be vulnerable to many claims on it, such as divorce settlements or bankruptcy. However, the most likely risk comes if you are claiming means-tested benefits for day-to-day living or need local authority funding for your care. These will be stopped, meaning you would have to live on your compensation, instead of using it for the intended purpose of maintaining your quality of life.
The way to avoid this is to put the compensation money into a particular type of Trust fund called a Personal Injury Trust, managed by people you appoint called Trustees under terms that you specify when setting up the Trust. This will mean that you are still able to access funds when required, but that the assets will not be legally regarded as your property. They will not be able to be claimed for any settlement or debts, and they will also not be counted when assessing you for means-tested benefits.
Like any legal process, this can be a complicated matter, and we have found that people interested in setting up a Personal Injury Trust typically have quite a few questions. Here are the most common and their answers:
1. What is a Personal Injury Trust?
A Personal Injury Trust is a legal arrangement that allows individuals who have received compensation for personal injury or clinical negligence to protect and manage their funds. It provides a way to safeguard the compensation, while ensuring it does not affect their eligibility for means-tested benefits or care funding.
- A Personal Injury Trust is created to hold and manage compensation received for personal injury or clinical negligence.
- It protects the compensation from being considered as an asset that affects eligibility for means-tested benefits or care funding.
- The trust ensures that the funds are used for the beneficiary’s benefit, such as paying for medical expenses or improving their quality of life.
2. Why should I consider setting up a Personal Injury Trust?
Setting up a Personal Injury Trust offers several benefits and safeguards for individuals who have received compensation for personal injury or clinical negligence.
By placing the compensation in a trust, it does not count towards the means-tested benefits calculation, ensuring continued eligibility for financial support.
Trust funds are not taken into account when assessing an individual’s ability to fund their care, allowing them to access necessary care services without depleting their compensation.
Another major reason to set up a personal injury trust is that it ensures that the compensation is managed responsibly, protecting it from potential mismanagement or misuse.
3. How do I set up a Trust fund?
Before you take any other steps towards setting up a Trust fund, the first thing to do is to choose a specialist solicitor who has a good track record of helping people with Trust funds.
Secondly, you will need anything between two and four Trustees. In theory, these can by anyone over the age of eighteen who has mental capacity, but in practice, they need to be someone you can rely on to act in your best interests. They could be family members or close friends, or else professionals such as solicitors or accountants. However, it’s necessary to ensure that they are willing to act as Trustees before you start the process.
Next, you will need to have a Trust Deed drawn up, which some solicitors, including Osborne Morris & Morgan, will be able to prepare and then store for you. Your solicitor can also help you decide how to invest the funds by engaging the help of a financial advisor, as well as register the Trust with HMRC and help to administer it.
4. Do I need a Solicitor to create a Personal Injury Trust?
While a Trust Deed does not legally require a solicitor’s input, it is a complex legal document. Any mistakes you might make could have serious consequences, ranging from problems in administering the funds to the Trust being declared invalid.
However, not all solicitors are equally knowledgeable about Trusts. A general solicitor may have some idea of the procedure, but you would be best advised to seek the services of a specialist firm that has a dedicated team dealing with Personal Injury Trusts.
5. Will I have to pay tax on a Personal Injury Trust?
It is often assumed that a Trust Fund is not subject to tax, but the reality is more complex. If you as Settlor (the person who sets up the Trust) are the only person to benefit from it (which is the normal situation with a Personal Injury Trust), your compensation will not be taxed when it is paid into the Trust.
However, income received from the Trust may in some circumstances be subject to income tax, capital gains tax and inheritance tax, although you may be able to reduce your tax burden by careful estate and lifetime planning.. This should be discussed in full with your solicitor when setting up the Trust, and they will be able to advise you on how to keep tax to a minimum.
6. Who can be a trustee of a Personal Injury Trust?
When choosing trustees for a Personal Injury Trust, it is important to consider individuals who can effectively manage the trust and act in the beneficiary’s best interests. Trusted family members or friends are often chosen as trustees, as they have a personal connection to the beneficiary and can make decisions in their best interest.
Some individuals opt for professional trustees, such as solicitors or trust companies, who have expertise in trust administration and can ensure the trust is managed efficiently. It is possible to have a combination of family members or friends and professional trustees to benefit from their respective strengths and expertise.
7. Can I access the funds in my Personal Injury Trust?
Accessing the funds in a Personal Injury Trust requires adherence to the rules and terms outlined in the trust deed. The trustees have the discretion to release funds from the trust for the beneficiary’s benefit, such as paying for medical treatments, rehabilitation, or other needs. Trustees must act in the beneficiary’s best interest and consider their welfare when deciding on releasing funds.
Depending on the terms of the trust, there may be limitations on accessing the funds to ensure their long-term preservation and use for the beneficiary’s benefit. Remember, it is important to consult with a legal professional to understand the specific provisions and conditions of your Personal Injury Trust.
8. Can I use my compensation for personal investments?
When you put your compensation money into a Personal Injury Trust, it is no longer legally your property. Asmentioned above, this protects it from a wide range of potential claims, but it also means that you cannot treat it as personal assets. This includes making personal investments, such as an ISA.
However, the funds can (and in many circumstances should) be invested by your Trustees, preferably diversified as widely as possible. As long as this is done carefully and responsibly, it should bring in greater income for the Trust than leaving it in a bank account, and this extra money will be available for your needs in the same way as the original funds. However, you will need to specify in the Trust Deed what kind of investments the Trustees may make.
9. Can I buy property with the money in my Personal Injury Trust?
The answer here is much the same as to the previous question. Since the funds in the Trust are not legally yours, any property bought with them would belong to the Trust, not to you. However, the purpose of the purchase would need to be either for your personal residence or as an investment, with income received into the Trust being used for your care.
Again, you would be advised to establish in the Trust Deed what latitude the Trustees have to buy property with the funds and how it should be used.
10. Can every bank account be used as a Trust account?
Even if the Trustees invest the funds wisely, a bank account will still be required. This will be where your compensation will initially be deposited, as well as being where any money spent for your needs will originate from.
The account will need to be set up by the Trustees, but by no means all types of account will be available for a Trust. Typically, the major banks are each likely to offer one or two Trust accounts, meaning that the Trustees will not be able to compare a full range of accounts and pick the one offering the highest rate of interest.
11. Can a Personal Injury Trust be set up for someone without capacity?
Unfortunately, some personal injuries result in brain damage, meaning that the victim does not have sufficient mental capacity to make important choices. This includes making the decisions necessary when setting up a Personal Injury Trust.
If the victim has established a Lasting Power of Attorney (LPA) for finance and property, this will empower the appointed Attorney to set up the Personal Injury Trust on their behalf. The alternative is a long-winded and expensive application to the Court of Protection, and this is just one of many reasons why setting up an LPA is advisable. Osborne Morris & Morgan’s dedicated Lasting Power of Attorney team can help you with this.
12. Are there costs in setting up a Personal Injury Trust?
Very few legal processes are entirely cost-free and setting up a Personal Injury Trust is no exception. Essential costs include registering the Trust and reporting to HMRC. Your solicitor will also charge for their advice and assistance. These set-up costs may in some circumstances be included in the Court’s calculation of your compensation.
In some circumstances, there may also be ongoing costs, ranging from storing the Trust Deed to professional advice to the Trustees. Any costs should always be weighed against the risk of the Trust losing money or performing ineffectively without assistance.
If professional Trustees are appointed to manage the Trust rather than a family member then their professional fees will also be met from the Trust.
13. Can I make changes to a Personal Injury Trust?
Under certain circumstances, it is possible to make changes to a Personal Injury Trust to accommodate evolving needs or circumstances. Depending on the terms outlined in the trust deed, it may be possible to amend certain provisions with the agreement of all trustees and beneficiaries.
Trustees can be appointed or removed if it is in the best interest of the beneficiary or the trust. However. it is always advisable to consult with a solicitor specialising in trust law to ensure any changes made to the trust are legally valid and properly documented.
14. What happens to the trust if the beneficiary passes away?
The fate of a Personal Injury Trust upon the beneficiary’s death depends on the specific provisions outlined in the trust deed and legal regulations. The trust deed may specify how the remaining trust funds should be distributed upon the beneficiary’s death. It could go to other beneficiaries or be included in the beneficiary’s estate for distribution.
It is essential to carefully consider succession planning and determine the desired course of action for the trust in the event of the beneficiary’s passing.
Seeking guidance from legal and tax professionals is crucial to ensure compliance with legal requirements and minimise potential tax implications.
15. Can a Personal Injury Trust be revoked?
Revoking a Personal Injury Trust is possible in certain situations, but it is a complex process that requires careful consideration and professional guidance.
The trust deed may include provisions for revocation, allowing for the termination of the trust under specific circumstances. It is strongly recommended to consult with a solicitor who is experienced in trust law, to understand the implications of revoking the trust and the steps involved.
Before revoking a Personal Injury Trust, you should consider alternative solutions. Explore alternative options and consider the potential consequences, such as the impact on means-tested benefits or care funding.
16. I want to set up a Personal Injury Trust — what should I do?
The first thing to do if you have decided to set up a Personal Injury Trust, either for yourself or as an Attorney for someone else, is to contact our dedicated Personal Injury Trust team for an exploratory meeting.
Osborne Morris & Morgan’s expert solicitors will be able to walk you through every step and every problem you are likely to encounter. If you appoint us as Trustees we also produce annual trust accounts for the clients to review.
So contact us today and take the first steps in setting up your Personal Injury Trust.