In this episode of the HJ Talks About Abuse podcast, Partner Alan Collins and Senior Associate Robert Hurling discuss personal injury trusts.
What is a personal injury trust?
An injured person sometimes places or has placed for them their compensation into a personal injury trust which is a legally binding arrangement for the holding and managing of monies – compensation received as a consequence of injury.
When and why would a personal injury trust be needed?
The injured person may be unable to work and their family members may have given-up employment to provide care. They will continue to have their regular living costs to meet, including providing maintenance costs for their children or other dependant relatives. All these obligations and needs could mean that the person may still need to access DWP and local authority means-tested benefits and funding for care services. Receipt of compensation could affect entitlement.
A personal injury trust is a legal vehicle that can be used to ensure that the receipt of compensation does not affect entitlement to certain DWP and local authority means-tested benefits.
It is important to consider whether a personal injury trust could be used to ensure that the injured person:
- Is able to claim all of the state benefits and care funding that they may be entitled to, both now and in the future
- has a suitable structure in place to manage their compensation in the future
A personal injury trust can, therefore, protect the interests of very young, old, disabled or otherwise vulnerable people.
How does the personal injury trust work?
The personal injury trust is created by a legal document called a deed. The injury person appoints two but no more than four trustees who will manage the fund – the compensation. They will make decisions about investment and payments. This a very responsible job and depending on the individual’s circumstances whether family members or close friends act as a trustee together with the person receiving the compensation, or professionals are appointed such as solicitors. The trustees must each authorise all transactions within the trust, providing protection against inappropriate use of funds.
Trustees must each be over 18 years of age and mentally capable of fulfilling their responsibilities. They have to set-up a bank or building society account to hold the trust funds, which must be kept separate from all other personal finances. All cheques and transactions will be signed and authorised by the trustees. It is important to choose the right trustees, as they will have full control over the personal injury trust and the funds held within it. The trustees chosen must be able to work well together and act in the best interests of the injured person for whom the funds are held.
It is important that the injured person receives legal advice from a specialist solicitor about the right kind of trust to put in place. The simplest type of trust is called a ‘bare trust’ and this is often the most appropriate for personal injury funds. In this type of trust, the money still belongs to the injured person and they can end the trust at any time if they so wish.
However, other types of trust may be appropriate so the person’s specific circumstances should be considered. For example, the type of trust may affect the distribution of the injured person’s estate when they pass away, so provisions for their family in the future should be taken into account.
A personal injury trust can protect the interests of very young, old, disabled or otherwise vulnerable people
An injured person can benefit from the knowledge and experience of their trustees. Appropriate trustees can provide valuable advice and support when making important decisions. This can ensure that funds are managed appropriately to protect the injured person's long-term interests.
A personal injury trust helps to define and ‘ring-fence’ the funds that have arisen from a personal injury, keeping them separate from other assets. This can assist if a person's circumstances change and they become entitled to means-tested benefits and care services in the future.
How much does it cost to set-up a personal injury trust?
There will be a cost in setting up a personal injury trust. It should be remembered though that the trust may pay for itself several times over, and should be factored in when decided whether to go ahead.
The cost of creating a trust can sometimes be included in a compensation settlement, but often people will have to pay the costs themselves. Also, if a professional trustee, such as a specialist solicitor, is appointed to manage the fund then they will usually charge an annual fee.
When should the personal injury trust be created?
There is a 52-week disregard for payments relating to personal injury. This means that clients will have 52 weeks from the first payment of compensation (whether that is an interim payment of the final settlement) to set up a trust to receive the compensation.
Once set up, it will ensure that the funds can be transferred into the trust immediately and there will be no loss of DWP benefits or care funding entitlement provided this is done within the 52 week limit.
Some injured people may not be entitled to means-tested benefits and services at the time they receive their funds, and so a personal injury trust may not seem immediately relevant but circumstances can change, and some thought needs to be given to what might happen in the future.
It is possible for a trust to be created at a later date but it is not retrospective and does not allow for the injured person to claim for DWP benefits that they have missed out on.
Trusts for people without mental capacity
Some injured people lack the mental capacity to deal with their own financial affairs, under the criteria set out in the Mental Capacity Act 2005 (MCA). In order to make decisions for someone who lacks capacity, an application must be made to the Court of Protection (CoP). A CoP judge will then have to decide the most appropriate method for management of the person's financial affairs.
A deputy will usually be appointed in order to manage another’s property and financial affairs. This is usually preferred to the establishment of a personal injury trust, because a deputy is required to report to the Office of the Public Guardian (OPG). This requirement provides assurance that the person lacking capacity will have their best interests looked after. Funds held by a deputy will also be disregarded for means-tested benefits and services, in the same way as funds held in a trust.
In cases involving a child, a judge will need to approve the establishment of a personal injury trust to manage their funds until they reach 18 years of age. The court will need to be satisfied that a trust is suitable and is likely to be beneficial to the child, as well as approving the trustees and the type of trust that is to be used.
But it’s my compensation!
Yes it is, and remains so even with the establishment of a personal injury trust. An injured person (provided they have capacity) can always end the trust.
If you have any questions about setting up a personal injury trust, you can speak to Robert Hurling by visiting the Court of Protection page on the Hugh James website.
You can email firstname.lastname@example.org to speak to Alan about something you have heard today or to suggest a topic for a future episode of the podcast.