Personal injury trusts
If you have received damages for personal injury, you need specialist advice on the benefits of setting up a trust to hold your compensation money.
What is a personal injury trust?
It is a trust that can hold assets from an award of damages or compensation for any personal injury. It must be established for the benefit of the injured person (‘the beneficiary’). Individuals known as trustees are responsible for the day to day running of the trust, such as investing the funds, making payments to the injured person, and any annual compliance matters, such as tax returns.
Why create one?
Putting personal injury money into a trust ensures that the injured person is eligible, or continues to be eligible, for any means-tested benefits they might otherwise be entitled to receive. If the injured person (and their partner) has capital of £16,000 or more, they can no longer claim means-tested benefits until the capital has dropped below this amount. By placing the personal injury damages or compensation in a trust, this money is disregarded for assessment purposes.
There are other benefits of placing the funds in a trust. There may be concerns about:
- fluctuating mental capacity;
- protecting assets from divorce or bankruptcy in the future;
- ability to claim means-tested benefits in the future as a result of bad health; and
- managing large amounts of A trust can help with all these things.
How long do I have to decide whether a trust is appropriate?
There is a period of 52 weeks from the date of receipt of the first compensation payment to decide what to do with the funds. After that, the fund will become assessable as capital and benefits will be affected.
Who can be a trustee?
You should consider the following when choosing trustees:
- we recommend a minimum of two and a maximum of four trustees;
- the injured person can be a trustee but this may not be advisable;
- trustees must be over 18, be mentally capable and be UK resident;
- trustees should be financially astute and must not be bankrupt or have been declared bankrupt; and
- a professional trustee is not necessary but may prove helpful to avoid arguments or conflicts of A professional trustee also understands the various ongoing obligations but is likely to charge for their involvement.
What type of trust is appropriate?
Bare trust : this is the simplest form of trust. Any income or gains are treated as belonging to the injured person and the assets form part of their estate for inheritance tax purposes. As the trust ends automatically when the injured person dies, we recommend making a Will at the same time.
Life interest trust : the injured person is entitled to receive all the income generated from the funds during their lifetime. When the injured person dies, the capital will pass to other beneficiaries already selected by the injured person e.g. spouse or partner, children. For inheritance tax purposes, this trust is a relevant property trust which means there are entry, exit and 10-year anniversary charges.
Discretionary trust : the trustees of this trust have wide discretion to distribute or retain trust income and capital for the benefit of beneficiaries, usually selected by the injured person. They offer more protection for vulnerable injured persons. Discretionary trusts are relevant property trusts with entry, exit and 10-year anniversary charges.
Disabled persons trust : only injured persons who fall within the legal definition of a disabled person can benefit from this type of trust. To benefit from preferential inheritance tax treatment, the capital and income of the fund must be used almost exclusively for the benefit of the disabled person during their lifetime. This means it is not treated as a relevant property trust so does not have entry, exit and 10-yearly anniversary charges.
Can the injured person use the funds in the trust?
If the injured person receives capital directly from the trust fund it could, depending on the amount, have a detrimental effect on the level of any means-tested benefits awarded.
It is better for the trustees to make payments from the trust, either income or capital, directly to third parties. Such payments must always be for the benefit of the injured party (e.g. invest money, buy and insure property, purchase ongoing help and assistance, buy equipment, pay for holidays). The continuing benefits payments should generally cover ordinary expenses such as utility bills, clothing and food and therefore the compensation money should not be used for these purposes.
How can Greenwoods GRM help?
The Wealth preservation team at Greenwoods GRM can advise you whether a personal injury trust is suitable for your circumstances. We can act as a professional trustee or advise the appointed trustees as and when necessary.
Call our Wealth Preservation enquiry line on +44 (0)203 691 2080 and we will put you in touch with a lawyer who can help.
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