Personal Injury Trusts

If compensation is received for a personal injury there are often advantages to paying this into a Personal Injury Trust (PIT). For example, if the injured person is vulnerable or to preserve means-tested benefits, or both. Means-tested benefits include Income Support, Housing Benefit, Council Tax Benefit, Working Families Tax Credit, Disabled Person’s Tax Credit, Income Based Jobseeker’s Allowance and Employment & Support Allowance. Generally, if a claimant has over £6,000 they risk having their benefits reduced, or even lost altogether if they have over £16,000.

(1) Vulnerability
The PIT may be particularly useful if the person receiving the award is vulnerable due to young age or lack of mental capacity, and needs protecting from themselves or third parties. The trust adds a layer of protection that may not otherwise be available.

(2) Means tested Benefits
The Benefits Agency and Local Authorities, who are responsible for assessing eligibility for different types of benefits, usually disregard sums held in a PIT. Therefore eligibility for Income Support, Housing Benefit, etc, may be preserved and this could also possibly even help to ring-fence the sum from liability to contribute to the cost of long term care in a residential or nursing home.

It is not just individuals who are currently in receipt of benefits who should consider using a PIT. The future is uncertain and failure to pay compensation into a PIT when the damages are first awarded may result those assessing benefits seeking to include that sum in their assessment of capital available for meeting the cost of care.
Types of Personal Injury Trusts

Various types of trust may qualify as a PIT. Each has both advantages and disadvantages which need to be carefully considered. The interaction between tax, benefits and trust law can be complex and therefore expert advice will be necessary. The main types of trust are as follows:

1.A Bare Trust is where the fund is held outright for the injured person (ie the beneficiary) but administered by a trustee. When the beneficiary dies the fund is treated as part of their estate and passes under their Will, or if none the laws of intestacy. Bare Trusts are tax-neutral and often cost little to set up and run, but offer only limited protection for the injured person.

2.A Liferent Trust is where the fund is held by the trustees for the lifetime of the injured person, but so that upon their death it automatically passes to another person and therefore is not a part of their estate that they can leave by Will.

3.A Discretionary Trust is where the fund is held by the trustees in such a way that they may choose how much and when to pay to the injured person (or others). When the injured person dies the fund does not form part of their estate and the trust may end or continue, depending upon the terms of the trust. The main advantage of these trusts is flexibility.

4.A Trust for a Disabled Person is a type of Discretionary Trust where the injured person is ‘disabled’ (ie basically incapable by reason of a mental disorder, or in receipt of attendance allowance or disability living allowance). Under these types of trust the injured person must not have any actual legal right to the funds, although the trustees may choose to pay sums from the fund to them, and not less than 50% of any sums paid out from the fund must be paid for their benefit. There are tax advantage to these trusts which are therefore more commonly used where large compensation funds are involved and the trust is expected to be in place for a long period.

Depending on which type of trust is used, there could be tax implications and therefore it is recommended that you tax advice is sought – especially where very high level awards of damages are involved. The trustees may need to make annual trust tax returns to HMRC, unless a Bare Trust is involved. It is always advisable to have at least two trustees, one of whom may be the person entitled to the award of compensation if capable of acting.

Once the most appropriate type of trust has been selected it will then be necessary to decide how to invest the trust-fund. This is where the services of an Independent Financial Adviser can be useful. The Charities and Trustee Investment (Scotland) Act 2005 imposes duties on trustees to consider the suitability of the investments selected, to diversify the funds and to consider proper advice before acting.

This may involve conducting a cash-flow analysis to identify how much capital may have to be used to top-up any shortfall in income, with regard to the anticipated rate of growth of the fund. This exercise will have to be repeated regularly to ensure that no changes in investment policy are necessary. Investment Bonds are one of the many options available and as up to 5% of the sum originally invested can be paid tax-free to the injured person this may be attractive.

If you have any queries regarding the issues referred to in this article please contact our Private Client Department.

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