Frequently asked questions about personal injury trusts

1. What is a personal injury trust?

A personal injury trust is any trust that is set up by or on behalf of an injured person to hold funds that were received in consequence of a personal injury.

2. Why use a personal injury trust

One of the main advantages of creating a personal injury trust is that the assets held within the trust fund will be disregarded for the purposes of assessing eligibility for means tested benefits meaning that those who have come to rely on valuable income streams can continue to rely on them. In many cases, state benefits will pay for all aspects of daily living and the trust will be used to pay for the extras the beneficiary would not otherwise be able to afford such as private therapies, home adaptations and specialist equipment.

A personal injury trust is also an effective means of long-term asset protection. Those in receipt of compensation may have no experience of managing large sums of money and might benefit from the assistance and oversight of trustees who will manage the award on their behalf, provide checks and balances on spending and ensure the longevity of the fund. Injuries may make beneficiaries of personal injury trusts vulnerable to their own impulses as well as to influence from others who might seek to take advantage of them – a personal injury trust provides an additional layer of protection and ensures that the fund is spent appropriately and as intended. Some of those in receipt of compensation may not have capacity to make their own financial decisions. A personal injury trust provides a mechanism through which the fund can be managed by trustees and applied for the benefit of the injured person.

3. When should a personal injury trust be set up?

Ideally, a personal injury trust should be set up before an injured person receives their award. However, where that is not possible, the first payment received (whether in whole or part settlement of a claim) will be disregarded for the first 52 weeks when assessing entitlement to means tested benefits and some other forms of state support. If, after the 52-week period, the funds remain in the injured person's personal bank account, their means tested benefits will be adjusted accordingly. It is therefore important to seek professional advice as early as possible to ensure the trust structure is in place, prior to or shortly after the first payment is received.

It is never too late to create a personal injury trust but if compensation awards become mixed with other earned income and capital savings, it will become more and more difficult to ascertain which funds are derived from the funds paid in compensation for injury. A personal injury trust is special only by virtue of how it is funded. If funds are settled into the trust that are not paid or derived directly from compensation paid for personal injury, it will not qualify as a personal injury trust and will therefore not be disregarded for means tested benefits purposes.

4. What type of trust can be set up?

As above, a personal injury trust is special by virtue only of how it is funded. This means that any type of trust can be used to create a personal injury trust. The most appropriate structure will vary depending on the circumstances of each individual case.

Generally, a bare trust is the most common trust structure used in the context of a personal injury trust. The beneficiary of a bare trust is entitled to receive trust property at any time. This type of trust is appropriate where there are no concerns about overspending or susceptibility to influence from third parties. The main aim of this type of trust would be to protect the beneficiary’s entitlement to means tested benefits, either now or in the future.

If there are concerns that an injured person is likely to spend funds impulsively or inappropriately, a more protective structure like a liferent or discretionary trust may be required.

A liferent trust gives the injured person a right to the trust income. The injured party is not automatically entitled to the capital of the fund but normally, the trustees can make capital payments to them.

A discretionary trust has a set class of potential beneficiaries. This means that no one beneficiary has an absolute right to receive funds from the trust. The trustees will decide who benefits from the trust and to what extent.

Please note that a liferent and discretionary trust have potential IHT charges when assets enter and leave the trust and on each ten-year anniversary if the trust does not qualify as a disabled persons trust.

5. Who should be appointed as a trustee and how many trustees are needed?

Trustees will manage the trust fund for the benefit of the beneficiary. They are subject to certain duties and obligations and so an injured person should appoint people that are reliable and trustworthy.

There is no maximum number of trustees, but we generally recommend a minimum of two trustees and no more than four.

Where there are two trustees appointed, decisions must be unanimous. Where there are three or more trustees, decisions are made by majority. It is possible to appoint more than four trustees but as decisions are made by majority, there can be administrative delays caused by waiting for approval from more than four people at any one time.