Personal Injury Trusts Explained

A personal injury trust may be relevant to you if you have or are about to receive financial compensation as a result of a personal injury. This compensation could be intended to cover a number of different matters including loss of income, an inability to continue a job and the cost of rehabilitation. 

Depending on the nature and extent of your injury, you may be entitled to claim certain benefits and local authority care support. However, many of these benefits are means tested and any savings or income that you have will be taken into account including any compensation received in a successful personal injury claim and in turn, may prevent you from being eligible for such benefits. This can be avoided or reduced by setting up a personal injury trust. A personal injury trust allows you to protect your compensation whilst retaining an entitlement to claim available benefits and the support that you need now or may need in the future. As well as benefits considerations, there are equally important tax and financial management issues to consider. These can engage complicated areas of tax, trusts and other topics.

What is a personal injury trust?

A personal injury trust is a place to hold the funds given in compensation of injury sustained. This can be from an injury in the UK or abroad and for a claim of any value. It can also include criminal injuries compensation. The trust itself can take a number of different forms and depends on whatever best reflects your needs and takes account of the tax situation. Once the funds are within trust, your trustees (which can include you) have control of the funds and will be managed for your benefit.

Why should a personal injury trust be set up? Protecting you, your award, family and loved ones

Once the compensation is placed in trust, it is generally disregarded when evaluating your eligibility for means tested benefits and local authority care and support. If the compensation is not placed in trust, then it will form part of your assessable capital and may affect your entitlement to claim these benefits. Furthermore, by creating a separate trust specifically identified as a "personal injury trust" will help authorities to identify that you have placed compensation funds in trust for a specific purpose. So be aware, look at the benefits you are receiving today, and just as important, the benefits you may need in the future. This also includes benefits claimed by your partner.

A personal injury trust can also be helpful if you have no or limited experience of handling large sums of money or perhaps you may not want to, or are unable to, deal with financial administration. By putting the money into a trust, your trustees will be responsible for looking after the funds rather than just yourself for your benefit. This can help lift the burden of these matters.

There are costs involved in setting up a trust and possible further costs of administering the trust. However, it need not be expensive or complicated and the ongoing costs (if any) will depend on the type of trust and your needs. The costs should be something a lawyer dealing with your personal injury claim should seek to recover from the other party or insurer. We can help your personal injury lawyer on such points.

Importantly, in situations where the injured party is vulnerable, incapable or is a child, this means that the funds are protected from third parties who may take advantage of their vulnerability.

When should a personal injury trust be set up?

In short, as soon as possible after receipt of the compensation, and ideally before it is received. If it is anticipated that the reward is going to be particularly large, the personal injury trust could be created before receipt of the reward or any interim payment so that it may be transferred swiftly into the trust. For the first 52 weeks following receipt of the whole or part of an award of damages from a personal injury claim, the award is disregarded from means tested assessments.

The 52 week disregard begins on the day on which you receive the first payment whether this is an interim or full payment and so care should be taken where there is an early interim payment of damages. Care should also be taken where the damages were used to purchase an asset which is then sold within the first 52 week period. In certain circumstances the proceeds of that asset can be taken into account when assessing capital. Therefore, it is preferable to set up the trust within 52 weeks of receipt of the reward to ensure your entitlement to claim means tested benefits and local authority support for care is protected.

However, all is not lost if the 52 week period passes with no trust in place as a personal injury trust can be set up at any point. The only potential disadvantage of delaying the process is that, firstly, it can be more difficult to identify what part of your finances comes specifically from the compensation award as, over time, it becomes more likely that the fund given as compensation will mix with your other assets. Secondly, any benefits you missed due to the financial award cannot be retrospectively claimed, making it worthwhile to set up a trust as soon as possible. Even if you are not eligible to receive means tested benefits at present, circumstances can change so it may still be worth considering creating a trust at the time of the receipt to strengthen and protect your position in the future.

Who can set up a personal injury trust?

You, the injured person, can set up the trust. If the injured person is a child then their parent can do this as their legal representative. If the injured person is an adult with incapacity then their attorney or guardian could establish the trust on their behalf, if appropriate and they have the right powers to do so.

What is the role of trustees and who should be appointed?

The role of the trustee is to administer the assets held in trust according to the terms of the trust deed. The trustees are responsible for making decisions about investments and distributions and also for paying taxes. It is important to choose someone you trust given the level of responsibility that they will have and you can be one of the trustees. It is therefore worth spending time deciding who to appoint as you will want these people to work well together and in your best interest. It is also worth considering appointing a professional trustee, such as a trusted adviser, particularly where awards are significant in value as they will be able to provide impartial guidance.

What happens with the money making up the award?

The compensation fund will be transferred into the name of the trust for your benefit. This means a bank account and/or investments would be set up in an account in the name of the trustees. All trustees would need to approve any funds being released. They can also assist with ensuring that payments do not exceed your capital limit to be eligible for means tested benefits and support (and the assessment also extends to your partner's capital). If you need to use part of the fund for a large payment, it may be better for you to instruct trustees to pay this direct so that large sums of money are not passing through your personal account and are potentially deemed as assessable.

There will also be important questions of financial advice and investment to consider. We are not financial planners and investment managers, but can help identify the right financial adviser to help you. You need a financial adviser who understands how these trusts work.

It is worth noting that you should not add any funds to the trust that are not part of your award. It is also of note that you do not have to put your entire claim into the trust.

What happens on death?

What happens when you die is dependent on the type of trust that you have set up. If you create a simpler trust then at death, the funds will form part of your estate and passed to the beneficiaries of your will or in accordance with the rules of succession if there is no will in place. In some trust arrangements, the trust deed (or an accompanying letter of wishes) will state what is to happen to the funds on your death and who benefits from the trust funds.

How is a personal injury trust set up?

By getting in touch with us to help you make these important decisions and put in place the right the legal documents and structures to protect you, your award and your family and loved one. We would be pleased to speak with you.

A little bit about our team

We are a well-resourced team with offices across Scotland and can help individuals, families, and other advisers (including personal injury lawyers) make informed decisions about the right legal structure to hold, manage and best use a compensation award. We are experienced in working with families and other advisers to set up a personal injury trust that meets individual, family and financial objectives.

Our core personal injury trust team gives unique access to a mix of Law Society of Scotland accredited trust law specialism, membership of the Law Society's mental health and disability law sub-committee, Society of Trust and Estate Practitioners membership and legal directory top ranked as well as compassionate and personable lawyers to help make important initial decisions and longer term support, guidance and advice.