Personal Injury Trusts: Support for you and your clients with life changing injuries

id

Individuals who suffer an injury following an accident or negligence, can often be awarded compensation and they may be advised to create a personal injury trust to hold these funds. In 2023 motor insurers paid out £2.4 billion in personal injury claims and the NHS paid a total of £1.992 billion in clinical negligence claims in 2022/2023.

Trustees may approach you to help them navigate some of the complexities of their role. As an adviser, you can also help them understand the investment and tax planning options available to them, with the injured person’s needs at the core of your advice.

In this second of a two-part series, we give you guidance on personal injury trusts and help dispel some of the myths. In the first part we discussed Deputies and Guardians.

We also have a guide on Personal injury payments where you can find out more about how we can support you and your clients.

id

Personal Injury Trusts

Individuals who have been awarded compensation because of a personal injury can often be advised to set up a personal injury trust. This can be used towards the payment of care, equipment, modifications to the home or ongoing treatment of the individual. 

The trust ring-fences the compensation from the individual’s personal assets and gives the trust the status of a personal injury trust. If personal funds, that do not relate to the compensation, are added to the trust, it will lose its status. 

This type of trust can be set up as a discretionary, absolute or interest in possession trust. These trusts are drafted on a bespoke basis by the individual’s solicitor. Each type has its advantages and drawbacks, and these will be specific to the individual’s circumstances and needs which would have been discussed when the trust deed was drafted. The discretionary trust is likely to provide the most flexibility.   

The person who has been awarded the compensation will be the settlor and a beneficiary of the trust. When the trust is created, the compensation is transferred to the trustees to hold and manage it for the benefit of that individual.

Protecting means tested benefits

One of the main benefits with this type of trust is the compensation payment isn’t regarded as a personal asset, it is disregarded when assessing the individuals’ eligibility to means tested benefits. The trust must be created within 52 weeks from the date the compensation is awarded for it not to be included in the assessment. 

Depending on the individual’s circumstances, they may not qualify for means tested benefits today however, they could qualify in the future. Creating a personal injury trust for the compensation payment removes it from any future assessment. 

This is something you may want to consider when carrying out your annual review meeting with the trustees.

id

This type of trust may also be suitable for individuals who have capacity.

id

Deputies and Guardians can create this trust, provided they have authority to do this. If the Deputy or Guardianship Order doesn’t include the authority to create one, they can ask the Court to authorise it.

id

Trustees will apply for and own any investment; they legally own the investment for the benefit of the individual.   

Trustees can invest in mutual funds, National Savings products, and onshore and offshore investment bonds. Individual Savings Accounts would not be a suitable investment because they can’t be owned by trustees.   

Trustees have a duty to obtain advice. The fact-find will help you draw out the income and capital needs of the beneficiary. The trust provisions can restrict the type of investments that trustees can invest in. Reviewing the trust deed early in the advice process will help you determine if there are any restrictions.

id

Income and capital paid to the individual loses its protection and will be included in the assessment. This can result in the means tested benefits being reduced or lost completely.

If the individual needs specific items, the trustees may want to consider buying them for the individual to use. The individual’s entitlement to means tested benefits will not be affected if the trustees own them.

id

These trusts can benefit from specialist tax treatment if it qualifies as a vulnerable person and disabled beneficiary trust. Provided the trust meets the qualifying criteria, the trustees can make an election, to HM Revenue and Customs, for it to be treated as a vulnerable person and disabled beneficiary trust.

Certain conditions must be met each year for the trust to benefit from specialist tax treatment. These rules are complicated and restrict who can benefit. The trustees may want to consider these complexities and restrictions before making any election and consider obtaining specialist tax advice. Using a personal injury trust without any election may provide greater flexibility.

Finally

The role of a trustee can sometimes feel overwhelming. They must navigate the complexities of managing a trust as well as ensuring that the compensation payment can support the immediate and long term needs of the individual.

As an adviser, your support in recommending tailored investment options and financial planning solutions will help the trustees to achieve a sustainable outcome for the beneficiary.