Personal injury trusts: not only for welfare benefits preservation
From time to time you may be asked to advise someone who has received a substantial damages award as a result of accidental or criminal injuries or as a result of a medical clinical negligence claim. In circumstances such as these if the client has been claiming means-tested benefits prior to his injury, or is likely to do so in the future, then you should consider whether they would benefit from setting up a personal injury trust. However, such trusts can also be useful for those individuals who are not claiming benefits and do not anticipate doing so in the future.
The advantages of personal injury (PI) trusts
Many benefits are means tested and if your client is likely to claim benefits, perhaps as a result of their injury, then their entitlement to benefits will be affected if their capital exceeds a certain limit (currently £6000). Once their capital exceeds £16,000 there will be no entitlement to means tested benefits at all. Certain assets are, however, disregarded from the assessment of the amount of an individual’s capital for benefits purposes and this includes a personal injury compensation payment if that payment is held in trust. An individual who has received a PI award of any substance who is claiming State benefits, or may do in the future, should therefore be advised to take advice on the possibility of a PI trust.
If benefits are not being claimed
Some clients may have other savings apart from their PI compensation payment and will not expect to have to claim benefits. Those individuals may, however, need to move into residential care in their later years, and this may be exacerbated by the injury that they have suffered. The advantage of a PI trust for those people is that assets in the trust will be disregarded in assessing that person’s financial contribution towards their care home fees, raising the possibility that the PI damages can be ring-fenced from social care liabilities.
Other individuals may not be in receipt of welfare benefits but, perhaps as a result of their injury, they find it difficult to manage large sums of money or are vulnerable to exploitation by others. In those cases a PI trust can provide a useful protection mechanism.
What sort of trust qualifies as a PI trust?
It is the nature of the trust assets rather than the form of the trust that qualifies it as a PI trust. If the trust assets consist of a lump sum received in relation to criminal injuries, or accidental injuries arising from negligence or industrial disease caused by workplace conditions, then the trust will be a PI trust.
Many PI trusts are constituted as bare trusts, ie the trustees hold the assets upon trust for the beneficiary absolutely. This is probably the most common PI trust but other types of trust are used. The advantage of a discretionary trust, for example, is that it provides a greater level of self-protection for a beneficiary as the injured person is not entitled, as of right, to either the income or capital of the trust. A discretionary trust is not, however, recommended if the amount of the damages award exceeds the inheritance nil rate band given the immediate lifetime charge to inheritance tax that would then arise.
Examples
David is injured in a car accident and receives a damages award of £150,000. He is able to work but feels that his injuries might result in him having to retire before pensionable age and perhaps having to draw benefits. In David’s case a bare trust would probably be recommended.
By comparison, Sarah has received a damages award of £250,000 arising from a medical negligence claim. She has had difficulty managing money in the past and is under pressure from friends to use her award in ways that would not be to her long-term benefit. A discretionary PI trust is recommended to Sarah both to preserve her benefits entitlement but also so Sarah’s chosen trustees can mange the award on her behalf and she will then be protected from her friends’ influence.
Charlie is involved in a car accident as a result of which he loses a leg. He has an office job and is able to continue his career and has accumulated other capital apart from his PI award. He is single and anticipates that in older age his disability will make it more likely that he will require some form of residential care. A bare trust is recommended to Charlie to protect his PI benefit from social care liabilities (although it remains available should he wish to draw on it).
Are there any tax advantages?
There are no tax advantages to a PI trust. Aside from the usual trust benefit of asset protection, the main advantage is in preserving benefits entitlements or maximising local authority help towards care home fees.
How soon should the trust be set up?
The damages award will be ignored as far as benefits are concerned for 52 weeks from its award, so there is a breathing space in which the client can decide what to do. During this period the damages should not be mixed with other assets but held in a separate account. If the award is received in tranches we would suggest that your client sets up the trust within 52 weeks of the first interim payment.
If you would like further information on PI trusts, please call us on 0800 915 7732.