If you have been awarded compensation in a personal injury claim, you might want to consider setting up a personal injury trust to protect it. This will ensure that the payment you received is not taken into account for the assessment of means-tested benefits or care contributions.
A PI trust may also benefit vulnerable people such as children and the elderly or those unfamiliar with managing large sums of money. Furthermore, the trust would also ring-fence your settlement, so it is protected from third parties and cannot be used to cover future care costs if you ever need to go into a care home.
Setting up a trust requires the appointment of at least two trustees to hold and manage the personal injury trust funds. They would have to agree to the withdrawal of any money and authorise all cheques and transactions.
A personal injury trust is not always necessary. Depending on your circumstances, your solicitor will decide whether this is your best option. For more information and advice on PI trusts, you can enter your details into our online claim form or call 0800 678 1410 to speak to a legal adviser.
What is a personal injury trust?
A personal injury trust is a legally binding agreement in which at least two people hold and manage the compensation money. This is a legal way of ring-fencing your settlement so that it will not be taken into account for the assessment of means-tested state benefits.
Many benefits you could receive from the state are means-tested, meaning that your income and capital might affect your eligibility. Without a PI trust, your compensation award might prevent you from accessing these benefits, which may include:
- Jobseeker’s Allowance
- Income Support and Housing Benefit
- Council Tax Support
- Pension Credit
- Tax Credits
- Universal Credit
- Sure Start Maternity Grant
- Funeral Payment
- Cold Weather Payment
A compensation award aims to put you in the same financial position you would have been in had the accident not occurred and falls into two parts:
- General damages awarded for the pain, suffering and loss of amenity
- Special damages awarded for any related financial expenses, including future losses
However, local authorities do not distinguish between the compensation money and your personal savings. Having between £6,000 and £16,000 in your bank account will lead to reduced benefits, and having a more substantial capital will likely cause you to lose entitlement to means-tested benefits completely.
A personal injury trust may also protect your settlement from being used to pay care home fees if you might need to go into residential care. The PI trust would also ring-fence your compensation award from any third party, for example, if you declare bankruptcy or go through a divorce.
How does a personal injury trust work?
A personal injury trust is a legal document which allows trustees to hold and manage any compensation awarded for a personal injury, including when it was caused by:
- A road traffic accident
- An accident at work
- An accident in a public place
- Medical negligence
- A sports injury
- A criminal injury
The primary purpose of the PI trust is to allow the injured person to claim or continue to receive means-tested benefits and help protect their future.
Personal injury trusts have several characteristics:
- It is comprised exclusively of the compensation received after winning a claim.
- The person establishing the trust, called the settlor, is the claimant, except in certain circumstances, such as when the injured part is a child or protected party.
- The settlor must be the sole beneficiary or, in some situations, at least one of the PI trust beneficiaries.
To set up a trust, you must nominate at least two trustees whose role will be to manage the compensation money. If you nominate yourself as a trustee, you should appoint a minimum of two and a maximum of four further trustees over 18 years of age.
There are two main types of PI trusts that are commonly used:
Bare trusts are often used to pass assets to young people and look after them until the beneficiary is old enough. Once the beneficiary turns 18, they have the right to all of the capital at any time. Any income generated within the trust belongs to the beneficiary, and the trust becomes part of their estate on their death, but it will be taxed.
If you set up a discretionary trust, the trustees can decide how to use the trust income and sometimes the capital, depending on any terms specified in the deed. The PI trust is held and managed separately from your estate, so it is protected from third parties and claimants. The trustees often have discretion on any conditions to impose on beneficiaries.
Should I set up a personal injury compensation trust?
Setting up a trust may not be necessary for everybody, but this could help people manage their capital, whether they are vulnerable, old, young, or unfamiliar with administering large sums of money. A PI trust is especially recommended if your compensation award is large enough to impact state benefits that you currently receive or think you may claim in the future.
There are several benefits of having a personal injury trust in place, including:
- Any funds held in the trust will be ignored for means-tested benefits and Local Authority funding, so you can continue to receive these in the future.
- It protects your right to receive social care funding, so your compensation will not be used to pay care fees if you ever need to go into a home.
- A personal injury trust ensures that your compensation award is not spent unwisely. You could benefit from the knowledge and advice of your trustees when making important decisions to make sure your long-term interests are protected.
- The PI trust ring fences the funds you received in a personal injury claim, keeping them separate from other assets and safe from third parties.
- It protects disabled, very young, old or otherwise vulnerable people against inappropriate use of the compensation award, if:
- They have no experience handling large sums of money
- They want protection against grasping family members or friends
- They have an unstable mental condition
- They do not want to concern themselves with the financial administration of the fund
- They fear the impact of a divorce or bankruptcy on their funds
Depending on your circumstances, your solicitor will determine whether setting up a personal injury trust is worth it and what type of trust best suits your situation. They can also advise you on:
- What state benefits you might be entitled to receive
- Who to appoint as trustees
- How to run your personal injury trust
- Tax returns and accounts for your trust
Although setting up a PI trust is not expensive, it may not be worth it if your compensation award is nominal or if you do not plan to claim means-tested benefits. To find out whether a personal injury trust is the right option for you, enter your details into our online claim form or call 0800 678 1410 for a free consultation with a legal adviser.
What is the role of the trustees?
To set up a personal injury trust, you must appoint at least two trustees, each over 18 and mentally capable of fulfilling their responsibilities. They should set up a bank account to hold the PI trust funds separate from all other personal finances.
It is essential to choose the right trustees, as they will have control over the funds held within the PI trust and must authorise all cheques and transactions. However, trustees cannot use the funds for their benefit or as their personal property.
There are several points to be considered when choosing trustees:
- It is not always recommended to appoint the settlor (the claimant) as one of the trustees.
- The optimal number of trustees is between two and four.
- Trustees should reside in the UK and not have a criminal record or a negative credit rating.
- To avoid conflicts of interest, at least one trustee should be someone who is not a family member.
- If there is a substantial compensation award, people find it valuable to appoint a professional trustee to manage their funds.
- Trusts for children or adults who lack mental capacity usually have to include at least one professional trustee.
Your trustees should always have your best interests at heart, provide key advice on how to manage your compensation award and consent to the withdrawal of any funds. Their powers and responsibilities are set out in the PI trust deed and are included within general law.
The trustees could potentially open and operate a bank account, buy and insure property, invest money and hire help and assistance for the beneficiary. They also need to fulfil a series of duties, including:
- Take independent financial advice
- Have the final say over what to invest in
- Act fairly, impartially and with reasonable care
- Do not charge anything for their services
- Ensure beneficiaries are fully informed
- Keep good trust record and accounts and pay any taxes due on time
If you are unhappy with a trustee, you can remove them and appoint someone else. Your solicitor can give you more information on the role of your trustees and can advise on whom to appoint.
When does a personal injury trust need to be set up?
You are not required to set up a trust before your case settles, and you can do so within 52 weeks after receiving compensation. However, it is advisable to set up your PI trust as soon as possible once you know you are going to receive compensation for your damages.
It is essential to know that the 52-week period to set up a trust runs from the first payment received following a personal injury, which could be an interim payment, a payment from an accident insurance policy or even a capital payment from a charity.
Under the Income Support (General) Regulations 1987, any payment received in a personal injury claim will be ignored for 52 weeks when assessing entitlement to means-tested benefits. After this period, your funds will only be ignored if placed in a personal injury trust.
Depending on the size of your compensation award and the intended use of the money, setting up a trust may not be necessary at all. For example, if the payment you received does not place you above the relevant threshold for receiving benefits.