Have you ever wondered whether it’s possible for a client to receive compensation from a personal injury claim without it affecting their entitlement to means-tested benefits? The answer is yes; within this article, we’ll explore a powerful estate planning tool known as the Personal Injury Trust.
What is a Personal Injury Trust?
A Personal Injury Trust is any type of trust or arrangement that can take receipt of funds derived from a personal injury, accident, or medical negligence claim. The type of trust should be tailored to the client’s individual circumstances and needs.
It is advisable to have at least two trustees or a trust corporation (such as our strategic partner Countrywide Tax and Trust Corporation) appointed to manage the trust and, depending on the type of trust, the trustees will have a range of powers and rules that govern them.
Why use a Personal Injury Trust?
It is commonplace that those who have suffered from a personal injury or accident may require assistance in the form of means-tested benefits, whether currently or in the future. Coupled with this, the client may not have the ability to work but would still have their normal daily living costs and responsibilities to account for.
With means-tested benefits, certain criteria determine whether a person is eligible for financial support and commonly this is capital or income dependent. If the client who needs financial support is due a lump sum of money (such as from a personal injury claim), this may render them ineligible for any benefit entitlement.
What can be done?
To avoid this problem, the funds can be settled into a Personal Injury Trust. The trust is viewed as a ‘disregarded location’ as the funds no longer sit with the client and therefore should not affect the person’s eligibility for benefits.
It is crucial that funds are settled into the trust within 52 weeks from the first payment to ensure there is no impact on their benefit entitlement. Be mindful that this may be as a lump sum or an interim payment. The Department of Work and Pensions provide this period of grace (52 weeks) from the first payment to enable clients to handle their financial affairs and for a Personal Injury Trust to be established.
What is the process of setting up a Personal Injury Trust?
The first step would be to determine what type of Personal Injury Trust is most appropriate for the requirements of your client:
• Bare – The beneficiary is absolutely entitled to the assets held in the trust; the trustees merely hold the asset on trust. This is the simplest form of Personal Injury Trust and is typically only used to move the funds from the possession of the client for means-testing purposes.
• Discretionary – The trustees are granted discretion over the decisions within the trust; they utilise their discretion on which beneficiary should benefit, at what time and how. This is beneficial from an asset protection point of view.
• Interest in Possession – The beneficiary is entitled to the income from the trust; the reason in doing so may be to obtain certain income tax benefits but the capital is held on a discretionary basis.
Due consideration should be provided when appointing trustees as it’s crucial to make the ‘right’ choice, especially where the trust asset is of considerable value. Appointing a professional trustee can ensure that a higher level of expertise and knowledge is applied to the role. The right trustees can take reasonable steps to manage the trust and protect the trust asset from any inappropriate use, which is particularly important for vulnerable clients.
CTT Group’s advice is to utilise discretionary trusts where possible. Not only are the funds disregarded for means-tested benefits, but the discretionary nature also procures a level of asset protection to ring-fence the funds against the beneficiary’s circumstances as there is no absolute entitlement to the trust asset. Thus, should the beneficiary encounter a threat to their wealth such as divorce, creditor claims, bankruptcy, or care costs, the funds are better protected than other types of trust.
However, a point to bear in mind is that a settlement into a discretionary trust is a Chargeable Lifetime Transfer. Thus, expert trust advice should always be sought.
On the funds being settled to the trust, the trustees could look to utilise the funds for the beneficiary, such as purchasing items directly from trust assets. However, any distributions from the trust should be facilitated with the utmost caution to avoid impacting the beneficiary negatively. Ideally, distributions should be loaned to the beneficiary in an attempt to ring-fence the funds from any threats.
If our partner Countrywide Tax and Trust Corporation Ltd was appointed as a trustee, a Trustees Meeting would be held to discuss any distributions, ensuring adequate assessment of the beneficiaries’ circumstances.
If you have a client who is due a significant sum of money because of an injury or claim, then the logical consideration would be the suitability of a Personal Injury Trust.
It is crucial to set up a Personal Injury Trust as soon as is reasonably practicable to avoid impact on any benefit entitlement your client could be in receipt of.
For further support on Personal Injury Trusts, contact the Estate Planning Team here at CTT who will be happy to advise you.