A personal injury trust is a versatile legal arrangement that offers far more than just safeguarding your benefits eligibility. It’s a powerful tool for financial management, providing protection, structure, and potential tax efficiencies for your compensation funds. Whether you’re currently receiving benefits or not, a trust can offer significant advantages in managing your settlement effectively.
This comprehensive guide will explore what personal injury trusts are, how they work, and the wide-ranging benefits they can provide. From protecting your funds against future financial pressures to ensuring professional management of your compensation, we’ll look at why a personal injury trust might be the right choice for you, regardless of your current benefits status.
What is a Personal Injury Trust?
A personal injury trust is a legal arrangement that allows you to hold and manage compensation from a personal injury claim separately from your personal finances. By doing so, the funds within the trust are not considered when calculating your eligibility for means-tested benefits. This can help ensure that your compensation does not inadvertently reduce or eliminate your benefits.
Key Features of Personal Injury Trusts
- Protection of Benefits: Funds in the trust are disregarded when assessing eligibility for benefits like Universal Credit, Income Support, and Housing Benefit.
- Control and Flexibility: You can be one of the trustees, getting a say in how the funds are used.
- Separate Legal Entity: The trust is a separate legal entity, distinct from your personal finances.
While the primary purpose of a personal injury trust is often to protect means-tested benefits, there are several other compelling reasons to consider setting up a trust, even if you’re not currently receiving benefits.
Why Set Up a Personal Injury Trust?
Preserve Means-Tested Benefits
The primary reason for setting up a personal injury trust is to protect your entitlement to means-tested benefits. Without a trust, receiving a large compensation payment could push your savings above the threshold, affecting your benefits.
Financial Management and Protection
A trust can provide a framework for managing your compensation over the long term. It can help you budget and allocate funds for specific purposes related to your injury. For example, ongoing medical treatment, rehabilitation, or necessary adaptations to your home or lifestyle.
Having your compensation in a trust can provide a layer of protection against financial pressures from family, friends, or creditors. The funds are ring-fenced for your specific needs related to the injury.
Future-Proofing Your Finances
Even if you’re not currently receiving benefits, your situation may change in the future. Having a trust already in place can protect your eligibility for future benefit claims if your circumstances change.
In some cases, funds may be protected in the event of divorce or personal bankruptcy. This can ensure that the compensation remains available for its intended purpose.
Potential Tax Advantages
While personal injury compensation is generally tax-free, any interest earned on the compensation could be taxable. A trust might offer some tax planning opportunities, depending on how it’s structured.
Protection in Case of Loss of Capacity
If you were to lose mental capacity in the future, having a trust in place with appointed trustees can ensure that your compensation continues to be managed in your best interests.
Access to Expert Financial Advice
Trustees can include financial professionals who can provide expert advice on managing and investing the funds to ensure they last as long as needed.
Ring-Fencing Compensation
A trust clearly separates your compensation from your other assets. This can be psychologically beneficial, helping you to use the funds specifically for your recovery and rehabilitation needs.
Flexibility for Complex Cases
For large compensation awards, a trust can be used in conjunction with a structured settlement, providing regular payments while protecting the bulk of the award.
Protection for Vulnerable Individuals
If the injured person is vulnerable (e.g., a child or someone with cognitive impairments), a trust can provide additional safeguards to ensure the funds are used appropriately.
Personal Injury Trusts and Estate Planning
Integration with Your Will
Separate from Your Estate: Funds held in a personal injury trust are typically not considered part of your estate for probate purposes. This means they don’t fall under the general provisions of your will.
Specific Trust Provisions: The trust deed, not your will, determines what happens to any remaining funds in the trust after your death. It’s crucial to ensure that your trust deed aligns with your wishes for these funds.
Beneficiary Designations: You can specify in the trust deed who should benefit from any remaining funds after your death. This can be different from the beneficiaries named in your will.
Advantages in Estate Planning
Avoiding Probate: Since trust funds are separate from your estate, they can be distributed to beneficiaries without going through the probate process, potentially saving time and costs.
Protecting the Funds: If structured correctly, a personal injury trust can help protect the compensation from being used to pay for care home fees or other debts of your estate.
Tax Planning: In some cases, having compensation in a trust rather than as part of your personal estate can offer inheritance tax advantages. However, this depends on the specific circumstances and trust structure.
Considerations for Your Will
Referencing the Trust: While the trust funds are separate, it’s often advisable to mention the existence of the personal injury trust in your will to ensure clarity for your executors and beneficiaries.
Coordinating Beneficiaries: Consider how the beneficiaries of your trust align with those in your will to ensure your overall wishes are met.
Letter of Wishes: You might consider writing a letter of wishes to accompany your will and trust deed, explaining your intentions for the compensation funds.
Updating Your Estate Plan
Regular Reviews: As with any aspect of estate planning, it’s important to review your personal injury trust and will regularly, especially after significant life changes.
Professional Advice: Consult with both your trust solicitor and estate planning solicitor to ensure your personal injury trust and will work together effectively.
Integrating your personal injury trust with your overall estate plan means your compensation continues to be used according to your wishes, even after your death. By considering how the trust interacts with your will and other estate planning tools, you can create a comprehensive strategy that protects your compensation and provides for your beneficiaries in the most effective way possible.
How to Set Up a Personal Injury Trust
Setting up a personal injury trust involves several steps, and it’s advisable to work with a solicitor experienced in this area. Here’s an overview of the process:
1. Choose Trustees
Select one or more trustees to manage the trust. You can be a trustee, but it’s recommended to have at least one other person, such as a family member or professional trustee. This will help to ensure impartiality and proper management.
2. Draft the Trust Deed
A solicitor will help you draft a trust deed, which outlines how the trust will be managed, the powers of the trustees, and how funds can be used. The deed is a legal document that establishes the trust.
3. Open a Trust Bank Account
Set up a separate bank account in the name of the trust. This account will hold the compensation funds and should be used exclusively for trust-related transactions.
4. Transfer Compensation Funds
Once the trust is established, transfer your compensation funds into the trust bank account. This ensures that the funds are legally part of the trust and protected from benefits assessments.
5. Manage the Trust
The trustees are responsible for managing the trust according to the terms of the trust deed. They must act in the best interests of the beneficiary (you) and ensure that funds are used appropriately.
When to Set Up a Personal Injury Trust
It’s advisable to set up a personal injury trust as soon as possible after receiving your compensation. Ideally, the trust should be established within 52 weeks of receiving the settlement. That way, the funds are disregarded for benefits purposes from the outset.
A personal injury trust can be an invaluable tool for protecting your compensation and preserving your eligibility for means-tested benefits. By setting up a trust, you can ensure that your compensation is used effectively to support your recovery and long-term needs without jeopardising your financial stability.
While protecting means-tested benefits is a key function of personal injury trusts, they offer a range of other benefits that can be valuable even if you’re not currently receiving benefits. A trust can provide structure, protection, and peace of mind in managing your compensation.
If you’re considering a personal injury trust, consult with our solicitors who specialises in this area. We’ll help to ensure that your trust is set up correctly and in line with your specific needs.
Frequently Asked Questions
Personal injury trusts are specifically designed for compensation received from personal injury claims. Other types of compensation may not be eligible for a trust.
The process can vary, but it typically takes a few weeks to set up a trust, including drafting the trust deed and opening a bank account.
Yes, but the trustees must agree to any withdrawals, and the funds should be used for purposes related to your injury and well-being.
The trust can continue to exist, and you can use the funds as needed. If your circumstances change, you may want to review the trust with a solicitor.
Yes, the trust deed can include provisions for changing trustees if necessary. Consult with a solicitor to make any changes legally.
Remember, setting up a personal injury trust is an important decision that can have long-term implications for your financial well-being. Always seek professional advice to ensure that your trust is tailored to your specific needs and circumstances.
