A personal injury trust (PI trust) is a legal arrangement that allows individuals who have received compensation for a personal injury to hold and manage those funds without the money being taken into account for means-tested benefits or care cost assessments.
For individuals in the UK, establishing a PI trust ensures that compensation is safeguarded, providing financial security while maintaining eligibility for benefits and other entitlements. This article explores the concept, benefits, types, and practicalities of personal injury trusts, offering a comprehensive guide for those considering this option.
Understanding Personal Injury Trusts
A PI trust is a legal mechanism to hold compensation funds received as a result of personal injury claims. This can include money awarded through court settlements, negotiated agreements, insurance payments, or Criminal Injuries Compensation Authority (CICA) awards.
The trust is set up in a way that separates these funds from the beneficiary’s personal finances, ensuring they are not included in means-testing for state benefits or local authority care assessments.
Purpose of a Personal Injury Trust
The primary purpose of a personal injury trust is to protect the compensation funds from being considered as part of your assessable estate for means-tested benefits. Beyond this, a PI trust offers additional benefits, such as helping vulnerable individuals manage large sums of money and shielding the funds from third-party claims or creditors.
For those who may not currently rely on benefits, setting up a trust can future-proof their financial security in case they need to access benefits later in life.
Eligibility for Setting Up a PI Trust
Anyone who has received compensation for a personal injury can establish a PI trust. This includes adults, children, and individuals lacking capacity. In the latter cases, a parent, guardian, or an individual with Power of Attorney or Guardianship Order can set up the trust on their behalf. Legal advice is essential to ensure the trust is structured appropriately for the beneficiary’s circumstances.
Types of Payments Covered
A PI trust can hold funds from various sources related to personal injury, including:
- Court-awarded damages.
- Negotiated settlements.
- Insurance payouts.
- CICA awards.
- Charitable donations specifically linked to the injury.
It is crucial that only these funds are included in the trust. Mixing other types of money with the trust funds can invalidate the trust and undermine its purpose.
Why Should You Consider a Personal Injury Trust?
Establishing a PI trust provides several benefits:
Protecting Means-Tested Benefits
UK benefits such as Universal Credit, Income Support, and Housing Benefit are means-tested. If compensation funds are not placed in a trust, they may push your total assets above the threshold for eligibility, resulting in loss of benefits. A PI trust ensures the funds are disregarded in financial assessments.
Shielding Care Contributions
Local authorities assess an individual’s financial resources when determining contributions to care costs. Compensation held in a PI trust is excluded from this assessment, preserving the funds for the beneficiary’s intended use.
Managing Funds Effectively
For individuals unfamiliar with managing large sums of money, a PI trust provides structure. Trustees oversee the funds, ensuring they are used appropriately and preventing overspending.
Protecting Funds from Third Parties
Compensation in a PI trust is protected from creditors, relatives, or other third parties who may otherwise claim a share of the money.
Future-Proofing
Even if you do not currently claim benefits, circumstances may change. Establishing a trust ensures your compensation remains protected should you need to apply for means-tested benefits in the future.
Timing: When to Set Up a PI Trust
The Department for Work and Pensions (DWP) allows a 52-week disregard period during which compensation funds are not considered for means-testing. Ideally, the trust should be established within this period to prevent issues. If the trust is not set up in time, the compensation may be treated as part of your assets, potentially disqualifying you from benefits or care entitlements.
Also, if funds are spent during the disregard period, the DWP may scrutinise these expenditures, especially if they appear to be “alienated” (e.g., gifted or used frivolously). Setting up a PI trust early avoids such complications and ensures compliance with legal requirements.
How to Set Up a Personal Injury Trust
- Seek Specialist Legal Advice A PI trust requires careful planning and legal expertise to ensure it complies with regulations. A solicitor with experience in PI trusts can guide you through the process.
- Choose Trustees
- At least two trustees are required (three are preferred for stability). These can include family members, friends, or professional trustees.
- Trustees should be trustworthy, financially responsible, and capable of managing the trust. Professional trustees can offer expertise and impartiality.
- Draft a Trust Deed This legal document outlines the terms of the trust, including its purpose, the role of trustees, and how funds will be managed and distributed.
- Open a Trust Bank Account The compensation funds must be held in a separate account in the trust’s name. This ensures clear separation from personal finances.
- Register the Trust The trust must be registered with HM Revenue and Customs (HMRC), and any necessary reporting requirements must be fulfilled.
Types of Personal Injury Trusts
There are two primary types of PI trusts:
Bare (Absolute) Trusts
- The beneficiary has full ownership of the trust funds, and the trustees manage them on their behalf.
- Simple to administer and transparent for tax purposes.
- The funds form part of the beneficiary’s estate upon their death.
Discretionary Trusts
- Trustees have full discretion over how the funds are used and distributed.
- Offers greater protection from creditors and third-party claims.
- More complex to administer and subject to different tax rules.
Special trusts for vulnerable or disabled beneficiaries may also be established, offering tax advantages while meeting specific needs.
What are Costs of Setting Up a PI Trust?
The cost of setting up a PI trust varies depending on its complexity. Typical expenses include:
- Legal advice and preparation of the trust deed.
- Registration with HMRC.
- Ongoing administration and compliance costs.
Professional trustees may charge fees for their services, often subject to annual audits to ensure transparency.
Accessing and Managing Funds
Beneficiaries can access trust funds, but withdrawals should be for specific purposes to avoid “mixing” with personal finances. Trustees typically pay directly for expenses, ensuring the funds remain separate. Investments may also be considered to grow the trust’s value, guided by financial advisors.
What Happens to the Trust When You Die?
- Bare Trust: Funds become part of the beneficiary’s estate and are distributed according to their Will or intestacy rules.
- Discretionary Trust: Trustees manage the distribution of funds to other beneficiaries as outlined in the trust deed or the deceased’s expression of wishes.
Common Questions About PI Trusts
Do I Need a PI Trust If I Don’t Claim Benefits?
While benefits protection is a primary reason for setting up a PI trust, other factors—such as shielding funds from care costs or third-party claims—may still make it beneficial.
Can I Set Up the Trust After Spending Some of the Compensation?
Setting up the trust after spending funds can complicate matters. Any money already spent may be scrutinised by the DWP, and you cannot recover “lost” benefits due to delays.
How Quickly Can I Access Funds?
Accessing funds is straightforward if the trust is properly managed. Trustees may hold cash accounts for quick disbursements while maintaining investments for long-term growth.
Conclusion
A personal injury trust is a valuable tool for managing compensation funds while protecting financial entitlements. For UK residents, the trust offers numerous benefits, from safeguarding benefits and care contributions to providing effective fund management. Setting up a PI trust requires careful planning, expert legal advice, and the selection of reliable trustees. With the right approach, a PI trust ensures that personal injury compensation is preserved for its intended purpose, offering peace of mind and financial security for the future.
