Personal Injury Trusts - Guidance for Beneficiaries and Trustees
A short summary for the guidance of beneficiaries and Trustees.
Section one: Trusts and Trustees
A Personal Injury Trust sometimes known as a ‘compensation protection Trust’ or ‘special needs Trust’ is a form of ‘Trust’.
‘A Trust’ is a relationship that is recognised and enforceable in the courts. Where there is an award of compensation for a personal injury a Trust arises for the injured person when that award is put under the control of other persons (the Trustees).
The Trustees must look after the award (which becomes the ‘Trust fund’) for the benefit of another person (the Beneficiary i.e the injured person). In most Personal Injury cases there will be just one beneficiary. Some Trusts can have only one Trustee, but a sole Trustee cannot be the sole beneficiary or else there is no Trust relationship.
It is therefore usual to appoint a minimum of 2 and a maximum of 4 Trustees. A beneficiary can be one of the Trustees, but because of future technical difficulties, this is not something we would automatically recommend (though the same is permissible provided adequate safe guards are put in place)
When the Trustees are appointed, they agree to act in the interests of the beneficiary and not themselves. This is why it is called a ‘Trust’. They are entrusted to look after the Trust fund for the beneficiary.
In the case of a personal injury Trust the beneficiary can benefit in the ways set out in a document (the Trust Deed). The injured person is expected to be the main concern of the Trustees of a personal injury Trust even if there are other potential beneficiaries.
- Any person under 18. It may also be too much responsibility for younger people over 18.
- Undischarged bankrupts and those with voluntary arrangements with creditors.
- People with current money troubles or with a history of money troubles.
- People in prison or who have or may soon be convicted of offences involving
- People with a conflict of interest with the injured person or others in the Trust.
- People with serious health problems who may be unable to fulfil their duties at any time.
- People who live outside the UK or may do so.
- People who are in any way concerned they might be unable or unwilling to fulfil their duties as Trustee.
- Ideally the injured person and their partner should not be Trustees. (however, depending upon the value of the Trust fund, it may often be acceptable for the compensated person to be one of the Trustees)
It is usually considered wise to have a combination of family and where the level of compensation in the Trust fund is considered substantial experienced professionals as Trustees
The Trustees have certain powers over the handling of the Trust fund. These are set out in the Trust Deed. Trustees do not have any power to go beyond the terms of the Trust Deed unless they are included within the general law. Most things a person would want to do with their own money can be done by the Trustees for the benefit of the beneficiary. For example, they can, upon taking appropriate advice, open and operate a bank account, invest money, buy and insure property and purchase help and assistance for the beneficiary.
Trustees may sometimes need to take legal advice. That is funded by the Trust fund and not from their own pockets unless the Trustees do something wrong. That is called committing a ‘breach of Trust’. Trustees are liable for losses due to ‘breach of Trust’ out of their own pockets, so taking legal advice is important. Trustees can also obtain help from accountants, for example, in filling in tax returns, and from other professionals as required. Again, that is at the expense of the Trust fund so far as it is necessary to the smooth running of the Trust.
A Trustee must:
- Disclose any circumstances where they might have a conflict of interest with a beneficiary. For example if a beneficiary owes a Trustee money this should be disclosed.
- Not act in conflict with the interests of the beneficiary or profit from their role as Trustee.
- Ensure they know what the terms of the Trust are and that they are carried out.
- Ensure that they do not act beyond the terms of the Trust and its powers.
- Ensure that good Trust records and accounts are kept and pay tax due on time.
- Take independent financial advice. This does not preclude the use of common sense.
- The Trustees must also ensure that the advice taken is in accord with the Trustee Act
- The ultimate decision over what to invest in is the Trustees’ decision. It cannot be delegated.
- Act impartially and fairly between any multiple beneficiary (where applicable) and those who are a beneficiary now and those who will be in the future. This is the general rule but in the case of a personal injury Trust the compensated beneficiary will be expected to be the main beneficiary for life. That is allowed for under the powers of the Trustees.
- Take reasonable care. Professional Trustees must take more care than others.
- Act jointly. Trustees should not normally delegate functions to each other. Trustees are jointly liable for mistakes and should therefore act together.
- Not charge. Only professional Trustees can claim more than out of pocket expenses.
- Ensure the beneficiaries are kept fully informed. This avoids disputes.
Section two: The Personal Injury Trust and benefits issues
The aim of this section is to make you aware of the generality of the rules. Complex questions will need to be referred to us for legal advice. But the administration of the Trust can usually be operated without that.
- If a person receives damages for a personal injury then that compensation may reduce or even stop entitlement to ‘means-tested’ benefits such as Income Support, Family Credit, Housing Benefit and Council Tax Benefit.
- The amount of money or ‘capital’ a person can have before losing income support is currently £16,000. If you have less than this but over £6,000 then you will lose benefits on a sliding scale. You will only get full state benefits if you have under £6,000. Some means-tested benefits allow you to have more savings but income support can help determine your eligibility to other benefits which means its thresholds are very important. New rules may mean that a personal injury award can be ignored by the Benefits Agency for up to one year. It is extremely important, however, that a compensated person takes advice if it is thought this may apply as, unfortunately, the rules are more complicated than they might at first appear. For example, if a compensated person received any payment in relation to their personal injury more than a year ago, compensation being received later will not be ignored for any period at all.
- ‘Capital’ is made up of cash/investments and so on – subject to certain ‘disregards’ – such as for the value of the family home whilst you live there and the surrender value of life policies. Disregarded items are not treated as part of your capital.
- It is important to note that the rules mean that the amount of capital in the name of your marriage partner or a person you are living with as man and wife also needs to be taken into account. If your partner’s money when added with your own exceeds £6,000 you will not receive maximum means-tested state benefits. Please bear this in mind when reading this guide. It is very important.
- A child’s capital does not count towards an adult’s claim for benefits even if they arein the same household. A ‘child’ is one of any age including adult children still living at home. However, it is vital that the ownership of capital assets is transparent and not manipulated. To do so could lead to the claimant being treated as if they still had the capital. That is the result of the anti-avoidance ‘notional capital’ rules.
- Special rules apply to certain, generally older, people in residential care. Broadly, if they have over £23,250 (English threshold after April 2013-2014) they will have no entitlement to means-tested benefits which includes local authority assistance with residential care funding. Below £23,250, down to £14,250 they will receive benefits on a sliding scale. Below £14,250 they will have full entitlement to means-tested funding. A claim for a fall or other injury affecting an older person can be protected from liability to care fees. This guide is therefore relevant for all ages. It may help you to retain means tested benefits and protect your assets long into the future.
- The law says that where money, “derived from a payment made in consequence of any personal injury” is placed in a Trust then “the value of the Trust fund and the value of the right to receive any payment under that Trust” shall be disregarded as capital in calculating a claimant’s entitlement. This means that, by putting your compensation for your personal injury into a Trust you should be able to retain your entitlement to state benefits.
- It is important that you are aware that the disregard of compensation placed in Trust is not a ‘loophole’. The government recognises the special situation. It is happy for you to keep on claiming benefits but you must do it in the way the government has specified. That means putting the personal injury compensation into a Trust.
- If you are a carer and are supported by means-tested benefits but part of the award of compensation is for past care of the child or other person you have looked after, depending upon the terms of the settlement and the historic position regarding payment, that may be your money. It may reduce your own entitlement to benefits depending upon how much is received. You may choose to allow that amount derived from the personal injury to remain with the injured person or to be placed upon any Trust set up for them for this reason. That may protect your entitlement to benefits but that is not certain and you may need to take independent advice if you wish to discuss that option further. Many people just want to take that money and make use of it, perhaps claiming benefits again later when it runs out. The choice is yours.
- Your adviser and any benefits offices should be aware that these important rules are included in Regulation 46(2) of the Income Support (General) Regulations 1987. Paragraph 12 of Schedule 10 applies. They were also amended by Statutory Instrument 1990 – 1776. That amendment got rid of some old limitations upon the original disregard of money in personal injury Trusts. Further changes to your advantage have taken place since.
- These rules are mirrored in the case of other benefits such as housing benefit and council tax benefit. For local authorities dealing with long-term residential care issues the relevant disregards are contained within the National Assistance (Assessment of Resources) Regulations 1992 (as amended) the NA(AR) Regulations, Schedules 3 (as to income) and 4, notably paragraph 10 (as to capital) apply.
- For local authorities dealing with the cost of care at home as opposed to in a home, that care should be assessed in accordance with the Fairer Charges Guidance. That was issued as mandatory guidance by the Department of Health as LAC (2001) 32 under Section 7(1) of the Local Authority Social Services Act 1970. Section 17 of the Health and Social Services and Social Security Adjudications Act 1983 gives local authorities a discretionary power to make reasonable charges for adult service users, in England and Wales for non-residential services but the Fairer Charges Guidance makes it clear that persons cared for at home should not be assessed financially in such a way as to disadvantage them when comparing their financial assessment with the one arising for a person in residential accommodation effected under the NA(AR) Regulations. This makes sense as it is government policy to secure care for people at home and not in an institutional type setting.
- The Fairer Charges Guidance requires local authorities to take account of the provisions of the Charging for Residential Accommodation Guide (the CRAG) which is periodically issued by the Department of Health and is the mandatory guidance in relation to the NA(AR) Regulations. The current CRAG at time of writing (September 2008) is LAC (DH) 2007(4). It reiterates the point that the financial assessment of those cared for at home should mirror that of those who are residents in care homes. As the NA(AR) Regulations and the CRAG disregard personal injury Trust funds in the context of residential care so should local authorities when addressing the means-tested cost of care provided at home. Local authorities are sometimes able to take income from Trust funds into account when assessing liability to pay for care at home. This is a complex and developing area, and appropriate advice should be sought. We can arrange that for you.
- You can receive the benefit of the money/investments in the Trust. That is on top of your being able to keep means-tested benefits.
- Broadly speaking, if the capital paid out to you from your Trust means that the money you have in your own name (or in your partner’s name or when your joint capital is added together) is more than that allowed by the benefit rules then your means-tested benefits will be reduced or stopped altogether until your capital drops below the limit again. This means that only relatively small payments may be made directly to you from time to time out of capital. At the time of writing this guide it would usually be a benefits disadvantage for you to have over £6,000 in assessable capital in your own or joint names.
- Although you may not receive large amounts into your own account there is nothing to stop the Trustees from buying things for your use.
- A useful rule of thumb to help with your budgeting is that if your benefits are supposed to pay for something then that ‘something’ should not be paid for by your Trust. Benefits are supposed to pay for ordinary expenses of daily living such as food, clothing, footwear, gas, water, electricity bills, rent and mortgage interest. Obviously if you receive an unexpectedly large bill your Trustees could make good the shortfall. That makes sense.
- ‘Care needs’ are not ordinary living expenses nor are the costs of repairs and refurbishment of property, the price of motor cars and even your telephone bill. These should therefore normally be paid for directly by the Trust without affecting your benefits related budgeting. The Trustees could also buy you a holiday, furniture or a computer and other educational equipment and any other personal possessions you want, even valuable ones. They would pay for those items direct. Your account balance and thus your means tested benefits would therefore not be affected by this expenditure.
- In short there is nothing in the normal way of things the Trust could not pay for. Payments can also be made to other beneficiaries if you want. Care needs to be taken not to increase your partner’s capital above the threshold which will mean you are both over the capital threshold.
Section three: The personal injury Trust and other issues
There are important ways in which an injured person can benefit from the Trust apart from financially:
- Your Trustees can look after your property in the Trust even if you cannot. That may be particularly important in later life.
- Your Trustees can help share the burden of sorting out your paperwork which naturally arises when money is invested.
In essence, these additional advantages of a Trust are related to better peace of mind.
1. As most personal injury Trusts are ‘bare Trusts’, any income derived from the Trust fund will be yours and will be taxed at your normal tax rate.
2. The income from the Trust will need to be declared on your own personal tax return. If you do not receive one at the moment, you will need to request one if the award is significant. We can also do that for you. We can assist with tax returns and tax refund applications each year.
3. It is important to note that often a good independent financial adviser will be able to find a way of generating income which is not subject to income tax or at least defers it or minimises it.
4. Payments of capital from the Trust fund to you are not subject to income tax.
5. Gains in value (between purchase of Trust assets and sale) are subject to capital gainstax but as you will have an interest in your own Trust, your own personal capital gains.
6. tax allowance should be available set against them.
7. There are special rules relating to the purchase/sale of residential property. It would beprudent to allow us to deal with that for you as we should be able to eliminate capital gains tax issues by dealing with such matters in a special way. Capital gains tax is a complex area and before any Trust assets are sold advice should be taken. Note that some payments of assets out of the Trust where there has been a gain in value (even if the assets are not sold) can trigger a charge to capital gains tax. Again take advice before you do anything. The same can sometimes apply upon the possible break up of Trust after death.
8. When you die inheritance tax is payable if your assets including the value of the Trust and certain gifts made within seven years of your death exceed a certain amount called ‘the nil rate band’. That is currently £325,000 (tax year 2015/16). The rate is 40% on value above the threshold. We can help if this is an issue.
1. Your Trustees will have power to invest the money as they see fit but the Trustees must take independent financial advice which we can arrange through a special authorised party arrangement with an independent financial adviser. We do not accept commission for the introduction.
2. We cannot and do not advise on investments ourselves. We are happy to work with the financial adviser to ensure the tax and administrative issues are dealt with properly. This joint work is important.
1. The Government can change the benefits rules, tax rules and Trust laws at any time.
2. The arrangements we put in place are very flexible so many changes can be accommodated easily. You should keep in touch with us. Revised guides may be issued from time to time.
1. The fund will usually form part of your estate. You will need to draw up a will to say who your estate is to go to. Please ensure this is done as soon as possible. Do not forget we can help you and family members with wills/Trusts and tax advice generally.
2. Family members who might want to benefit you upon death will need their own wills adjusting to avoid you losing benefits upon direct receipt of funds from them. They can still benefit you but a ‘normal’ will is not appropriate.
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