What is a personal injury trust and why might I need it?
A personal injury trust is a lawful and legitimate method which allows you to ring fence your compensation if you or others in your close family either claim, or will need to claim in the future, means tested benefits or require local authority care.
The law allows compensation for your injury and the losses you have suffered, plus losses you will suffer in the future. You will usually receive this compensation in a lump sum, and if that lump sum is not ring fenced by a personal injury trust you may lose your entitlement to means tested benefits for many years to come. You cannot just blow the money and then claim benefits, as there are strict rules which apply to depletion of capital before you claim means tested benefits.
The other often ignored benefit of a personal injury trust is that it provides protection against the means test for services provided by local authorities. When a local authority assesses your need for care it must assess your financial situation. If you have tucked away your compensation money for a rainy day, that money may mean you have to pay for your own care. Worse still there are rules about depleting capital which mean you cannot just blow the money and then claim financial help.
With all this in mind you should see a personal injury trust is a necessity in many cases, and not an optional extra.
So why do many people decide not to use a personal injury trust to protect their compensation? The reasons are:
1. The advice from the personal injury solicitor is weak.
2. The advice comes too late in the case.
3. It sounds complicated and it sounds expensive.
4. Fear you will lose control of the money to trustees.
The reasons for needing a personal injury trust are very clear. Do not just look at your personal circumstances today, think ahead.
You can create a personal injury trust within one year of receipt of compensation, so you have time. Ideally the trust ought to be set up ready to receive the money, whether it be an interim payment or the final compensation, as once the compensation has mingled with your own money it can be difficult to explain what money should be ignored, and what should be included in the means testing process.
A trust is a document which identifies the compensation paid after an accident, it appoints at least two trustees (and you can usually be a trustee), and sets out how the money is to be managed. You must set up a separate bank account for the trust fund. This means there is no question what money falls outside the means testing process.
The money does remain in your control, as the usual method is to create a bare trust. A bare trust means the money is yours, and you can demand it at any time, and the trustees do not have to be persuaded by your good reasons. The money in a bare trust is treated as yours for tax purposes, so the interest on investments is included in your tax return.
There are occasions when a more complicated type of trust is necessary, but usually the bare trust route is the right way forward.
What can I purchase through my personal injury trust without affecting entitlement to means tested benefits?
This is a frequently asked question the answer is often quite welcoming to clients. The following can be purchased:
1.The cost of care and other needs. Continuing medical and therapeutic expenses are often vitally important. As they are not currently paid for by income support or otherwise by the benefits system they can be met from the fund as their is no duplication of payment. There used to be an old rule that the trust could not be used for purposes for which state benefits were paid. This meant that the trust could not be used for the "normal expenses of daily living". These rules have now been changed so the trust monies can be used for whatever you want and need.
2. The family home. The trust can be used to buy you a home. If it is not bought in the trustees' names (as an investment) then the value is still disregarded as assessable capital for means tested benefits purposes under normal means testing principles. Ideally, bearing in mind funds may be released on a future sale, a purchase within the trust by the trustees is desirable. The trustees can also pay off the mortgage on an existing family home if you so wish. Again, this has no impact upon means tested benefits. Tax rules in respect of capital gains tax and the private residence rule should be considered.
3. Personal possessions. If a person owns a rather nice vase or a DVD player or a sofa then under normal means testing benefits principals these are disregarded for means testing purposes. In the same way the trust can be used to buy various items for you.
How much can I put into a personal injury trust?
You cannot put more than the total value of your personal injury compensation into a personal injury trust. Depending on your own circumstances, you may decide to place less than the total value of your compensation into the personal injury trust.
If you have been advised that a personal injury trust is a good idea, and you want to set up a trust, then the cost should not put you off. The cost should be a few hundred pounds rather than thousands, and there should be no ongoing cost and only limited administration for the trustees. The cost of not setting up a personal injury trust may be the loss of means tested state and local authority financial support for a long time to come.