Personal injury trust

Personal injury trust or special needs trust or compensation protection trust and protection of State means-tested benefits

When you receive compensation for a personal injury it can take you above the financial limits for means–tested State benefits, and affect your entitlement to local authority support for care. So be aware and look at the benefits you are receiving today, and just as important the benefits you may need in the future. Don’t just look at yourself as benefits are claimed for a family unit.Image shows personal injury trust deed to protect means tested benefits

It is worth repeating that you must also look at your care needs, both now and in the future, as a personal injury trust can protect compensation when local authority care is assessed.

A short-term decision may cost you dear.

The law quite rightly accepts compensation is not a bonus or windfall. Compensation is designed to put right the financial damage, both past and future, caused by an accident or injury. For that reason it is possible to receive compensation for an injury and still receive state benefits which are means tested. This can legitimately be achieved by paying the compensation into a Trust, the sole purpose of the Trust being to receive personal injury compensation.

These trusts are given a number of names which can confuse. I use the term personal injury trust, but some prefer compensation protection trust or special needs trust. What we are talking about is a trust set up to hold compensation received after a personal injury.

It might sound complicated, but for most cases a simple Trust can be drawn up; trustees appointed (one of which can usually be you); a separate bank account opened; and that is it. The most straightforward Trust is a Bare Trust, and I can draw one up for you. For large sums, when the compensated person is a child, or if there are mental capacity issues a more complicated arrangement may be necessary, but not to worry as I will help you through the process.

I have set out some questions and answers which should help you.

Do I Need a Personal Injury Trust?

If you receive a compensation award in respect of a personal injury, your current or future entitlement to certain state benefits and local authority care may be affected. If the amount of compensation will lift you over the financial limits for benefits either now or in the future the answer is simple, you need a personal injury trust. You can only hold a certain amount of capital before means tested benefits are reduced or stopped, so a personal injury trust is the only answer.

When should a Personal Injury Trust be set up?

As soon as possible is the only answer. If you are in receipt of means-tested benefits there is a period of 52 weeks during which the compensation will be ignored, but take care as the 52 week period runs from when you first receive compensation, even if it is a small interim payment. A trust can be set up beyond the 52 weeks but leaving things to the last-minute is asking for trouble. My preference is to set up the personal injury trust before any personal injury compensation payment is received. This applies to an interim payment as well as final settlement. Having the trust in place to receive all compensation is the best way to avoid problems and prevents means-tested benefits being lost. Learn more about the 52 week period.

Who should I choose to be my Trustees?

A personal injury trust should have at least two trustees. If the simple form of trust is used you can be one of the trustees. but you should then have two other trustees. Your trustees must be people you trust and may include family, friends, a solicitor or a trust company. It is your decision as to who you want to act as your trustees. There are no general restrictions as to who can be your trustees although they must be over 18. A trustee should also have a good bank and credit rating or there may be problems opening the trust bank or building society account

What are the responsibilities of my Trustees?

The trustees hold your personal injury compensation, and administer the personal injury trust for your benefit. Although your trustees hold and have control over your compensation award, they cannot use it as their own personal property or for their own benefit. If you set up a Bare Trust the money is essentially yours and you can bring the trust to an end whenever you want. You do not have to give away control of your money when you set up a trust.

What if something happens to my Trustees?

If, for whatever reason, your chosen Trustees are unable or unwilling to continue, then the terms of the Trust will tell you how a Trustee is to be replaced. I recommend you have the power to replace a Trustee.

Will my chosen Trustees’ Means Tested State Benefits be affected?

No, they hold your award as a Trustee and it is not counted as part of their capital.

How do I access my Personal Injury Trust Fund?

You must set up a separate bank or building society account. You are not limited to one account, so you can have a current and a savings account. Depending on the terms of the trust property and other investments can be held. The golden rule is that all holdings should by the trust, and not by you personally. The trustees will have banking facilities and the text book approach is to use a cheque book. All Trustees should sign cheques issued on your behalf from the Trust fund. You should pay for items you buy directly from the trust bank account and avoid transferring funds to your personal bank accounts.

How much can I put into a Personal Injury Trust?

You can put the total value of your personal injury compensation into a personal injury trust. You can add income earned on the money held in trust, or profit made on trust assets. The one trust can hold compensation from more than one personal injury if its terms are drafted widely enough.  Depending on your own circumstances, you may decide to place less than the full value of your compensation into the personal injury trust.

Are there limitations on how the money in the trust is used?

The old rule used to be that money from the trust could not be used for purposes for which state benefits were paid. This meant the trust could not be used for the “normal expenses of daily living.” These rules have now been changed so  the money can be used for whatever you want. However, I always advise that a record of expenditure should be kept, and that the old rule of not paying the “normal expenses of daily living” should be followed as you never know when the rules will change. One practice to avoid is making a regular transfer from the trust to yourself. Do not pay money across from the trust fund to your personal bank account; spend directly from the trust and you will avoid problems.

What happens if my circumstances change in the future?

If you have used the simplest form of trust, known as a bare trust, the money is yours and you can tell the trustees what to do. If at any time you decide you no longer need the personal injury trust, you simply instruct your trustees in writing to transfer the money to you. The personal injury trust will then cease, but you may lose your entitlement to any means-tested State benefits/support. If you need a more complicated form of trust you will need detailed advice on this point.

What happens if I die?

If you die, the value of your personal injury trust would be paid to the beneficiaries named in the trust, or it may be paid across to your estate. You must choose which course is best so it can be written into the trust.

Are there any tax implications?

The money held in the personal injury trust is usually taxed in exactly the same way as if you held the money yourself. This is the case for a simple bare trust. If the possibility of a discretionary trust is raised do make sure you understand the inheritance tax and income tax issues which apply to such a trust. Getting this wrong can be very expensive.

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About Mark Thompson

Personal injury and accident specialist solicitor
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28 Responses to Personal injury trust

  1. Kieran Bradley says:

    Can you please tell me if I must pay Capital Gains Tax
    when cashing in shares from my compensation trust to
    pay for a flat?

    Thanks

    Kieran Bradley

    • Mark Thompson says:

      The answer depends on the type of trust you have. The usual trust is a bare trust which is tax neutral which means the tax rules apply as if the money in the trust belongs to the compensated person. On the whole compensation protection trusts are not designed to give tax breaks, they are designed to allow means-tested benefits to be received.
      For a definitive answer you will have to talk with the people who set up the trust for you.

  2. Jessica says:

    Hello Mark,
    May I ask two questions-
    (1) I understand from your prior answers that all I have to do to set up a PIT is to open a bank account in my name with the words “Personal Injury Trust” after it. How do I then appoint the other one trustee (myself being the 2nd trustee, as per your advice)? Do I have to draft a trust deed and, of so, how do I do this?
    (2) If sums under the threshold for means-tested benefits are transferred occasionally into my regular current account (not the PIT account), would I be correct in understanding that this would not affect my benefit entitlements if that account’s cumulative balance remained below the benefit’s threshold for savings?
    Thank you so much.
    Jessica

    • Mark Thompson says:

      The trust is created by a trust document known as a deed. The bank or building society simply holds the money, and does not create the trust. The account has the same name as the trust so the account is clearly identified.
      So you need a trust document drawn up first. That document will identify the trustees. If you want to be a trustee then you should have two other trustees. A trust must have a minimum of two trustees, but if you are a trustee you should avoid the risk of being the only trustee. Your money is being held for your sole benefit, and if you are the only trustee it does not like a trust does it. You can see details of all the things you must think about and the information I need to prepare a trust document at http://www.markthompsonlaw.com/how-to-set-up-a-personal-injury-trust/personal-injury-trust-to-protect-personal-injury-compensation/
      I always advise that you should avoid transferring funds from a trust account to your personal bank or building society account. The same advise goes for cash, as once money is in your account or in your hand, it is yours for benefits purposes and may affect your eligibility for benefits. Staying below the benefit threshold is not easy. Entitlement will be calculated across a household, and knowing the exact figure at any one time strikes me as difficult at best. You might think you have got your sums right, but the benefit agencies are perfectly entitled to call for your account statements.
      There are no longer rules as to how compensation can be used. There used to be rules, and there will be rules again, so I suggest the compensation be kept separate from you. Buy direct from the trust and you will not have a problem. There is more at the link above.

  3. Jacek Kokula says:

    Dear Mark Thomson,

    Thank you so much for an over phone advice regarding buying a house in the name of the injury trust. I have been looking for a lawyer to explain to me that subject which proved a very difficult task. Fortunately at last I have found your website and got your professional advice.

  4. julie says:

    Can I just say what a good site you have here. I have been reading the information on local authority care assessments and wasn’t given any advice on this by my solicitor. I was a homeowner when I received my compensation, and got my solicitor to pay off my mortgage on my home directly from my compensation before i even received it (never even hit my bank account). I had paid £127,000 for my home but had borrowed extra on it so ended up paying £138,000 to redeem my mortgage. Should I have put this money into the Trust fund then paid the house off?

    • Mark Thompson says:

      The short answer is yes.
      Overall the value of your house, or the amount of equity you have in the house, has no effect on your ability to receive means-tested benefits. On the present rules your home is included in the financial assessment undertaken by local authorities if you have care needs. That is the position today but I always fear that entitlement to State benefits will become tighter.
      In the situation you describe an alternative would have been to place the compensation in a personal injury trust, and the trust could then take over the ownership of the home. The home would then be outside the local authority financial assessment of the local authority.
      I think what is often forgotten by personal injury solicitors is the future.

  5. Chris says:

    Hi,

    Very informed site and great info !

    I am just about to get a payment for compensation resulting from an accident, and after the shocking fees scale from my solicitor decided to have a look at a PIT to see about looking after it ‘in house’, as opposed to the afore mentioned running the fund with quite high charges.

    Now the one thing I noticed was that for the Bare fund, you recommend 2 trustees and one can be the beneficiary, (me). I was told by my solicitor that I could not be named as it then is funds in my name !?! Can you please clarify this as I am in receipt of means tested benefit and would like to get this resolved so I can get the PIT up and running.

    Best Regards

    Chris

    • Mark Thompson says:

      One of the attractions of a bare trust is that the person receiving the compensation can be a trustee. If not people would become nervous if they felt they were handing the money, and permission for its use, to others. A bare trust means the “Settlor” (you) is the only person for whose benefit the trust can be used. You can bring the trust to an end, and depending on how the trust is written appoint and replace trustees. The trust is therefore a mechanism to hold money which is effectively yours, but by using a trust to hold the compensation you are identifying it as outside the means-testing mechanisms.
      It is not correct to say you should not be a trustee, but there is a belt and braces view which says if there are two trustees, the Settlor and one other, and that other dies, then having the Settlor alone as trustee means the trust is no longer. I advise you should have at least two trustees, but most people are not interested in having three because it can be administratively difficult. Most people also prefer to keep their affairs private, so I quite understand why most clients draw the line at two trustees, one of which is them.
      Hope that helps.

      • Chris says:

        Thank you for the reply and I have just got off the phone to my solicitor, who after telling them about myself being one of the trustees, said in no way should I be a trustee and that the law on this for benefits will not allow me to control the money in trust as I am the sole beneficiary. They quoted note 147 of the income support !!??!! I did not catch the whole title but thought you ought to know that as the beneficiary you cannot be a trustee !

        Thank you for the continued help and the senior partner of the firm that won my case in the first instance said in no way should you be a trustee !

        Not sure what to do now but they did advise non professional trustees as my amount is not in the seven figure bracket and that they would happily draw up a trust deed, supply the details of the trustees and send the deed and cheque to them, who can then open an account as outlined here.

        Best Regards

        Chris

        • Mark Thompson says:

          Thanks Chris. I cannot track down the note from your description.
          The person who receives compensation can be a trustee of a bare trust. The reason why that may not be a good idea is this – a trust has two trustees, and one is the compensated person. If the other trustee dies leaving the compensated person as the only trustee it could be argued that the trust no longer exists. So where the compensated person is to be a trustee there could be two other trustees to help avoid such a situation.
          I find that compensated people want to be trustee of a bare trust. Even though they are the only beneficiary of such a trust, and even though they can boss the trustees, or even bring the trust to an end, the compensated person will find it odd to hand over their hard won compensation to others, no matter how close and reliable those people may be.
          I find most people when faced with this question opt for two trustees, one of which is the compensated person. There are elements of confidentiality and convenience in such an arrangement. It is important the compensated person should have the ability to appoint new trustees.

  6. lee says:

    hi would i have to pay back the cru out of my compensation for personal injury or could i not have to pay it back if i put it into a trust fund .

    • Mark Thompson says:

      The repayment of benefits received after an accident is handled within the compensation case. You may have to give credit for some or all benefits within the calculation of your case. Any benefits to be repaid to DWP are dealt with by the paying insurance company, and the cheque you receive is net of the benefits. CRU is therefore not an issue for personal injury trusts.

  7. Simon says:

    Once a trust is set up and had my compensation money paid in, can additional compensation money be paid in at a latter date, whether it is for the same incident or not?

    • Mark Thompson says:

      A personal injury trust is for compensation paid to you as a result of a personal injury. You can hold the compensation and you can hold income arising from that compensation, the most obvious example being interest.
      If you suffered a second personal injury it is possible to use the same trust provided the wording of your trust allows that.
      What you should not do is pay in other money to the trust, as it is not money from a personal injury. The law allows compensation to be ring-fenced from the financial assessments for means-tested benefits, but it is not meant as a hiding place for other cash.
      Remember the agencies which pay benefits know how much compensation you received, and can ask you how much money is held in trust and ask to see bank statements etc.

  8. Mark Thompson says:

    Income from funds held in a bare trust is income of the beneficiary, in this case your father-in-law, and should be included in that person’s tax returns. This simplicity is one attractions of using a bare trust.
    The question you ask is different, as the bank acts as a collector of taxes, and therefore must follow the guidelines from HMRC. I am no tax expert but found an explanation of the position at http://hmrc.gov.uk/taxon/guidance-notes.pdf as follows:
    “But, if the beneficial owner of the interest is an individual, (and therefore the deposit is a relevant investment) the account cannot be registered with a form R85 ….. The reason is that the certificate must be given by the person in whose name the investment is held and who is beneficially entitled to the payment. In this case the investor is the trustee and the account will be held in the name of the trustee, and as the trustee is not beneficially entitled to the payment they cannot complete a form R85.
    But it may be possible to accept a declaration form R105…”
    The guidance does also say:
    “Where interest on a deposit arises to trustees, the deposit may be a relevant investment depending on the nature of the trust. To determine the nature of the trust for this purpose Financial Institutions may rely on information provided by the trustees such as a copy of a letter from a solicitor or accountant acting for the trustees”
    So you could go back to whoever set up the trust and ask that they confirm the position in a letter to the bank. My guess is the bank will stand by its position, but no harm trying.
    Let me know how you get on.

  9. Kat says:

    My partner and I would like to use our trust fund to purchase a property which requires renovation, carry out the renovation and then sell it on again and make a profit. However, the house in question is more than the sum of our trust fund so we would need to use money from other sources as well as the trust to be able to purchase it and carry out the works. Am I right in thinking that, once the property is sold, we can only put back in to the trust what we took out of it plus a percentage of the profit made? So, for example, if we use £50,000 from the trust and £50,000 from other sources, and then sell the property for £150,000 we could put £75,000 back in the trust (the original £50,000 plus half of the profit)?

    If I’m correct, would it then be necessary to keep track of exactly what money paid for what? I.e did the trust fund pay for the plastering/painting/new kitchen etc etc.

    Thanks!

    • Mark Thompson says:

      A personal injury trust is designed to receive the compensation from a personal injury and any income gained on that compensation. You cannot use the trust to hold other funds. The answer to your question lies with whoever set up the trust for you in the first place. The starting point is to ask if the trustees have the power to undertake such an investment.

  10. neville says:

    I have just opened a trust fund for the compensation i am about to recieve.I understand that it protects benefits that i am recieving.What i am unclear about is what i can do with the money when i recieve it.Can i invest the money ie buy a property,buy shares etc.Will this effect benefits recieved if i go down that route. Thankyou

    • Mark Thompson says:

      Dear Neville,
      When you receive compensation and you are in receipt of benefits the first thing you should do is tell the benefits people you have received the money. This is part of your ongoing responsibility to tell them of a change in your circumstances.
      The best course is to have the trust completed and a separate bank account opened to receive the money. That way the notification to the benefits agency is much simpler, as you tell them you have received the money which is already protected by a trust.
      A separate bank account makes great sense, and I think it is vital, as it is then clear what money came from the compensation. If something is to be bought the trustees should buy it for you, and not put money into your account. Once the money goes into your personal bank account the protection of a personal injury trust is lost.
      There is no restriction as to how the trust money is used. You can buy a pair of shoes, a television, or a house. I repeat the trust money should be used for the purchase as then there is a clear “audit trail” and your own personal bank balance has not been inflated temporarily.
      If you are thinking of buying property you must consider whether the property is to be owned by you, or by the trust. I say this because a personal injury trust can provide protection from the means test carried out for local authority care. A property owned by you would be included in a local authority means assessment, but a property owned by the trust would be exempt from that means assessment. If you need firm advice on the purchase of property through the trust you will need more detailed advice than I can provide.

  11. Pingback: I may need a personal injury trust | Mark Thompson Law

    • Mark Thompson says:

      No is the short answer.
      The law in the USA is fundamentally different to the law in the United Kingdom. The law also differs between States in the USA. We will help members find the right representation, but you will need a lawyer in the State where the accident happened.

  12. Paul says:

    My wife and i have just set up a trust fund under recommendation from our solicitor, and the amount of compensation received is in the six figure area.
    Could you please advise me on the tax implications, Thanks

    • Mark Thompson says:

      I am always surprised that a solicitor has set up a personal injury trust but has not explained how it works.
      If the personal injury trust is set up as a bare trust the money belongs to the person who has received the compensation, so any income from the trust should be included in that person’s tax return.
      A bare trust is a way of holding money for someone, but the money remains theirs, and they are entitled to ask for it at any time. This is usually the best method for a personal injury trust. If a more complicated trust is advised, such as a discretionary trust, then you need to know why such a trust is thought best, and you must take great care no tax is payable on setting up the trust. Income tax is also different if you use a discretionary trust so make sure you understand every twist and turn before the trust is created.
      Please also make sure the compensation is paid into a separate bank account, and the account has the name of the trust. Signing a trust and then paying the money into your current account spoils the point completely.

  13. Peter says:

    We opened a separate joint account in anticipation of a settlement before we knew about PI trusts. We have now accepted an offer to settle and the amount, although not huge, takes us over the £16000 threshold for means tested benefits which we are currently in receipt of. Can we use this existing joint (Lloyds current, with a zero balance and no funds have ever been deposited) account to be the trust account, with my wife, the beneficiary, as one trustee and myself, her husband, as the other?

    • Mark Thompson says:

      The money paid into a Personal Injury Trust must be held in a separate bank account, and the name of the account must state it is a trust. Have a word with your bank and have the account name changed to your name with Personal Injury Trust added at the end. If they will not change the account open a new one. You could get away with the arrangement you suggest but why take a chance. Do it properly from the start and avoid problems down the track.
      One additional tip is to keep a record of what you use the Trust money to buy. The money should not be used for items for which means tested benefits are intended. It is rather bizarre that you can buy a television from Trust funds but not use it to buy the weekly shop at the supermarket. I have not known a client to have their expenditure examined, but there are rules, so abide by them and avoid problems.

  14. Alan says:

    Could you tell us how long it will take to set up a personal injury trust fund?

    • Mark Thompson says:

      Dear Alan,

      A personal injury trust does not have to be complicated, and the time necessary depends on what works for you.

      Assuming the Claimant has the mental capacity necessary to deal with their compensation, then a simple trust, called a bare trust, is all that is required.

      A bare trust holds the Claimant’s money, the money remains the Claimant’s for tax purposes, and the Claimant can demand the money at any time. Two trustees should be appointed, and I usually include the Claimant as a trustee. You then set up a joint bank account to deal specifically with the compensation from the personal injury case, and that is all there should be to it.

      The statement above assumes the claimant has the mental capacity to handle their own money, and there are no investment reasons which make a more complicated form of trust necessary. By more complicated I mean a discretionary trust, but these have significant complications in terms of tax. The money in a discretionary trust is for the trustees to deal with, and this contrasts with a bare trust where the money actually remains the Claimant’s. If a trust more complicated than a bare trust is advised then serious and specialised advice is necessary. There should be vey good reasons if a complicated arrangement is necessary.

      The answer to your question is it takes days rather than weeks or months to set up a simple personal injury, a bare trust. It will probably take longer to open the bank account.

      Make sure you get clear advise as to what purchases should not be made from the trust, which means the trust funds should not be used for items for which State benefits are intended. You should also keep a record of what the trust money was used for in case there is a dispute.

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