Personal Injury Trust - Role and Practice

Role and Practice

The role and practice of personal injury trusts under English law.

(1) Basic advantages

The existence of a personal injury trust can enable the injured party to obtain certain means-tested State benefits entitlements and to make the best use of the award under English law but there are also other potential advantages.

(2) When advice should be given/sought.

Advice on personal injury trusts is usually given by lawyers involved in all injury related cases concerning:

• Accidental injuries
• Criminal injuries
• Clinical and other medical negligence causing injury
• Compensation given for any disease or injury caused as a result of a disease

That is irrespective of whether or not the harm caused was physical or mental. It is irrespective of where the injury occurred. It may have occurred in the UK or abroad. It is also irrespective of the size of the payment made.

(3) Means-tested benefits advantages.

A personal injury trust is also considered relevant even if a person is not currently in receipt of means-tested benefits. That is because they might potentially have access to them in the future if their "assessable capital" for means-testing purposes is low enough. Long term care provision in England and Wales, either at home or in a care home, is a means-tested benefit provided by or through local authorities.

(4) Other practical advantages of a personal injury trust.

There are also other potential advantages of personal injury trusts apart from the retention of means-tested benefits. That is particularly in the case of older, very young, mentally incapable or other vulnerable persons:

• They may have no experience of handling a large sum of money.
• They may want the protection which trustees can offer against grasping relatives.
• They may have unstable mental conditions which renders the use of trustees helpful.
• They may just want to get on with their lives without having to concern themselves with financial administration.
• They may fear the impact of divorce and separation on their finances and want to try and ring-fence their resources in some way.

(5) Further points of note.

Under English law:

• The award placed in the personal injury trust may be negotiated or mediated and no court order making an award is required to facilitate a personal injury trust unless the compensated person is either a minor or mentally incapable of managing their own affairs.
• Cases involving minors will involve the High Court agreeing to the foundation of a personal injury trust.
• Cases involving mentally incapable persons will involve the Court of Protection agreeing to the foundation of a personal injury trust.

(6) Tax issues.

Personal injury trusts usually carry no UK tax advantages. Compensated people need access to their award via their chosen trustees. Thus it is essential that they retain an interest as a named beneficiary in the award which they settle to form the trust fund.

The UK taxation anti-avoidance rules prevent tax advantages being given to such settlor interested trusts. They apply to settlor interested personal injury trusts in the same way as they apply to trusts founded from non-personal injury related funds.

Personal injury trusts can create adverse tax consequences under UK tax law if the wrong sort is chosen. For example if an award of more than the nil rate band for inheritance tax is placed in a discretionary trust or (since March 21, 2006) an ordinary life interest trust, an inheritance tax charge on the surplus becomes due immediately. The limit is £325,000 for the 2009-10 tax year. Above that a 20% charge at the inheritance tax lifetime rate will apply to the surplus.

Importantly the above adverse tax consequences do not apply to bare trusts and certain other highly specialised types of trust arrangement.

(7) Investment of personal injury awards. UK trustees will wish to comply with the Trustee Act 2000 and the general law on trustee investment. This is a complex technical field.