Personal injury trusts

Personal injury trusts, special needs trusts, compensation protection trusts '“ a jumble of names, but what do they mean? And why should you be so interested in them?

If a personal injury client is receiving means tested benefits or local authority funded care, it is vital that they are advised that their benefits are likely to be affected (stopped or reduced) if they receive compensation and do not put it into a personal injury trust.

But advice on personal injury trusts does not only need to be given if a person is currently in receipt of means-tested benefits. A person may not be in current need of means-tested benefits but may potentially have access to them in the future if their assessable capital for means-testing purposes is low.

It should be remembered, as pointed out above, that long-term care provision (at home or in a care home) is a means-tested benefit provided by local authorities. An injured client is more likely than others to need to take advantage of it in the future.

Legal basis

The type of trust, and the name, are not important. Bare trusts, life interest trusts (flexible or otherwise) or discretionary trusts can be used. They can be called whatever
you like, although a reference to compensation or personal injury is useful to avoid confusion. The Department for Work and Pensions (DWP) and local authorities are often inexperienced in such things. The two important points are simply:

1) There is a trust.

2) It contains money that was paid as a result of a personal injury to the person claiming benefits.

Means-tested benefits

The 'capital disregard' for income support and other means-tested benefits is contained in para 12, Sched 10 of the Income Support (General) Regulations 1987 (SI no 1967, as amended). This states that:

'Where the funds of a trust are derived from a payment made in consequence of any personal injury to the claimant, the value of the trust fund and the value of the right to receive any payment under that trust are disregarded.'

There are also mirror provisions in paras 44(a) and 45(a) relating to personal injury compensation administered by the court
on behalf of a mentally incapable injured person.

Regulation 51(1)(a) of the Income Support (General) Regulations also exempts a personal injury trust situation from the 'deprivation of capital' or notional capital rules. These would usually impute a trust founded by a benefits claimant to that claimant, otherwise everyone would found a trust to enhance their entitlements. This recognises the special status of personal injury trusts.

There are some key points to bear in mind to ensure that means-tested benefits are not affected, now or in the future:

1) The compensation funds must be put in a trust or must be held by the Court of Protection

If the compensation is taken out of the trust (or held in a receivership account outside the Court of Protection), the capital disregard will no longer apply.

There is no requirement that money is paid in immediately after the person is compensated. It is possible to pay money into trust 'late', for example, when a person has received compensation some time before but was not then in receipt of means-tested benefits or when a person has received interim payments and bought investments with them and decides when the case is finally settled that a personal injury trust would be a good idea.

In theory, compensation money can be paid into a personal injury trust decades later, provided the disregard still applies, but it is very important that the money being paid in can be traced back to the original payment. If the compensated person has bought a house and a couple of investments with the compensation, this should not necessarily be too challenging. If, however, the payments have been put into an account and mixed with the claimant's other money, this could prove more problematic. When the person went out for dinner, bought that car or went on holiday, how can they categorically say that they were spending the money which they had received in salary and/or benefits and not the compensation payment itself? Therefore, if a client does not feel that a personal injury trust will be appropriate at the moment, but may want to set one up later if their circumstances change, it is an extremely good idea to advise them to place it in a separate account and not to mix it up with any other money.

2) The personal injury must be to a benefits claimant

This has an obvious negative effect in
fatalities compensation cases.

3) The funds of the trust need to be derived from a payment made in
consequence of a personal injury

This suggests a wider application than merely the cheque that arrives from a person's solicitor following a personal injury claim. It does not matter whether the compensation is arrived at as a result of a judgment or far more commonly, as a result of a consent order. In fact, the compensation may not come from the court at all. Criminal Injuries Compensation Authority and Motor Insurers Bureau claims are usually concluded entirely without reference to the court system, but these should, it is contended, be perfectly validly settled into a personal injury trust.

Firth v George Ackroyd Junior Ltd and City of Bradford Metropolitan District Council [2000] Lloyd's Rep MED 312ï'žµinvolved an argument that only compensation for pain and suffering and not for other losses could be validly settled into a personal injury trust. As there is absolutely no backing for this position in statute or regulation whatsoever, it is not surprising the argument was given 'short shrift'.

The Income Support Regulations are broadly mirrored in the regulations for the other means tested benefits.

4) Only personal injury related funds within a personal injury trust are disregarded

If a claimant inherits money from a relative or if their numbers 'come up' on the Lottery, this money cannot be paid into the personal injury trust and disregarded. Similarly with the Court of Protection, not all money held by the Court of Protection for a patient is disregarded. Only that part which is personal injury related is disregarded.

The rules relating to pension Credit are more complex and are outside the scope of this overview.

Long-term care

Under para 10, Sched 4 of the National
Assistance (Assessment of Resources)
Regulations, the following capital is to be
disregarded:

'Any amount that would be disregarded under para 12 of Sched 10 to the Income Support Regulations (Personal Injury Trust).'

This mirrors the Income Support Regulations and other means-tested benefit regulations. In addition, the deprivation of capital aspect of the notional capital rules does not apply when a person founds a personal injury trust. Usually if a person requiring care had founded a trust with the aim of reducing their liability to pay for their care, they could be treated as still owning the money in the trust fund. It would be assessed as notional capital and would be included when assessing how much capital the resident had. NA(AR)
regulation 25(1)(a) states:

'A resident may be treated as possessing an actual capital of which he has deprived himself for the purpose of decreasing the amount he may be liable to pay for his accommodation except:

(a) where that capital is derived from a payment made in consequence of any personal injury and is placed on trust for the benefit of a resident.'

Other advantages

It appears likely that a disregard for personal injury money within the first year of receipt is to be introduced. In smaller cases where the majority of the money is to be spent within the first year, a trust may no longer be needed. That will not, however, apply to most claimants. This is crucially important.

The current capital limits for income support, council tax benefit and housing benefit are £6,000 (lower) and £16,000 (upper). There is a lower limit only for pension credit guarantee credit (£6,000), but no upper limit. If a person has capital under £6,000, they receive the full rate of benefit. If they have over £6,000 but under £16,000, they receive the full rate less £1 per week for every £250 over £6,000 (or £1 for each £500 for pension credit). Over £16,000, they receive nothing.

If a person is in long-term care, the lower limit is £12,750 and the upper limit is £21,000.

It is easy to see from these figures how drastically a person's benefits or care funding could be affected by even a smaller award.

If a client is not advised about the existence of personal injury trusts, their personal injury lawyer is likely to be found negligent. Even if the litigating firm does not deal with these trusts, the client should be given the details of a firm that does.

The benefits of a trust go further than keeping the indemnity insurers happy,
however.

Once a claim is complete, you will often wave your client goodbye. If that client sets up a personal injury trust, they are likely to come to you as first choice for other legal work as they have an existing relationship. You are 'their solicitor'. They will need wills, as will their family if they are not to lose their benefits when they inherit £30,000 from Great-aunt Dot. Very often, personal injury compensation will be used to buy a house, with follow on property work.

There have also been important changes in the Budget, notably in the now infamous BN25 which has generated so much coverage in the press. This means that certain types of trust, notably flexible life interest trusts, should not be set up until the taxation situation has been finalised.

Good quality client relationships, repeat business and word of mouth referrals and an enhanced bottom line '“ these are very good reasons for telling your clients about personal injury trusts.

Lynne Bradey is a solicitor in the private client department at Wrigleys Solicitors LLP