PERSONAL INJURY TRUSTS: OVERVIEW AND PRELIMINARY CONSIDERATIONS
1.1 An Overview of Personal Injury Trusts
Personal injury trusts were originally created as a response to the capital rule in means tested social security benefits. Put simply, this rule denies certain means tested benefits to those with capital in excess of a certain amount. This then creates a problem for the existing benefit claimant who receives a sum of capital, in that he or she will on the face of it be immediately deprived of access to his or her benefits. This would be the case in the event of a windfall such as a legacy or lottery win; and this can be seen as supporting the reasoning behind the rule in the first place. The state should not support someone who has adequate resources of their own. In order for the rule to apply, the claimant must be able to gain access to the money, so that, for example, a legacy which is set out in the form of a discretionary trust will not of itself invoke the rule.
In order to prevent abuse of the rule, a person who seeks to give their capital away in order to gain access to benefits will nevertheless be caught under what is normally known as the deprivation rule. The capital they have given away becomes “notional capital” and is taken into account as if they still possessed it.
Where the rule is applied because someone becomes entitled to a sum of money as compensation for personal injury, however, the purpose of the rule is being corrupted. Personal injury compensation, by definition, is not a windfall, but is a sum of money designed to compensate for pain and suffering, and also to meet the additional costs of care which have come about as a result of the injury. The capital rule was therefore amended, initially so as to provide a limited amount of protection for the benefit claimant with personal injury compensation, and subsequently to make the idea of placing the compensation in a trust fully workable, so that it could be ignored for benefit purposes.
Originally, therefore, a personal injury trust was simply a method of sheltering the compensation paid to someone as a result of their personal injury. For someone receiving means tested benefits, this would mean that the compensation did not form part of their capital for benefit purposes, and they would therefore not be caught by the maximum capital rules. Similarly, if they were (or were likely to become) resident in residential care, the capital rules which limit the amount payable by them would be avoided by this method.
At the same time, following the coming into force of the Finance Act 2006, the merits of personal injury trusts as a device to deal with the tax implications of an award have become more apparent. It may therefore be the case that the personal injury trust needs to be employed as a method of tax planning, especially if it is desired to provide protection for the dependants of the injured person.
The term ‘personal injury’ is widely understood. The term covers all types of accidental and criminal injuries, and also clinical and other negligence. Almost any physical or mental harm caused to a person will be relevant.
The personal injury trust is often not just a device which benefits the person injured, and there may also be benefits for other people, which are explored further below.
In order to take advantage of the disregarding of personal injury compensation, a trust must be established. There are few formalities associated with the setting up of the trust. There is no requirement for a specific type of trust, and nor is a court order required (in most cases). It is the source of the trust fund, not the method used, which determines whether the trust can count as a personal injury trust for benefit purposes. It is not confined to private trusts, but also covers a trust arising from funds which are administered by the Court.
There is no specific time limit for setting up a trust, but if there is a delay, then the capital rule may result in the moneys being treated as capital by the Department of Work and Pensions (“DWP”), and thus in benefits being lost. Once this is done, benefits may take a long time to reinstate. It may be difficult to trace the trust back in time in order to show when a trust came into existence, and from what point the benefits disregard should start.
It is therefore recommended that the issue of a personal injury trust be raised with a client straight away, at least as far as someone presently in receipt of benefits is concerned. Time runs from the receipt of any payment, so if nothing is done, their entitlement to means tested benefits will be lost if the trust rules are not complied with; and even if they are, time will start running from receipt of the first payment.
A claimant has a duty to inform the DWP, or the local authority (as appropriate), of any relevant ‘change of circumstances’ which includes an increase in personal capital. This covers DWP benefits such as income support, income related employment and support allowance, income based jobseekers allowance, universal credit, and pension credit; and local authority benefits such as housing benefit. It will also apply to local authority-funded services such as residential care.
The duty, under Section 111A of the Social Security Administration Act 1992 as inserted by the Social Security Fraud Act 2001, is to make a ‘prompt’ notification. A client who does not notify is not only likely to be required to repay any benefit overpaid as a result of the failure. They are also liable to prosecution under the Act. This means that the client is potentially committing a criminal offence by failing to notify, and therefore a duty may fall on any solicitor involved to complete a referral to the National Crime Agency.
This book firstly looks at the different benefits, setting out how they approach questions of personal injury compensation; it them considers other possible care needs and how the receipt of compensation will affect them – local authority care, and continuing NHS health care. We then consider the different types of trusts, and some of the problems which they may raise for the practitioner.
1.2 Creating a Trust: Introduction
In principle any type of trust may form a personal injury trust. It is the source of the funds, not the type of trust, which determines entitlement to the exemption for benefit purposes.
However, this situation was affected by the Finance Act 2006, which means that there may also be tax implications for certain types of trust. The Finance Act 2006 amended the Inheritance Tax Act 1984 in respect of trusts founded after 21st March 2006.
Although it may be desirable that the only factors determining the question of whether there should be a trust at all, and its type, are those of personal and family needs, this will now only be the case where compensation does not exceed the injured party’s ‘nil rate band’ (the level above which inheritance tax can be charged). At present this is £325,000, less any chargeable lifetime transfers during the previous seven years. A transfer of value into most forms of trust which exceeds that amount will now trigger an immediate inheritance tax charge at the lifetime rate (20%), and may incur further charges.
In order to avoid this, it is therefore necessary to consider the tax implications of the form of trust chosen.
The different forms of trust are considered in outline in chapter 8 below.
1.3 Underlying considerations
Different trusts are set up for different purposes, and give different rights and responsibilities to the trustees and the beneficiary. Although it is noted above that the type of trust does not matter when considering benefit protection, there may be additional or different motivations which clients have when setting up a personal injury trust. Some examples are:-
They may wish to preserve their entitlement to means tested benefits. This may also apply to their family after their death.
They may be nervous about handling a large sum of money, of which they have had no previous experience.
There may be an instance of mental ill health, or even lack of capacity, which may require the presence of trustees.
They may wish to shelter their money against predatory relatives.
They may not wish the ‘hassle’ of handling the money and may just wish to get on with their lives.
There may be a risk of divorce or separation and a wish to exclude any compensation from inclusion in any matrimonial settlement.
We first consider the benefit rules and how they deal with a personal injury trust.