Have you recently received personal injury compensation? Are you considering the use of a personal injury trust to protect and manage your funds?
The process can seem daunting, but when you split it down into various stages it is more manageable and often easier to tackle.
We will now take a look at the pros and cons of personal injury trusts.
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In the most basic terms, a personal injury trust is a trust set up to retain and manage compensation received by an individual. The main benefits of the trust revolve around the fact that legally it is seen as a separate entity from the recipient.
However, this does have various pros and cons when looking at the long-term management of the trust.
While the vast majority of individuals will personally take receipt of any compensation awarded, others may require assistance. It may be that the individual is under 18 years of age or incapacitated to an extent where they are unable to make financial decisions.
Alternatively, many people find them a useful means of managing long-term income with limited tax benefits.
You will often come across the term settlor when setting up a trust of any kind. In this instance, the settlor is the individual who received the compensation and instigated the setting up of the personal injury trust.
It is also worth noting that this type of trust is often referred to as a “compensation protection trust”. It is important to note that once the funds have been transferred into the trust, the trustees become the legal owner - not the settlor.
Trustees are a very important element of any trust because they have control over assets and finances. They are also legally obliged to manage the trust for the benefit of the settlor(s) and therefore have a legal duty of care. If they fail to manage the trust for the benefit of the settlor they can face legal action.
While many people prefer to use professional trustees, aware of their legal obligations and regulations, in theory, anyone of sound mind and over 18 can be a trustee. If the settlor intends to be a trustee, which is perfectly legal, there would need to be at least two other unconnected trustees.
This effectively means that the settlor is not able to abuse their powers within the trust and take unreasonable action.
There is a rather strange quirk of law in the UK. When it comes to means-tested benefits, any compensation received will not be recognised for 52 weeks. If the funds are still in possession of the claimant after 52 weeks they will impact their ability to claim means-tested benefits.
So, in theory, there is a 52-week window of opportunity to transfer compensation into a personal injury trust.
There may also be longer-term local authority care funding benefits where compensation is not held directly, and not recognised when assessing an individual’s finances.
In a perfect world, it would make sense to hold any compensation in a separate interest-bearing account prior to transfer to a trust. If the funds are held in your normal account then it can become difficult to clarify which elements of the balance relates to compensation.
Where possible, there should be “daylight” between normal funds and compensation, otherwise, it can get relatively complicated.
This is one of the major benefits when transferring significant compensation into a trust. Everyday management of the funds is taken away from the claimant and effectively transferred to the trustees of the personal injury trust.
While many people will have no issues managing their own funds, others find it difficult, especially with relatively large compensation packages and specific long-term requirements, such as medical treatment.
This is one of the drawbacks of a personal injury trust, the cost of setting it up. It will depend upon the complexity of the situation but you are looking at upwards of £500 in setup fees.
Many people believe the cost of setting up a personal injury trust is minimal, compared to the long-term benefits of access to means-tested benefits/long-term care. It will also depend on the level of compensation transferred into the trust and how this is to be managed.
The fact that legally you are transferring your compensation from personal ownership to the trustees of your personal injury trust, can alarm some people. In reality, the personal injury trust is set up specifically for your benefit.
As a consequence, the trustees are legally obliged to act in your best interests at all times. Therefore, they are not able to siphon money off into their own account, spend on lavish gifts or generally abuse the funds available.
Yes. The beneficiaries, in this case, the settlor/claimant, have the option of terminating a trust at any time, assuming they are over 18 years of age and of sound mind. This is one of the few occasions in which they can override the views of the trustees.
Therefore, if you had issues about the way in which the funds were being managed you could bring the trust to an end and, as the beneficiary, take personal receipt of all finances/assets.
Income from the majority of personal injury trusts will be taxed at your normal rate when received, although advice should be taken. This is one of the more important issues as to whether a personal injury trust is a right move for your situation.
For example, full compensation received directly into your bank account (with no trust involved) would not be taxable. However, if you were applying for means-tested benefits this would impact your chances of receiving assistance. Take advice!
This is a very complicated area of taxation and an issue on which you should seek professional guidance. There may be ways and means of using the trust to reduce your inheritance tax liabilities but this will depend on a number of issues.
It is important that all elements of general tax and inheritance tax are addressed when the trust is first set up. Failure to do so could lead to significant tax liabilities in the future.
It is important to take financial and legal advice when setting up a personal injury trust so that you are taking the best course of action for your situation.
There are various pros and cons to personal injury trusts, all of which should be addressed and understood before a final decision is made.
Here at Money Savings Advice, we have partnered with some of the UK’s leading Personal Injury Claims management companies. They have already helped thousands of people claim compensation for injuries they have incurred, and they can do the same for you.
Choosing an independent claims management company means they won’t proceed with a claim unless they are sure it is in your best interests. They are also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these claim management companies who can help you make a compensation claim, then click on the below and answer the very simple questions.
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