What is a personal injury trust fund and do you need one?
If you have been awarded compensation after an injury, you may wish to consider the potential benefits of setting up a personal injury trust fund.
With several different options, this article provides an overview of the types of personal injury trust funds available and the benefits and suitability of each.
What is a Personal Injury Trust Fund?
A personal injury trust fund is created when an award of compensation is ringfenced from the injured person’s assets and put under the control of trustees. This then becomes known as the trust fund. This can be useful to protect the funds from any creditors and the cost of care in the future.
The trustees are normally chosen by the person setting up the trust. The trustees are responsible for looking after the trust fund for the benefit of the injured person and for others who may be named in the trust fund. These people are known as the beneficiaries. How they can benefit is normally set out in the trust document, known as a trust deed.
It is possible to be both a trustee and a beneficiary of a personal injury trust.
Types of Personal Injury Trust Funds
- Bare Trust
A bare trust is the most basic trust and is popular with people who have been awarded compensation for injury.
In this type of trust, the beneficiary (the injured person) would be entitled to the trust fund whenever they request. This type of trust puts the beneficiary in full control over the money or trust assets.
These are also useful if the beneficiary is in receipt of means-tested benefits as they can ringfence the compensation from benefit assessment.
This type of trust may not be suitable for those who lack the capacity to make decisions or if there are worries about how the funds could be used.
- Life Interest Trust (or an Interest in Possession Trust)
Life interest trusts operate by dividing the capital and income of the trust fund.
In respect of personal injury trust funds, the injured person would receive income from the award. Upon their death, the capital in the trust fund would then pass to the named beneficiaries. This protects the capital of the trust fund for the ultimate beneficiaries (known as the ‘remaindermen’).
Given the flexibility and discretion required by trustees, it is important they are chosen wisely. Normally, a memorandum of wishes is prepared to guide the trustees in exercising their powers.
A discretionary trust is held for a group of potential people who could benefit from the trust. This would normally include the injured person, their loved ones and charities.
The trustees will have the power to decide who can benefit from the personal injury trust, or not, as well as when to pay out capital and/or income.
The discretion the trustees have is very wide and it is important that they have an indication of the way in which you would like them to be exercised. A Memorandum of Wishes is normally prepared when the trust is set up to help guide the trustees.
A discretionary trust is a flexible vehicle which is often used in circumstances where some control is needed. It can be useful if the injured person is vulnerable to outside influences or unable to manage their money wisely.
- Disabled Persons Trusts
There is a specific type of trust specifically for an injured person who falls within the definition of a ‘disabled beneficiary’.
These types of trust can provide a more favourable tax position providing the criteria are met. However, the rules regarding these types of trust are complex and would need to be assessed on a case-by-case basis. Please let us know if you would like further advice on this.
What personal injury trust is best for you?
Whilst it is important to look at the differences in the personal injury trust funds as a whole, your own circumstances and intentions should be a driving force behind any decision you make. It important to consider the level of control and flexibility you require and what your ultimate intentions are with the capital within the trust.
The experienced team at GA Solicitors is here to help you through this process. For a free initial consultation about personal injury trust funds, call our Wills Trusts and Probate team on 01752 203500 or email me directly via Jonathan.hall@GAsolicitors.com.