A personal injury trust is a legally binding arrangement for holding and managing funds received as a consequence of personal injury. Often, the result of receiving compensation can be as daunting as it is a relief.
Financial awards can be substantial, and receiving it all at once can raise questions about how to manage it, where to hold it, and how it may be affected by external factors. What’s more, understanding the pros and cons of a personal injury trust will help you decide whether it’s the right course of action for your circumstances.
Here, we’ll outline the benefits and drawbacks of a personal injury trust, how to set one up, and whether it’s right for you.
What is a personal injury trust?
A personal injury trust is a type of trust reserved for individuals who receive compensation for a personal injury claim. The purpose of it is to hold your compensation funds separately from your other income.
As a legally binding document, it states that the funds held do not count as your income in terms of means-tested benefits or services, allowing you to keep your compensation and, where necessary, still be entitled to receive such benefits.
Usually, a trust is an ideal option for beneficiaries who are underage or who have a condition that renders them unable to manage their money independently. It requires the money to be managed by two or more trustees subject to a trust deed, which sets out the specific rules and obligations.
Pros of a personal injury trust
There are several benefits to having a personal injury trust in place, including the following:
It protects means-tested benefits: When someone receives a substantial compensation payout from a personal injury settlement, it can push their savings over the threshold for things like Universal Credit eligibility, housing support, or care funding. A personal injury trust ensures that the compensation is not counted as “available capital,” safeguarding their eligibility for these important benefits, both now and in future.
It provides financial oversight: A personal injury trust allows individuals to appoint trustees who can manage the funds on their behalf. These trustees could be family members, legal professionals, or financial experts who ensure that the money is used wisely and in accordance with the recipient’s needs. For individuals recovering from injuries, having someone else handle the financial side of things can reduce stress and mental burden.
It offers legal and financial security: Setting up a personal injury trust guarantees that the compensation is used for its intended purpose and not at risk of being taken by third parties. Because the money is held in a trust, it is legally separated from the individual’s other assets, making it harder for anyone to gain access to the funds without the beneficiary’s permission.
It offers flexible use of the funds: One of the greatest advantages of a personal injury trust is the flexibility it offers in how the compensation can be used. This ensures that the injured person’s specific needs are met over time, regardless of how their circumstances evolve. Daily living expenses, medical care, and rehabilitation are just a few examples of how the money can be used.
Cons of a personal injury trust
There are drawbacks of personal injury trusts, which are equally important to consider.
Initial setup costs: Setting up a personal injury trust involves various costs. The initial costs typically include professional advice to ensure that the trust is set up correctly and complies with relevant laws, the drafting of the trust deed which outlines the terms and conditions of the trust, and the ongoing fees for professional trustees, should you choose solicitors or accountants to manage the trust. While these costs may seem reasonable for individuals with large settlements, they can be a significant financial burden for those with more modest awards.
Loss of direct control: One of the key features of a personal injury trust is that the recipient loses direct control over their compensation funds once they transfer them into the trust. Instead, control is given to the trustees, who are legally responsible for managing the trust’s assets. This can be particularly difficult for individuals who are used to managing their own finances or are uncomfortable relinquishing control to others, even if those others are trusted professionals or family members.
Administrative requirements: You’ll need to manage separate bank accounts and undertake periodic reviews to ensure the trust is still serving its intended purpose, meeting legal requirements, and complying with any changing regulations. You’ll also need to obtain signatures from multiple trustees, which could be a slow process, as all parties must be in agreement before certain actions are taken.
Is a personal injury trust right for you?
As we’ve seen above, a personal injury trust can provide substantial benefits, particularly when it comes to safeguarding your access to essential support. If you are currently receiving or anticipate needing means-tested benefits in the future — such as Universal Credit, income support, or housing benefits, it will prove invaluable in ring-fencing your compensation funds.
It’s also important to consider whether you are in a position to manage a substantial amount of money independently. If you’re uncertain about your ability to make informed decisions about your finances, or are recovering from long-term injuries, setting up a trust can provide you the structure and support you need to effectively manage your compensation.
That said, one of the key components of a personal injury trust is the appointment of trustees who will be responsible for managing the funds. Consider who you wish to appoint as a trustee, as they will have significant responsibilities and decision-making power. You’ll want to choose those who will act in a way that aligns with your needs and best interests – whether that’s friends, families, or professionals.
Finally, it’s important to know that you have the option to dissolve or modify the trust. This flexibility means you’re not locked into a rigid financial structure if your situation shifts over time. However, before setting up a trust, you should consult with a solicitor to understand the options for ending or adjusting the terms of the trust in the future.
If you think you may be entitled to a personal injury claim, read more on the claims process.
How to set up a personal injury trust?
There are four main steps to setting up a personal injury trust.
The first step in setting up a personal injury trust is to seek professional guidance. Legal and financial advisors can help you navigate the complexities of trust law and ensure that the trust is set up correctly and according to your specific needs.
Next, you’ll need to choose your trustees. These can be family, friends, professionals, or a combination of both; but you’ll need at least two trustees and no more than four. It’s important to choose the right trustees – consider their capability to manage financial matters, their reliability, whether they have your best interests at heart, and the benefit of having professional expertise involved.
Once the trustees are decided, a trust deed will need to be prepared by a specialist solicitor. A trust deed is a legal document that sets out the rules and obligations of the trust, including how the trust’s funds should be used (e.g., for medical expenses, living costs, or care-related needs), who the beneficiaries are and the responsibilities of the trustees.
Finally, the trustees will need to set up a separate bank or building society account to hold the funds. That account must hold only the compensation from the personal injury claim and any interest received on that money.
It’s worth noting that you will need to set up your trust within 52 weeks of receipt of your compensation payment, as the first year is a grace period. This means that during the first year, your compensation will not affect your means-tested benefits or care contributions. If you set it up after the first year, any benefit you lost because the personal injury compensation was taken into account, you will be unable to recover.
Set up your personal injury compensation protection today
Personal injury trusts offer a multifaceted approach to managing compensation in a way that protects the recipient’s benefits, ensures proper financial oversight, and provides security and flexibility to meet the individual’s ongoing needs.
At Injury Lawyers 4U, we can help right from the start. If you think you’re eligible for a compensation claim, use our personal injury compensation calculator to see how much compensation you could receive. Alternatively, our experienced advisors can help decide whether a personal injury trust is right for you and if so, how to move forward.
Contact us by phone on 0330 822 6310, or if you’d prefer, fill in the contact form and our expert solicitors will arrange a call at a time that suits you.