The information contained within the following news articles have been pre published. The articles were published on the dates indicated and the information contained within these issues include references to taxation, legislation, regulation and other issues or concerns that may no longer apply
What is a personal injury trust
Personal injury trusts are usually established following payment of a compensation award to a claimant who has suffered personal injury. In some instances the Court will be involved giving specific direction as to how funds should be used and invested, however, more commonly, the claimant (or his representatives) will seek professional legal advice in respect of which type of trust should be set up. In either case, the trust will usually be treated as having been created by the claimant (a self-settlement).
WHY USE A PERSONAL INJURY TRUST?
1) To preserve entitlement to means tested benefits - When a compensation award is paid directly to the claimant, it will often have an adverse effect on means-tested benefits which may be reduced significantly or even stopped. By setting up a trust to
receive the award, most means-tested benefits can be preserved. This trust could also be used to protect any future entitlement where a client is not currently in receipt of means-tested benefits.
2) Where the claimant is mentally incapable – in some circumstances compensation may be awarded to someone who is incapable of dealing with their own affairs. The use of a trust ensures that the award, and the claimant, is protected. The trustees will need to satisfy the claimant’s needs and ensure they act within their statutory duty of care when administering the trust fund.
3) Where the claimant is a minor – an award may be made in favour of a minor who will be unable to legally deal with the sum of money. In this case a trust is equally beneficial as again it provides protection for the minor and the trustees are legally responsible for administering the trust fund in the best interests of the minor taking account of their statutory duty of care.
4) Tax benefits – provided the trust is structured correctly and the beneficiary meets the definition of a disabled person, the trust can qualify for beneficial tax treatment. There are different rules for income tax, capital gains tax and inheritance tax, but a correctly structured trust can meet the criteria for all three.
5) Wider personal reasons – the claimant may decide that they don’t have the necessary knowledge and experience to invest and manage large sums of money and would prefer to appoint other family members/professionals who would be best placed to look after the award. This would also mean that the claimant would not
have to deal with the burden of trust administration themselves.
FEATURES OF A PERSONAL INJURY TRUST
A personal injury trust is simply a trust that has been established to hold/receive a personal injury award, and may take any number of different forms with bare and discretionary trusts being the most common.
Discretionary trusts have the advantage of flexibility, allowing the trustees to accumulate income rather than pay it out and also to make payments to persons other than the settlor where necessary. But this flexibility comes at a cost as a more rigid tax regime applies. Creation of the trust will give rise to a chargeable lifetime transfer and there will be on-going charges periodically every ten years as well as when capital is applied in favour of a beneficiary. Trustees must also comply with the IHT reporting requirements. However, if the claimant/beneficiary satisfies certain criteria and the trust is structured correctly, the trust will be afforded special tax treatment and the onerous tax regime that applies to standard discretionary trusts will be avoided.
Definition of disabled person
• Someone who is incapable by reason of mental disorder defined by the Mental Health Act 1983 of administering their property of managing their affairs; or
• someone who is in receipt of attendance allowance or disability living allowance; or
• someone who is in receipt of the care component of disability living allowance at the highest or middle rate.
Definition of vulnerable beneficiary
• Someone who is mentally or physically disabled; or
• someone under the age of 18 who has lost a parent
Where the trust is set up on a bare trust basis, the absolutely entitled beneficiary/claimant will be the taxable person for income tax and capital gains tax purposes so there will be no need for vulnerable beneficiary elections which are required with a discretionary trust. Similarly, as the trust fund is not settled property for inheritance tax purposes, the value of the trust fund will automatically form part of the claimant’s (settlor’s) estate for inheritance tax purposes.
WORKING WITH CENSUS FINANCIAL PLANNING
This article provides a broad overview of personal injury trusts and some of the aspects which ought to be considered. It’s essential that clients who meet the definition of a disabled person (or have a condition that might reasonably be expected to lead to their becoming disabled) take professional advice to ensure that tax saving opportunities are not missed.
Chartered Financial Planner