Personal injury trusts and older people

When thinking about personal injury trusts, our minds often turn to children or working-age adults who need or want to retain their entitlement to Income Support, Housing Benefit and Council Tax Benefit. Yet personal injury trusts can be just as relevant in the context of older clients.
Put simply, a personal injury trust is a trust that contains money received as a consequence of personal injury. The trust can be a discretionary or life interest trust, but the most common trust arrangement these days is a bare trust. This is the simplest type of trust for the injured person to understand. Under its terms, the only person who can benefit is the injured person. Income Tax, Capital Gains Tax and Inheritance Tax are assessed on the injured person themselves, rather than on a tax return issued to the trustees. All the injured person’s own tax exemptions can be utilised.
For practitioners considering using a discretionary trust, or indeed any other type of trust which is now a relevant property trust following the Finance Act 2006, it is important to check that the amount of money which is being placed into the trust now, or will be placed into the trust later, does not exceed the nil-rate band for Inheritance Tax. If it does, the injured person will receive an unexpected and certainly unwanted bill from the tax man for 20 per cent Inheritance Tax on the amount above the nil-rate band, and you may well find yourself on the receiving end of a negligence action. No such complications apply to bare trusts.
A bare trust can be revoked at any time, at the request of the injured person. However, it may be that the injured person will want to use a different type of trust, afraid either that they may be tempted to break the trust under pressure from gold diggers, or that they themselves may be vulnerable to making rash decisions, perhaps if a medical condition deteriorates or an addiction re-surfaces.

What are the advantages of the personal injury trust?
As well as the immediate benefit and care-related advantages, there can be other good reasons for money being placed in a personal injury trust. The injured person may have no experience of handling a large sum of money and dealing with the responsibilities that come as a result. They may feel that they are financially naïve and would be easy prey for those who offer to invest their money, but take a hefty profit for themselves. There may be concerns that people will come out of the woodwork and ask them for money. Trustees can be a useful barrier against this.
For the purposes of long-term care, under the National Assistance (Assessment of Resources) Regulations Schedule 4 paragraph 10, which deals with capital disregards, “any amount which would be disregarded under paragraph 12 of schedule 10 to the Income Support Regulations (Personal Injury Trusts)” is disregarded.
Schedule 10 paragraph 12 of the Income Support (General) Regulations 1987 states that “where the funds of a trust are derived from a payment made in consequence of any personal injury to the claimant, the value of the trust fund and the value of the right to receive any payment under that trust [are disregarded]”.
But is the act of putting money into a trust caught? The answer is no. The National Assistance (Assessment of Resources) Regulations at regulation 25.1.a state that “a resident may be treated as possessing actual capital of which he has deprived himself for the purpose of decreasing the amount he may be liable to pay for his accommodation except (a) where that capital is derived from a payment made in consequence of any personal injury and is placed on trust for the benefit of a resident …” These rules are mirrored in the Income Support and other means-tested benefits regulations. So far so good.
If the injured person is a patient of the Court of Protection, funds held at Court or administered under the supervision of the Court benefit from a similar disregard. The position in relation to minors is a little more complex and is outside the scope of this article.
Of course, the majority of older clients who are in receipt of means-tested benefits will actually be receiving Pension Credit Guarantee Credit, and their entitlement to Housing Benefit and Council Tax Benefit will be determined by reference to that benefit and not Income Support. The regulations for Pension Credit are a little confusing. They disregard personal injury money held within a trust, but also disregard as capital “an amount equal to the amount of any payment made in consequence of any personal injury to the claimant or, if the claimant has a partner, to the partner.” There are also disregards relating to income.
At first glance, this would suggest that there is no need to set up a trust for a person who is in receipt of Pension Credit. This would, however, be a rather short-sighted view.
Apart from the non-financial advantages of having a trust that may be even more valuable to older clients, there are two issues – traceability and care fees. If no trust is set up and papers are not retained, how can you possibly tell that a client had an award and how much that award was? If the client has lost capacity, the person completing the benefits or care financial assessments may have forgotten about the injury, and the money that was paid because of it. If there is a trust in place, this may well alert the family to the possibility that the money in the trust will perhaps be treated differently from other money. Otherwise, the fact that there is a disregard for personal injury money under the Pension Credit regulations will probably not be picked up.
Perhaps more importantly, personal injury money is not disregarded for care fees unless it is either held in court or within a trust.

What about the new disregard?
The simple answer is that this will not help you very much when dealing with older clients. In October 2006, SI2006/2378 introduced a 52-week disregard for personal injury money. This disregard only applies to the first payment received as a result of that injury. If a person receives an interim payment or even some sort of gratuitous payment from the employer, that starts the 52 weeks running. If they receive a substantial sum three years later, they cannot have the benefit of the disregard. However, the major issue for older client practitioners is that this disregard only applies to means-tested benefits, such as income support, but not to care fees. The disregard is likely to be of limited use except for people who have received small awards, which will be spent within a year and who are not claiming any sort of assistance with their care.

The practical application for older clients
If you are acting as or advising the receiver or attorney for an older client who is claiming Pension Credit, it is important to check whether any personal injury money was ever received. Lay receivers and attorneys may not be aware that the information is important. If you are involved with a client who is entering care, how do you ensure that their personal injury money is protected?
The good news is that personal injury trusts can be set up late. Provided it is clear that money investments or other items were purchased from a personal injury award or other money flowing from a personal injury, these can be placed into a personal injury trust. Although the disregard cannot be backdated, it can be used from the date of the setting up of the trust. Funds that have just been paid into the injured person’s bank account can be extremely problematic. If their salary or other income has been going into the same bank account and this has been used for living expenses, it can be virtually impossible to tell what is personal injury money and what is not. If a client has prudently kept the personal injury money separate, either in a separate account or to purchase for example, an investment bond, the tracing issue is much easier. Most commonly however, the injured person will have bought a house with the compensation. Provided it can be shown how much of the value of the property can be attributed to a personal injury payment, that amount can be put into a trust and therefore protected. Even if a client has lost capacity, it is possible to make an application to the Court of Protection for a trust to be set up, although the Attorney or Receiver may feel that lodging the personal injury money with the Court will do the job just as well. There can be strong arguments for an external personal injury trust, but that is outside the scope of this piece.
The injury and the payment can have taken place several years ago. My colleague is involved with a matter where a lady was injured in the seventies. A house was bought and the rest of the money was placed into trust. This was not because of a desire to retain means-tested benefits, but was rather to protect the vulnerable person from people she believed may try to part her from her money. This was, and still is, a personal injury trust. Because it could be shown that the house was purchased solely with personal injury money, this could also be settled into the trust later on. And all that from a trust set up before the regulations as we know them even existed.

Lynne Bradey is a solicitor at Wrigleys Solicitors. She can be contacted at lynne.bradey@wrigleys.co.uk