Compensation Protection Trusts
A Compensation Protection Trust is a relationship that is recognised and is enforceable in the Courts. The compensation received is effectively put under the control of persons nominated to be Trustees. A Trust maybe required because the injured person is unable to look after the compensation (the Trust Fund) themselves or it could be that they are too young and the Trust fund needs protecting until they are old enough. A strong reason for the creation of a compensation Trust however is to obtain the benefits set out below. Under such a trust, the injured person becomes the beneficiary of the Trust and remains absolutely entitled to the funds held in the trust.
In some cases there may be just one Trustee and one Beneficiary but the sole Trustee cannot be the sole Beneficiary as in such circumstances there is no Trust relationship, however we recommend at least two to prevent issues further along the line.
What are the benefits of a Compensation Protection Trust?
- If a person receives damages for a personal injury then that compensation may reduce or even stop entitlement to “means-tested” benefits such as Income Support, Employment and Support Allowance, Tax Credits, Housing Benefit and Council Tax Benefit. By putting your compensation for your personal injury into a Trust you should be able to retain your entitlement to state benefits. If care is presently received or is required in the future either in a home environment or in a nursing or care home, then by placing the compensation into a Trust, the funds are disregarded in the context of assessing the means-tested benefits available towards the cost of care provided.
- Your Trustees have the authority to look after any property in the Trust even if you cannot. That may be particularly important in later life.
- Your Trustees will have power to invest the money to potentially grow the fund on your behalf. The Trustees must however, take independent financial advice which we can arrange through a special authorised party arrangement with an independent financial adviser. Your Trustees can help share the burden of sorting out your paperwork which naturally arises when money is invested. You may also wish to consider a Professional Trustee to assist.
- You can receive the benefit of the money/investments in the Trust. That is in addition to being able to keep means-tested benefits and although you may not receive large amounts into your own account there is nothing to stop the Trustees buying things for your use.
- A useful rule of thumb to help with your budgeting is that if your benefits are supposed to pay for something then that ‘something’ should not be paid by your Trust. Benefits are supposed to pay for the ordinary expenses of daily living such as food, clothing, footwear, gas, water, electricity bills, rent and mortgage interest. Obviously if you receive an unexpectedly large bill your Trustees could make good the shortfall.
- ‘Care needs’ are not ‘ordinary living expenses’ nor are the costs of repairs and refurbishment of property, the price of motor cars and even your telephone bill. These should normally be paid for directly by the Trust without affecting your benefits related budgeting. The Trustees could also buy you a holiday, furniture or a computer and other educational equipment and any other personal possessions you want even valuable ones. They would pay for those items direct. Your account balance and thus your means-tested benefits would not be affected.
- Coming into a large amount of money can be difficult to handle and so a trust can help to minimise this and remove the pressure from say friends or family who may be expecting you to share it.
Being a Trustee can be quite overwhelming as it is a complex area with many rules and tax implications that need to be considered. To assist we’ve written a guide which outline the duties and powers of a Trustee which you can find here. In the case of a Compensation Protection Trust the beneficiaries can benefit in the ways set out in a document (the Trust Deed). Some Trusts are imposed by law and do not need a Trust Deed but Compensation Protection Trusts should have a Trust Deed to make sure all the terms are clear.
The compensated person is expected to be the main concern of the Trustees of a personal injury trust even if there are other potential beneficiaries.
If you do not feel that this is something you can take on then let our experienced Trusts team help. Banner Jones are experienced in managing Compensation Protection Trusts for our personal injury clients, allowing families to adjust to the injury without the burden of managing a Trust as well.