Following settlement of a claim our specialist Court of Protection team can assist with the financial management of the compensation your child has received. They help to ensure that your child is provided for throughout their entire life through a personal injury trust. Often our clients have never heard of a personal injury trust so in this article Ruth Meyer, head of the Court of Protection team, explains what they are in more detail…
What is a personal injury trust?
A trust is a relationship that is recognisable and enforceable by the court. When a person, even a child, receives compensation for personal injuries the child can put that compensation in a trust under the control of others known as trustees.
How can a personal injury trust be set up?
If a child is under 18 years of age then their litigation friend can set up a personal injury trust on their behalf. The litigation friend is usually their parent and they can apply to the court under the CPR rules to set up a trust. Some of the paperwork that they will need to submit includes, but is not limited to:
- A draft of the trust deed.
- Financial advice setting out the investment strategy.
- Details of the cost of the trust.
What are the benefits of a personal injury trust?
If a trust is not applied for then if the child is still under 18 all of the award including any earlier interim payments must be paid into the court funds office until they reach 18. Any investment of that money is dealt with by the court funds office and interest paid is nominal.
It is usually better if funds are removed from the court so that full investment options can be looked at and flexibility given to the trustees. This will mean that they can use the money in the best interests of the child without having to go to the court each time for approval. This saves both time and money. It also allows the child to become more involved in the running of their trust as they are older otherwise they would simply receive the funds at the age of 18 without any guidance.
Will my child still be eligible for means tested state benefits?
A personal injury trust protects the compensation from being taken into account for assessment for means tested state benefits. A child may not be in receipt of such benefits while under the age of 18 but may be in the future. By setting up the trust while they are young, the compensation is ring fenced and this will continue into adulthood.
A personal injury trust is also disregarded for local authority care should the child require local authority assistance or funding for care in the future.
Such a trust is particularly suitable for children who are likely to retain their capacity at 18 but for various reasons may remain vulnerable. The trust provides protection, guidance and flexibility.
When can I set up a personal injury trust for my child?
The best time to set up the trust is as soon as liability has been admitted in a claim and you know that an interim payment will shortly be made. You will need to ensure that any payment is paid directly into a trust bank account and not intermingled with the child's or parents' other accounts. If it is intermingled then that money cannot go into a trust.
The trust bank account should be an account dedicated to only holding the compensation funds and have the facilities of an everyday current account for flexibility. Interest rates tend to be low but with the trust in place, trustees can transfer funds from the account to invest in assets with a higher return as long as they remember to keep those other assets in the name of the trustees. Income would then be paid from those assets into the trust bank account or rolled back into the trust investment.
What type of trust is a personal injury trust?
There are many types of trusts with different names. What is important is the source of funds. If the source is for personal injury then the trust is a personal injury trust which is also sometimes known as a special needs trust. Quite often compensation is placed into what is known as a 'bare trust'. The main advantages of this type of trust are that the child retains a large degree of control when they reach 18. If the child wants to they can close the trust down when they get to 18 and at that age they are free to change trustees.
The trust is also tax neutral which means that all income and capital gains are reported in the child's personal tax return as if it was income and capital gains in their own right. It is therefore taxed at their own rates and not at the higher trust tax rate.
Who can be a trustee?
In respect of large compensation awards the trustees are usually the child's parents and a professional trustee such as a solicitor. A solicitor will be insured. There must be a minimum of two trustees and a maximum of four. A child can be a trustee of their own trust once they reach 18 as long as there are other trustees to act with them. For practical reasons there is more administration with a higher number of trustees.
The involvement of a professional trustee enables the trustees to receive ongoing professional advice through the child's minority and afterwards. If the child chooses to keep a professional trustee once they reach 18. A professional trustee will also help assist in accessing other professional support.
What is the role of a trustee?
A trustee must look after the award (the 'trust fund') for the benefit of the beneficiary (the child). When trustees are appointed they agree to act in the interests of the beneficiary and not for themselves. They are entrusted with the funds and this is why it is called a 'trust'. The trustees will have certain powers over handling the trust fund and these are set out in the trust document.
What do trustees do?
Trustees are required to keep good records and accounts and pay the tax on time. They must seek appropriate advice, including financial advice and take reasonable care when carrying out their duties. Professional trustees, such as a solicitor, must take more care than others.
What is the child's involvement in the trust?
As a child gets older, perhaps in their teenage years, they should start attending annual trustee meetings so that they can gain a better understanding of their financial position in readiness of turning 18. By that time they should hopefully understand and be happy with the arrangements in place and understand why a trust was set up in the first place. It is with this knowledge that they can choose to take on the role as a trustee themselves and continue with the trust if they wish.
What does a trust cost?
The cost will be set out in the application to the court for a trust for a child. These will also be included in the litigator's 'Schedule of Loss'. This will mean that they litigator will try and get those costs recovered by the defendant when the claim settles. It is not unusual to get costs paid for up to the age of 18 and sometimes beyond that if a child can be shown to retain mental capacity to understand their award but still remain vulnerable so that they require supported decision making.
Professional trustee's costs are usually on an hourly basis so they depend on the amount of work carried out. Administration costs can be higher with a large number of trustees or if one is particularly difficult to contact. Costs are usually higher in the first year while the trust is set up and it enters the first functioning year. After that they should decrease.
So, in summary, why should I set up a personal injury trust for my child?
- The creation of a trust means the trustees can deal with finances more easily and without the delay and expense associated with continual court applications each time sums are required.
- The trust allows for greater flexibility than if the funds remain in court.
- It is likely that trustees will obtain a better return by investing money outside of the court.
- The involvement for a professional trustee enables the trustees to receive ongoing professional advice throughout the child's lifetime both before they are 18 and once they are over 18 if they wish. For many, this assistance, once they reach adulthood, is when they need it most.
- A professional trustee can assist in accessing other professional support that the trustees may need and continue to need throughout the whole of the child's life.
- The trust ring-fences the compensation and the child is therefore protected from outside influences and opportunists and is especially beneficial after the child reaches 18.
- Once a child is 18 they can continue to receive means-tested state benefits as funds are protected from being taken into account from assessment.
- Professional trustee costs can be included within the award for damages up to the age of 18 and sometimes beyond.
If you or a member of your family know someone who might find a further conversation about setting up a personal injury trust for their child useful, contact the Court of Protection team by email at email@example.com.