Compensation Protection – FAQ’s
Are you in receipt of means-tested benefits or do you think you may need to rely on means-tested benefits in the future?
If you receive compensation or any payment as a result of a personal injury and you are in receipt of means-tested benefits then you MUST disclose the fact that you have received compensation or payment to your benefits agency.
- If you don’t then you are at risk of committing FRAUD.
- If you receive a level of compensation which takes your capital over £6000 then you will have your means-tested benefits reduced.
- If you receive a level of compensation which takes your capital over £16,000 then you will lose your benefits altogether.
Don’t worry! There is a simple way of keeping your compensation and your means-tested benefits.
Frequently Asked Questions
How can I protect my entitlement to means-tested benefits?
By setting up a Personal Injury Trust to receive your compensation. We will create a special document for you called a “Trust Deed” and the trust is created as soon as it is signed.
What is in the Trust Deed?
It covers the following:-
- It appoints the Trustees i.e. the people who must look after your compensation on your behalf. You need to choose a minimum of two Trustees, preferably three. In most cases you can act as a Trustee. Your spouse/partner can usually be a Trustee.
- It will usually state the amount going into the Trust but if this is not yet known then it is possible to set the Trust up with £10 initially and then add your compensation in at a later date
- It will state that you are the only beneficiary of the Trust
- It will state that only payments made in consequence of a personal injury can pass into the Trust
- It will set out what will happen to the Trust fund on your death.
- It will state that during your lifetime only you have the power to remove and/or appoint new Trustees
How much does a Personal Injury Trust cost?
We will charge you a fixed cost of £500 plus VAT. This covers:
- taking your initial instructions and drafting the Trust deed for you;
- sending you a Trust deed with an explanatory letter;
- writing to your benefits agency to inform them that you have received compensation but that it should be disregarded because it is passing into a Trust and (if you would like) also introducing you to an Independent Financial Advisor who can assist the Trustees with opening up a Trustee bank account and/or give the Trustees some investment advice if required.
In most cases it will be possible for us to use your compensation to settle our costs so you do not have to find the £500 plus VAT yourself.
Which benefits could my compensation affect?
Your compensation could affect the following means-tested benefits:-
- Employment and Support Allowance
- Income Support
- Housing Benefit
- Council Tax Benefit
- Working Families Tax Credit
- Disabled Person’s Tax credit
- Income Based Jobseeker’s Allowance
Why do I have to tell the Benefits Agency about my compensation?
If you currently receive welfare benefits, you have a legal duty to disclose a change in your circumstances to the people dealing with your claim which includes letting them know about your damages award.
Placing your award into a Personal Injury Trust does not remove your legal duty to report that you have received you damages award. It simply tells the people dealing with your benefit claim that they have to ignore both the lump sum and any income when working out how much money you should receive.
Do I need to put all of my compensation into the Trust?
No, not necessarily. It may be that you want to use some of the compensation to pay off some debts or perhaps pay for some treatment. If you have earmarked some of the money already for these purposes (or others) and you intend to make payment as soon as possible (and most definitely within the 52 week period of grace) then it is not necessary to put this money into the Trust fund
Also, given your financial circumstances, it may be possible for you to receive a small amount in your bank account. Take for example a client who has £1000 in his bank account and no other capital. He then receives a personal injury award of £30,000. His solicitor gives him £4000 for him to go into his own account so the total is £5000 and still below the £6000 threshold. The balance of £26,000 passes into the Trust. The client protects his full entitlement to means-tested benefits.
Where does the money actually go once I’ve signed the Trust deed?
Once the Trust deed has been signed the Trustees will be required to open a special Trustee bank account. The Trustees would be welcome to make their own arrangements but setting up a Trust bank account can often be quite a complicated procedure. We would be happy to introduce you to an Independent Financial advisor who would be able to assist you with this at no additional cost. What is important is that only your compensation and other payments made in consequence of your personal injury pass into the Trust and that this money is not mixed with your own personal funds. Where the compensation pay-out is substantial then the Trustees would be advised to take independent financial advice and to invest the money to achieve a better return than a standard bank account can offer. Again we can introduce you to a Financial Adviser should you so wish.
How quickly can I access money in the Trust fund?
A Trustee bank account is a lot like any other bank account except that there is no bank card. Payments out of the account will usually be made by cheque or sometimes it is possible to set up an online bank account. Remember though that any payments out of the Trust fund must be unanimously agreed by the Trustees.
What can the Trust fund be used for?
Capital and income from Personal Injury Trusts can effectively used for any purpose without affecting your entitlement to means-tested benefits.
What happens if the Trustees don’t agree?
All decisions must be made unanimously by the Trustees. If a Trustee doesn’t agree to letting you have an amount of money from the Trust fund then you have a number of options. Firstly you should listen to his/her point of view. There might be a very good reason why you shouldn’t have the money at a given time. If you still wish to have the money or authorise the payment to a third party then you could take action to remove the Trustee in question as you and only you have that power. Otherwise you could “bust the Trust” as this is a revocable arrangement. But be careful when busting the Trust as it might mean that you risk losing your means-tested benefits or having them reduced.
I have not received any of my compensation yet so why should I consider a Personal Injury Trust now?
It really is best to set up the Trust as soon as possible. As soon as you know that you are likely to receive compensation for your personal injury you should consider setting up a Trust.
Whilst it is never too late to set up a Personal Injury Trust, problems arise when you have received your compensation already and mixed it with your own personal funds. This is a problem as only money received in relation to your Personal Injury can pass into the Trust and the longer it has been in your bank account the harder it is to trace that money.
Also if it is all a rush then arguably you cannot take a balanced view. If your compensation is considerable then you will need time to appoint a financial adviser and take their advice.
Finally once benefits have been reduced or stopped as a result of your award being paid into your account then it can take time for them those benefits to be reinstated once you have completed your Personal Injury Trust.
So the sooner the better!
What is the 52 week “period of grace” I’ve heard about?
There is a “period of grace” of 52 weeks from the date you receive your first payment. During this period (otherwise called the temporary disregard for personal injury awards) your compensation is disregarded capital and as such your means-tested benefits are not affected. It is best not to rely on this. The problems are:-
The trigger starting the 52 weeks is not always clear cut. What is meant by “first payment” – yes it can mean the first interim payment but arguably it could also be a payment received from a family member who has given you £200 to tide you over until you receive your compensation. So you cannot always be sure when your 52 week period has started and more importantly when it ends.
The DWP and benefits agency representatives are not always aware about the 52 week period and on hearing about your compensation may cut your benefits anyway. You will then have the inconvenience of having to get those benefits reinstated and the bother of having to claim back any missed weeks of benefits.
As you have received compensation in the 52 weeks (and you have not in this period opted for a Personal Injury Trust) then the compensation will have gone into your personal account and mixed in with your other money so it will be very difficult to “trace” that money. This would be a problem if you wanted to opt for a Personal Injury Trust at a later date.
What if I decide to spend my compensation quickly i.e. within the 52 weeks? Do I still need my Personal Injury Trust?
No you don’t. But if there is any possibility at all, however small, that you will still have the money after 52 weeks then you need to consider a Personal Injury Trust.
What if the 52 week period has passed and I then decide to go on a spending spree to bring by capital below the required level? Surely this would mean I don’t need a Personal Injury Trust?
No! This could be seen by the Benefits Agency as a deliberate deprivation of capital. They could assess your capital as including the value of what you have bought. So you’d be in the position of not having your money any more and losing your benefits! So please take great care.
What if after the 52 week period I decide to give my compensation away to my daughter in order to bring my self under the £6000 capital level?
Again a clear deprivation of capital. Please refer to answer to the question above.
What if after the 52 week period I decide to pay off my credit cards and also a long-standing loan from a friend (which I am not required to pay back for another ten years)?
Again in both these cases, the Benefits Agency may try to claim there has been a clear deprivation of capital. Neither of these debts actually requires repayment at present – the motive for repaying could easily be established as bringing one’s capital under the £6000 limit.
What if, after the 52 week period I actually want to go on a spending spree/ give the money to my daughter/ pay off my long-standing loan in accordance with the questions above?
Then set up the Personal Injury Trust and make the payments from there. Capital and income from Personal Injury Trusts can effectively used for any purpose without affecting your entitlement to means-tested benefits.
I’m only receiving £10,000 in compensation. Is it worth setting up a Personal Injury Trust?
It depends – are you thinking of spending the money in the first 52 weeks? If so see the answer to question 12.
If you are hoping to put the £10,000 or the majority of it away for a rainy day and you hope it will last you two to three years then definitely you need to consider a Personal Injury Trust. It will take you over the £6000 minimum capital limit meaning your benefits will be reduced after 52 weeks.
What will happen to my Trust fund on my death?
In most cases the Trust will come to an end and any money left in the Trust fund at the date of your death will be included in your estate and will pass in accordance with your Will if you have made one. If you have not made a Will then it will pass in accordance with the Intestacy rules (where someone dies without leaving a Will). If you do not make a Will you cannot control where the money goes. This is why you should think about making a Will now if you haven’t already done so.
Now is a good time to think about making a Will if you have not already done so. Please contact our Wills team on 01244 312306 for more information.
If the amount in the Trust fund when added to your estate and added to the value of any gifts you have made in the seven years prior to your death brings the total to more than £325,000 then Inheritance Tax may well be payable on your estate.
On a separate note, it is possible to word the Trust deed in such a way to ensure that it does not come to an end on your death. One reason why you might want the Trust to continue is if the beneficiaries of your Will or the beneficiaries under the Intestacy rules are on means-tested benefits themselves. Inheriting a lump sum from your estate will affect their entitlement to receive means-tested benefits. It would be far better if the money stays in Trust for them too.
When taking your instructions we will ask you about family members and their financial circumstances so we can fully advise on how best to draft the Trust deed.
Are there any other benefits of a Personal Injury Trust?
Yes, a Personal Injury Trust is beneficial for:
- Those who may need local authority care in the future whether in a residential care home or receiving care at home. Capital in a Personal Injury Trust is disregarded by the Local Authority.
- Those who are not confident with handling money and would like others to be involved in the decision-making
- Those who are put under pressure by family members or so called friends. With another Trustee appointed you will be able to say “sorry it’s not my decision alone”
What are the income tax implications of setting up the Trust?
Most Personal Injury Trusts are tax neutral. You are the only beneficiary of the Trust and as such any income it produces is treated as your own personal income. If the amount of income the Trust produces is substantial, then it may when added to your own personal income, mean that you come within the income bracket requiring you to complete a tax return. If that is the case then we can assist with filling in an income tax return for you.
Who should I appoint as Trustees?
You should appoint people you trust to act in your best interests. In most cases you can be one of the Trustees. It is possible to appoint your spouse or partner. If the amount going into the Trust is considerable or it is inappropriate for you to appoint family or friends then you might consider appointing a solicitor or other professional Trustee to act. Remember though that a professional Trustee will be entitled to charge for the work they do.
Who shouldn’t I appoint as Trustees?
- Any person under 18. It may also be too much responsibility for younger people over 18.
- Undischarged bankrupts and those with voluntary arrangements with creditors.
- People with current money troubles or with a history of money troubles.
- People in prison or who have or may soon be convicted of offences involving dishonesty.
- People with a conflict of interest with you or others in the Trust.
- People with serious health problems who may be unable to fulfil their duties at any time.
- People who live outside the UK or may do so.
- People who are in any way concerned that they might be unable or unwilling to fulfil their duties as Trustees.
What are the duties of the Trustees?
A Trustee must:
- Disclose any circumstances where they might have a conflict of interest with a Beneficiary. For example, if a Beneficiary owes a Trustee money, this should be disclosed.
- Ensure records of distributions are kept. The procedure should be kept simple and as practical as possible.
- Not act in conflict with the interest of the Beneficiaries or profit from their role as a Trustee.
- Ensure they know what the terms of the Trust are and that they are carried out.
- Ensure that they do not act beyond the terms of the Trust and its powers.
- Ensure that good Trust records and accounts are kept and pay tax due on time.
- Take independent financial advice. This does not preclude the use of common sense. The Trustees must also ensure that the advice taken is in accordance with the Trustee Act 2000.
- The ultimate decision over what to invest is the Trustee’s decision. It cannot be delegated.
- Act impartially and fairly between multiple Beneficiaries and those who are Beneficiaries now and those who will be in the future. This is the general rule but in the case of a Personal
- Injury Trust the compensated Beneficiary will be expected to be the main Beneficiary for life. That is allowed for under the powers of the Trustees.
- Take reasonable care. Professional Trustees must take more care than others.
- Act jointly.
- Trustees should not normally delegate functions to each other. Trustees are jointly liable for mistakes and should therefore act together.
- Not charge. Only Professional Trustees can claim more than out of pocket expenses.
- Ensure that the Beneficiaries are kept fully informed. This avoids disputes. Trustees are strongly advised to contain at least one independent professional in their number where the Trust
- Fund is substantial. The appointment of family Trustees is always open to the possibility of conflict.
Please contact us on 01244 312306 for more information or to set up your Personal Injury Trust.