Advantages

1. Protection of Means-Tested Benefits

• Preserves eligibility: Compensation placed in a personal injury trust is disregarded when assessing eligibility for means-tested benefits such as Universal Credit, Income Support, or Housing Benefit.
• Mitigates financial impact: Without a trust, compensation could push you over the savings threshold, causing you to lose benefits.

2. Protection of Assets

• Ring-fenced funds: The trust ensures that the compensation is separate from your personal finances, reducing the risk of mismanagement or impulsive spending.
• Asset preservation: Helps protect the compensation from creditors, divorce settlements, or other claims.

3. Flexibility and Control

• Controlled access: Trustees (appointed by you) manage the funds, which can ensure that money is used for its intended purpose, such as healthcare, housing, or other necessities.
• Tax planning opportunities: Trusts can sometimes offer tax advantages, though this depends on specific circumstances.

4. Peace of Mind

• Professional oversight: Trustees can include professionals who provide financial advice, ensuring the money is invested and used wisely.
• Longevity of funds: Ensures that funds last over the long term, particularly for those with ongoing care or medical needs.

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Disadvantages

1. Costs

• Set-up costs: Establishing the trust requires legal assistance, which can be expensive.
• Ongoing fees: Trustees, especially professional ones, may charge fees for managing the trust. There may also be costs for preparing annual accounts.

2. Administrative Burden

• Ongoing compliance: Trustees must comply with legal and regulatory requirements, which can involve paperwork and reporting.
• Time-consuming decisions: Trustees must collectively agree on how the funds are managed and spent, which can delay decisions.

3. Limited Access

• Restricted use of funds: The trust can only be used for specific purposes, as outlined in the trust deed. You’ll need trustee approval for withdrawals.
• Potential frustration: Some beneficiaries find it inconvenient not to have direct access to their compensation.

4. Tax Implications

• Tax liabilities: While many personal injury trusts have limited tax exposure, they may still incur tax on income or capital gains generated within the trust if they exceed certain thresholds.
• Inheritance Tax (IHT): Depending on the type of trust, there could be IHT implications every 10 years or when assets are distributed.

5. Trustee Challenges

• Trustee selection: Choosing suitable trustees can be difficult. Trustees need to act in your best interests and manage the trust responsibly.
• Trustee disagreements: Conflicts among trustees could lead to delays or legal disputes.

6. Potential Impact on Relationships

• Dependency on trustees: Relying on trustees for access to funds can strain personal relationships if friends or family members are appointed.

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Who Should Consider a Personal Injury Trust?

• Individuals receiving a significant compensation payout and who rely on means-tested benefits.
• People who need long-term financial planning for ongoing care or medical expenses.
• Those seeking to safeguard their compensation from financial mismanagement or external claims.

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Types of Personal Injury Trusts

• Bare Trusts: The beneficiary has direct entitlement to the funds, and income tax is paid at the beneficiary’s rate.
• Discretionary Trusts: Trustees decide how and when to distribute funds, offering more flexibility and protection but with more complex tax rules.
• Life Interest Trusts: The beneficiary has the right to income generated by the trust, while capital is preserved for others.

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Key Takeaway: A personal injury trust can offer significant benefits in terms of financial protection and means-tested benefit preservation. However, it is important to weigh the costs, administrative responsibilities, and restrictions. Consulting with a solicitor or financial adviser is crucial to determine if a trust aligns with your circumstances.

If you would like to open a personal injury trust bank account on the Monika platform, simply contact us and our friendly banking team will be happy to assit you with this.