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.
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.
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.
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.
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.
