Compensation protection and Personal Injury Trusts: Explained.

Compensation can’t turn back the clock. But properly managed it can provide life-long security.

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PI Trusts. Bare Trusts. Benefits. We’re here to explain it all.

At RWK Goodman, our Compensation Protection team understands the ins and outs of compensation protection and Personal Injury Trusts.

If you have significant injury compensation, we’re here to help you understand how it should be managed.

Frequently asked questions about Compensation/Personal Injury Trusts

What is a Compensation/Personal Injury Trust?

A Personal Injury (PI) Trust is a legal arrangement for holding and managing a compensation award as a result of an injury. This could be following a road traffic accident, an accident at work or a clinical negligence event.

A PI Trust can also be known as a compensation protection trust or special needs trust.

For an effective PI Trust, the source of the funds must arise from:

  • PI settlement award/interim payments
  • compensation received from the Criminal Injuries Compensation Authority or Motor Insurers’ Bureau
  • Armed Forces Compensation Scheme Award
  • payments from other government compensation schemes
  • charitable or public donations following an accident
  • payments from accident or travel insurance
  • payments from a professional negligence claim paid to compensate for a previously undervalued PI claim.

The type of trust set up, or even if a trust is appropriate, will depend on the individual’s circumstances.

Consideration must be given to the value of the compensation, the individual’s intentions for their award, and their present and future needs. Specialist legal advice is required as trust law can be complex. Also any decision made will need to ensure that the individual’s position and interests are protected and not in any way disadvantaged.

Normally a PI Trust will be managed by two or more trustees or a trust corporation.

The simplest and most common PI Trust is what is known as “a bare trust”. This type of trust means the trust fund is treated as belonging to the individual who sustained the injury and received the compensation, and allows them to end the trust whenever they wish.

How do I set up a PI Trust? Can I set one up myself?

An important first step for any individual is to seek specialist legal advice. This will help to determine the most appropriate trust to be put in place (if any).

Legal advice is especially important where the type of trust may have tax implications, or where the future provision for family members needs to be considered.

Ideally, thought should be given to setting up the trust while a compensation claim is proceeding. Certainly, the chosen trust arrangement should be set up ahead of any settlement/funds being received, to ensure no loss of statutory benefits or care funding entitlement.

Next, the individual will need to choose their trustee/s or a trust corporation. Where the individual is a minor, then their guardian or legal representative will appoint the trustees, which will require court approval to ensure it is in their best interest.

The individual receiving the compensation award can appoint themselves as trustee whilst also being the principal beneficiary of the trust i.e. the person benefiting from the trust.

A minimum of two trustees is required, unless one of the trustees is a trust corporation, with no more than four. A trustee must be aged 18 or over and be mentally capable of fulfilling their duties and responsibilities.

A trustee should be someone that is responsible, trusted, responsive and with a strong financial history. They should be someone with the individual’s best interests at heart.

A trustee can retire and or be replaced.

Although a trustee can be a friend or relative, often it is more appropriate for a professional trustee to be appointed. A professional will be independent, and have the experience and knowledge to provide expert advice. Normally professional trustees are held to a higher standard of care and will hold professional indemnity insurance as well.

A specialist solicitor will also need to draft the trust document known as a “trust deed”. The deed will set out all the obligations and powers for the operation of the trust. Then the trust will need to be signed by the trustees and settlor, witnessed and dated. The original trust deed should be securely and safely stored.

Lastly, a trust bank account should be set up to deposit only the trust funds into, and to ensure this is kept separate from all other personal finances.

The cost of setting up a trust will depend on the type of trust and complexities involved. Preferably the cost will be considered and included as a recoverable cost within the compensation claim. If not, then the individual will meet the costs from the trust funds. There may also be administrative charges with registering and initial reporting of the trust to HMRC.

It is important to note that a professional trustee is likely to charge for managing the trust and for any reasonable expenses which will be payable from the trust funds. The professional trustee should be able to provide an estimate of expected costs year on year.

What about PI Trusts for children?

In claims where a minor is involved and who is determined likely to have capacity on becoming an adult, a High Court Judge must approve a PI Trust to manage funds until the minor reaches 18.

The High Court Judge will need to consider the suitability of setting up a trust, the type of trust chosen and the trustees. The judge will prefer the appointment of a professional trustee where the compensation is significant.

How much money is usually ‘needed’ for a PI Trust to be created?

No specific sum of money is required in order to set up a trust.

However for practical reasons, if a trust is appropriate and needs to be set up, it should be a sum higher than the income and savings thresholds for means-tested benefits (which are subject to changes but currently as at 2021 between £6,000 and £16,000). The sum of money to be held in trust should also be proportionate to the costs of both setting up and managing a trust.

What is the 52 week rule in relation to PI Trusts?

Also known as the ‘one year disregard’ rule.

In brief, the individual has 52 weeks from the date that their first payment as a consequence of their injury is received (this includes any charitable donations or payments from insurance) to set up the PI Trust, to ensure that compensation funds are not taken into account when assessing an individual’s entitlement to means-tested benefits or local authority funding.

Again, expert advice should be sought as the rules concerning what type of payments the disregard rule applies to can be complex.

Can you set a PI Trust up after 52 weeks?

In short, yes it is possible to create a trust after the 52 weeks has passed. However the individual cannot retrospectively claim any means-tested benefits they may have been entitled to during that grace period.

Additionally, the longer funds are not held within a trust fund/account, the greater the risk that these funds will be mixed with other money. This can complicate matters unnecessarily or render a trust ineffective. As such, the trust should be set up as soon as possible and without any unnecessary delay.

How does a bare trust work?

A bare trust is the most common type of PI Trust. It is also known as an absolute trust.

A bare trust is simplistic in that the trust fund is treated as the individual’s personal funds (apart from in assessments for means-tested benefits). Therefore the trust fund is taxed as though it belongs to the individual. The individual will have to take specialist tax advice regarding their personal tax liability for example for income tax and capital gains tax.

Upon death, the trust fund will form part of the individual’s estate and will be dealt with in accordance with the terms of their Will (or the intestacy rules where there is no Will).

What are the advantages of setting up a PI Trust?

The main reason to create a PI Trust is that funds held in trust are disregarded when assessing eligibility for certain means-tested state benefits, services and local authority funding. This applies whether or not the individual is in receipt of these at the time the trust is created. The individual’s situation could always change at some date in the future.

Means-tested benefits include:

  • Universal Credit;
  • income-based Jobseeker’s allowance;
  • income-related Employment and Support Allowance;
  • Income Support;
  • Pension Credit;
  • Tax Credits (Child Tax Credit and Working Tax Credit);
  • Housing benefit;
  • Council Tax Support AND;
  • Social Fund (Sure Start Maternity Grant, Funeral Payment and Cold Weather Payment).

The trust funds are essentially ring-fenced and kept separate from all other income and assets held.

A PI Trust also protects the interests of vulnerable individuals (including the very young, old and disabled) as trustees must each authorise all transactions within the trust. This limits the potential for misappropriation or inappropriate use of funds. It also limits the ability of those close to the individual unduly pressuring them into lending them funds, whilst still allowing that individual to retain a level of control over their money.

Furthermore, a PI Trust is a useful structure where the individual is unfamiliar with managing a large sum of money independently.

Professional trustees can provide their knowledge, experience and expertise in the management of trusts providing useful and helpful advice and support when it comes to decision making. A professional trustee will also have a working knowledge of their legal duties and requirements and can ensure that funds are managed appropriately to protect the person’s long term interests.

Do I have to declare compensation to the Department of Work and Pensions (DWP)?

It is important to keep the DWP notified of a settlement award as this would be a significant change in and individual’s circumstances.

When informing the DWP, it is prudent to provide details of the PI Trust (or even a copy of the trust deed) and that it ought to be disregarded for means-tested benefits purposes. This ensures transparency and avoids any complications should any future dispute arise.

For a PI Trust to be accepted by the DWP, they will need confirmation that two trustees have been appointed, that the funds are kept in a separate clearly identifiable bank account, and that there is a clear record of decisions made in relation to the trust.

Do I have to repay Personal Independence Payments (PIP)?

No, as PIP is not a means-tested benefit, i.e. when calculating PIP it is irrelevant how much income and savings an individual has. Therefore, receipt of a compensation award and or interim payments towards a claim will not impact on an individual’s entitlement to PIP.

Repayment of PIP would most likely be triggered where there was an error in the initial calculation of the entitlement or where there is a change in an individual’s circumstances. For example, if an individual’s condition improves it could mean their PIP entitlement is reduced to a lower rate triggering a potential overpayment by the DWP, in the same way that an underpayment by the DWP may be triggered from an individual’s condition worsening.

Does money from the Trust count as income?

An individual should avoid receiving income from the trust if they are currently receiving, or intending to apply for, means-tested benefits/statutory funding. If they are in receipt of or intending to apply for means tested benefits/statutory funding it can lead to mixing of funds.

Normally the trust fund should be used to pay for things directly, instead of as an income.

Where a bare trust is operating, any income generated by the trust will need to be declared as part of the individual’s self assessment tax return. Any sale of trust property will also need to be reported to HMRC with any capital gains due to be paid within 30 days of the date of that disposal.

Can you spend money from a Trust fund?

Yes, the purpose of a compensation award is to be used to meet the needs of the individual during their lifetime. It is not a windfall; it is to ensure the injured individual has sufficient funds to reimburse their past losses and to meet their future losses.

Where a bare trust has been set up, and dependent on the value of the trust, normally a proportion of the fund is retained as liquid capital in a trust bank account to meet any ongoing expenditure. The remainder will then be invested into an investment portfolio or property. It may be necessary to engage with an Independent Financial Adviser where appropriate.

For funds held in a bank account or investment portfolio there may be administrative processes, charges and delays for releasing funds. In the latter there may also be tax consequences.

How funds are spent will depend on the needs and requests of the trust’s beneficiary and the decisions made by the trustees.

How long will a PI Trust last?

It depends. A PI Trust can last for as long as set out in the trust deed or be terminated in accordance with its terms. This could be due to the passage of time, or based on a triggering event.

For example with a bare trust it may be that the beneficiary wishes to end the trust and spend all of the money in one go i.e. to purchase a property. Or it could be that the trustees decide to wind down the trust. It may also be due to the trust funds running out or the death of the beneficiary.

Whatever the cause of the trust terminating, the trustees have a duty to keep a record detailing why the trust has come to an end and to ensure the trust funds are distributed correctly to the beneficiary (or beneficiaries).

How might having a PI Trust affect creating a Will?

If the PI Trust is a bare trust, then upon death it will form part of the estate and be dealt with in accordance with the terms of the individual’s Will.

A Will ought to be updated following settlement of a claim to reflect the individual’s wishes for their trust fund. If the individual dies without a Will, then the rules of intestacy will apply.

Are there any disadvantages to setting up a PI Trust?

Disadvantages include the costs of setting up and managing a PI Trust.

There will also be a need to abide by certain rules to ensure that the trust is effective – such as not mixing trust funds with any other source of funds.

There may be time delays associated with any administrative matters.

Furthermore, there may be practical issues and cost implications of replacing a trustee where there is a breakdown in the relationship between either the trustees or the trustee and the beneficiaries, or where the trustee retires, becomes incapable or passes away.

trust or deputyship

PI Trusts vs deputyships

Unfortunately there are many cases where an individual has suffered catastrophic injuries and lacks capacity to manage their property and affairs. As such, a decision has to be made by the Court of Protection (COP) as to the best option for holding and managing the affairs of the incapacitated individual (referred to as P).

The two main options are either through a property and affairs deputyship or a PI Trust. Often the COP prefers the appointment of a deputyship as it offers greater financial protection to P, with oversight from the Court as well as the Office of the Public Guardian to ensure decision making is in P’s best interests. In addition, a deputy usually has wider powers than a trustee and is able to deal with all of an individual’s property and financial affairs, not just funds received as a result of their injury. There need only be one deputy in place, there is no requirement for two.

Find out more about what a deputy does here >>

In terms of costs:

However there are valid reasons for a PI Trust, especially where P or their family members prefer the psychological separation from the court system after what can be lengthy, stressful and difficult claim. A trust arrangement can also be a simpler, cheaper (though cost savings would need to be of particular significance) more personal and flexible. Trusts can also be more responsive and not subject to the delays of the COP. Rightly or wrongly some individuals are uncomfortable with being a protected party under the jurisdiction of the COP.

If P were to choose a trust over a deputyship, an application would need to be made to the COP setting out clearly and in detail the reasons why a PI Trust would be more suitable. It is likely to involve a fully attended hearing which can be costly and lengthy.

Examples of appropriate scenarios could be where P has fluctuating capacity from day to day so a trust structure may be more manageable, or where P’s capacity is disputed – a trust may be more suitable instead of a deputyship.

How can our CPU Team help?

Our experienced Compensation Protection Unit can assist with all aspects of trust creation and management which includes:

  • advice on whether a trust is appropriate and if so the type of trusts available and which will be the right option for you
  • advice on appointing appropriate trustees, including how our Professional Trustee Corporation WKTL may be the right fit for you
  • preparation of trust documents
  • management of the trust including trust accounts
  • appointment of new trustees or removal of existing trustees.

Call our specialist team now to find out more


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