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Compensation Protection Trust

Compensation Protection Trust

If you have won compensation in a personal injury claim, a compensation protection trust allows you to protect the money from creditors without restricting your access.

They are also useful for preventing a substantial compensation payout from being spent too quickly.

In a compensation protection trust, trustees manage the compensation lump sum, these may be family members or a professional trustee such as a solicitor, if the sum is large, or you and your family don’t want the burden of financial and tax administration.

In this guide, we explain what's involved in setting up a compensation protection trust, explain its benefits, and answer some frequently asked questions.

• What is a compensation protection trust?

• Why should I consider setting up a compensation protection trust?

• How does a compensation protection trust work?

• What are the benefits of a compensation protection trust?

• How long does it take to set up a compensation protection trust?

• Can I manage the funds in a compensation protection trust myself?

• What are the duties of trustees in a compensation protection trust?

• Can I still access my compensation if it's in a compensation protection trust?

• How does a compensation protection trust affect tax?

• What happens to the trust if I pass away?

• Can I add other assets to a compensation protection trust?

• Can a compensation protection trust be set up for children?

Our network of trust lawyers can help you set up this type of trust.

Contact us for a free case assessment to discuss your circumstances and get a no-obligation quote for the services of a specialist lawyer.

What is a compensation protection trust?

A compensation protection trust, also known as a personal injury trust, is a trust that is set up to protect compensation payments from being claimed by creditors.

It is a way of protecting your eligibility for means-tested benefits such as pension credit, housing benefits, and more.

You may set up a compensation protection trust following medical negligence, a road traffic accident, or an incident of clinical negligence. 

Why should I consider setting up a compensation protection trust?

A compensation protection trust protects your eligibility for the following means-tested benefits:

• Income support

• Job seekers’ allowance

• Employment support allowance

• Pension credit

• Housing benefit

• Council tax benefit

• Residential care assessments

You can set up a trust with funds from:

• Personal injury settlement award

• Compensation payment from the Criminal Injuries Compensation Authority or Motor Insurers’ Bureau

• Armed Forces Compensation Scheme Award

• Government compensation schemes

• Charitable/public donations following an accident

• Accident or travel insurance payouts

• Professional negligence for an undervalued personal injury payout

The type of trust that you should set up and even if a trust is appropriate depends on the circumstances of the individual who was injured.

How does a compensation protection trust work?

A compensation protection trust, sometimes called a special needs trust, allows you to protect the funds from a compensation payout without affecting your eligibility for means-tested benefits.

Your benefits including residential care assessments, income support, and income-tested job seekers allowance will be preserved under a trust.

Your trustee can invest your compensation through a trust in managed assets, including stocks, property, or funds to provide you with an income.

What are the benefits of a compensation protection trust?

The primary benefit of a compensation protection trust is that it protects your current or future entitlement to benefits.

Other benefits include:

• Protection against the influence of friends and relatives and from yourself unwisely spending the funds.

• Ringfencing from separation or divorce, as the assets are held separately from other income and assets.

• Investment in your future, particularly if you can no longer work, or are forced to retire earlier than you expected because of the effects caused by your injuries.

How long does it take to set up a compensation protection trust?

It can take some time to set up your trust, the length of time it will take depends on your circumstances, including the size of your payout.

If you can, you should set up your trust as soon as possible, it’s in your best interests to set up the trust before any compensation payment has been received. 

Further, you should set up your compensation protection trust within 52 weeks of receiving an interim or settlement payout, otherwise, your eligibility to receive benefits could be impacted.

Can I manage the funds in a compensation protection trust myself?

Yes, however, it is usually a good idea to speak with a legal professional when considering setting up a trust. They can help you choose the most appropriate trust to put in place, and whether a trust is required.

Consulting a financial expert is especially important if the type of trust you want to set up has tax implications, or it is being set up to provide for dependants. 

What are the duties of trustees in a compensation protection trust?

You must choose a trustee or more than one trustee to manage your compensation protection trust. This can include yourself so that you are both beneficiary and trustee of the trust. 

A minimum of two trustees is required, unless one of the trustees is in a trust corporation, and there can be a maximum of four. 

Trustees should be responsible, trustworthy, responsive, and financially savvy. They must also be over the age of 18 and be mentally capable of undertaking their trustee duties and responsibilities. 

Can I still access my compensation if it’s in a compensation protection trust?

Yes, the purpose of compensation is to cover cover past losses and meet future costs. 

The main benefit of a compensation protection trust is that you can access compensation funds and remain entitled to means-tested benefits.

How does a compensation protection trust affect tax?

If the trust makes income via interest or rental income this must be declared in your tax return.

Capital gains tax (CGT) is payable for any sale of property held in the trust. CGT must be paid within 30 days of the property disposal.

The compensation in the trust belongs to the trust, not the individual so these funds won’t directly impact their personal tax or allowances.

What happens to the trust if I pass away? 

When you die, funds in your compensation protection trust will be transferred to your estate and should be distributed to your beneficiaries by your executors as per your will.

If you die without a will, funds will be distributed as per the rules of intestacy.

Can I add other assets to a compensation protection trust?

A compensation protection trust can only contain a settlement from a personal injury. You can't add funds from other sources.

Can a compensation protection trust be set up for children?

Yes, when a compensation protection trust is set up for children their guardian or legal representative will appoint the trustees.

The court will need to approve the appointment of trustees for a minor to ensure they will run the trust for the child’s benefit.

How can Lawhive help?

Our network of trust lawyers can help you decide whether a trust is right for your circumstances and if so, offer advice on setting up the right kind of trust.

We can also guide you during the setting up of a trust, including helping you pay the right tax.

Contact us today to explore compensation protection trusts further and get a fixed-fee quote for the services of a specialist lawyer to set one up.