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The Basics - what is the legislation & purpose

The Income Support (General) Regulations 1987 contain a number of items that must be disregarded when a claim for benefits is being assessed. In the same breath, failure to provide advice in this area leaves solicitors open to a claim for professional negligence.

Paragraph 12 of Schedule 10 is worth quoting:

“Where the funds of a trust are derived from a payment made in consequence of any personal injury to the claimant, the value of the trust fund and the value of the right to receive any payment under that trust.”

Therefore, solicitors have the means at their disposal, having obtained personal injury compensation, to extend their service to protecting what has been achieved.

Just like that? Well, no: not quite; and we propose to lay out a number of practical considerations that practitioners in this area would do well to consider.

Before moving on to the details, it is worth noting some other circumstances where a client should consider settling a trust (called a PI trust elsewhere in this article) with the proceeds of his claim.

Firstly, and simply, it is worth noting that trusts settled with the proceeds of a criminal injury are treated in the same way as personal injury cases.

Long-term care

Many older victims of personal injury are at increased of needing care, and any assets in excess of £20,000 are at risk of being assessed when considering if the person should be self-funding. PI compensation in a long term care assessment is covered by very similar legislation and provisions to Social Security, and we have experience of a client continuing to have care paid for, even though in receipt of a substantial claim, settled into a PI trust.

Divorce

The changed personal circumstances and financial pressures brought on by serious injury – both of which can be dramatic and traumatic – can lead to marital difficulties, sometimes ending in divorce. It may be possible, depending on the timing, trust wording, and documented reasons for settling the trust, to separate a PI claim from matrimonial assets in the event of an action for ancillary relief.

Bankruptcy

Likewise, if a client suffers financial difficulties, it may be possible to protect the claim in whole or part, from creditors. If a client is already bankrupt or has judgements outstanding, we think it unlikely that a PI trust will help, but if the trust is settled early enough in the process and the settlement is drafted carefully, we believe that protection may be offered.

Profligacy

Solicitors have vast experience of clients spending their claim before they receive it. For poorer or younger clients, this may be the first time they have been in possession of any worthwhile amount of money, and management of it may be more than the client is able for without assistance. While not strictly any of the solicitor's business, it would be of great assistance to the client if the client could be protected from his own spendthrift tendencies. It always seems a pity to usus that National Lottery winners are assisted with financial planners before they are allowed to spend their winnings, but the victim of an accident, who may really need the money, is offered no help at all, unless he seeks it himself.

The Trustee Act NI 2001

There is, of course, no problem with a solicitor being Trustee but there are a number of issues you which you will need to consider:

Taking on Trustee work has the potential to increase your exposure to liability. Things can go wrong – such as, administration issues, staff fraud, drafting negligence, failing to monitor investment performances. Strong consideration should be given to instructing Counsel to draft the Trust document.

You should ensure that there is a robust procedure in place for determining attitude to risk.

Various requirements are placed on Trustees under this legislation. The Trustee is required to have an investment policy statement, to be adhered to by the Trustees and by any advisers consulted. This is the Trustees responsibility. Accordingly if the Trustee is working in conjunction with an IFA it is for the Trustee to provide the direction to the IFA and not the other way around.

Investments must be diversified. This was established in case law with the Nestle case, but is now enshrined in the Act. It is not sufficient merely to play safe and simply put the money all in cash (unless the particular circumstances dictate it).

Depending on the type of investment made, tax returns may be necessary.

Unless you are professionally competent in the area of investment you are required by the Act take advice from a suitably qualified professional. The obvious choice here would be an IFA, but it might also be a stockbroker or suitably qualified accountant.

Investments must be reviewed regularly – we believe this means at least annually.

On the subject of reviews, you will need to bear in mind when costing your service that the case needs to be reviewed. There will be other cost/time issues such as clients drawing money out of their Trust and annual tax returns.

It should also be remembered that in all of this the file has to stay open. You will have to continue dealing with a client with whom you thought you had finished. The fees will not be large and we believe that it may be difficult for a solicitor to charge for Trust work to a client from whom they have already earned substantial fees. You need to be very careful that this does not become a time overhead for which it is difficult to charge.

If you decide that you do not want to be a Trustee, what are your alternatives?

Clients, friends or relatives? Possibly, and in may cases, yes – but consider your position. If you suggest or permit this, are there potential liability pitfalls? We believe so.

Beware the IFA/accountant who offers to do it for you – what Trustees are they suggesting? And remember, under the Solicitors Order no-one other than a solicitor is allowed to draft a Trust for a fee. Again, if things go wrong will the IFA or accountants professional indemnity policy cover them for a transaction that in itself is a criminal offence?

The Pitfalls

So, your client has accepted your advice to settle a personal injury trust, the trust is correctly drafted, and the right trustees chosen. End of story? Perhaps not. There are a number of practical issues of which your client and the trustees need to be aware.

Withdrawing money

There is the temptation to set up an arrangement to pay regular amounts, perhaps monthly or quarterly, almost as a replacement for income. This could quite easily be done, and an investment chosen to make such payments appointment of capital from a tax point of view. It is possible, however, that, the relevant agency could seek to deem such payments as income, not capital, with concomitant loss of benefits.

It might be wiser, therefore, to make specific, irregular payments, and make them out of capital, so that there can be no cause for uncertainty.

While on the subject of timing, it is worth pointing out that there is no absolute requirement for a PI trust to be set up immediately on settlement of the claim. If a client becomes aware of PI trusts, or perhaps falls into a position of needing means-tested benefits, at some future date, it is possible to settle a PI trust after the fact, with the caveat that the claim funds must be easily distinguished from the client's general funds. For example, if a trust is settled with £20,000 out of a general bank account, this is unlikely to work; but if the money is in a separate investment that is clearly the proceeds of a PI claim, even if this has grown, or been partly spent, there is no reason why such funds could not be used to settle a PI trust, even if this was some years later.

Use of funds

If the funds are used for general daily living, the relevant agency can also seek to reduce benefits payments. The argument here is that if one has the resources to pay for one's own upkeep, why does one need help?

This also applies to funds used for housing that would otherwise be covered by housing benefit, but does not apply to housing over and above that covered by housing benefit.

The answer is, as with the method of withdrawing money, to withdraw funds for a specific purpose – a holiday, a computer, a gift to children, clothing, furniture, etc.; or home improvements such as double glazing, central heating, disability modifications, etc.

Care is also needed with clients that are having care long term care funded by the State, as using trust funds to pay for care, or for personal needs that would be covered by benefits, may result in funding being reduced by the amount of the additional funds, or even withdrawn.

If you are the professional trustee in the case, the decision in Hurlingham Estates v Wilde & Partners means that it is your duty to bring to the client's attention any matters, of which you should be professionally aware, even if only peripheral to the matter in hand and advice is not directly sought, that are likely to materially affect the client if the transaction being contemplated proceeds.

Alternative trustees

Still want to be a trustee? Perhaps not. If not, who will be appointed?

It should be said here that the settlor/claimant should not, under any circumstances, be a trustee. This will be viewed as provocative in the extreme by the relevant agency.

Leaving the settlor aside, who else can be a trustee? Husband? Wife? Brother? Friend? Any or all of the above can be trustees; after all, the legal position is that anyone over 18 years who is of sound mind can be a trustee, but practically, what is wise?

You should be explaining to your client the gravity of the position, that he is contemplating giving a sum of money to an individual who will have full control over that money, and will be its legal owner. He is required, by law, to act only in accordance with the trust deed and statute, but no-one will check that he, in fact, does this.

If, for example, he decides to “borrow” £10,000 from the fund, no-one will query that decision. If he subsequently “forgets” to repay it, only an audit of the trust funds will find this out, and it may be many years before it is discovered.

This is where the word “trustee” applies in its most literal sense. Even if the client trusts the prospective trustee, can you afford to? If a trustee absconds with trust funds, he is most unlikely to carry professional indemnity insurance and, even if he is convicted of a criminal offence, the money is still gone. We would be concerned that the party with the PI cover – the solicitor – will end up paying.

We would suggest that you protect yourself by carrying out EJO and bankruptcy searches as a matter of course. It is rather more difficult to conduct criminal record searches without permission, but, if a potential trustee declines to give this permission, we would submit that certain conclusions might be drawn.

A better solution might be to appoint a third party, professional trustee, with a reputation to preserve and PI cover to back it up, with all the procedures and policies in place for administration and fulfilment of the Trustee Act.

Financial planning in a PI trust context

Financial advisers do, of course, have their traditional uses, in investing compensation money, but we would suggest that a suitably qualified financial planner can be of assistance to the solicitor in the prosecution of the case.

A financial plan is a cash-flow model prepared for the plaintiff, with the intention of ensuring, given a set of assumptions – some standard, some client-specific – that the client's money lasts as long as he does. It should be prepared only by a Certified Financial Planner (CFP), which is the only internationally-recognised qualification in the field of financial planning.

We feel that there is a place, in a contested case, where opposing forensic accountants are producing widely differing figures based on needs, for a financial plan based on the clients objectives for the future. Such a plan has the potential of eliminating risk for the plaintiff. For example, the defendants may have lodged £750,000, but the plaintiff's Senior Counsel advised that this is a little low, and there could be another £75,000 available, however a financial plan shows that the lodgement more than meets the client's needs, potentially obviating the need for a Court appearance with the attendant risks.

Civil Procedure Rules in England have changed recently, to allow judges, in certain circumstances, to direct the parties to obtain a full financial plan to assist the Court, the cost of the plan being a recoverable outlay.

Defending solicitors could even suggest that insurers pay for a Without Prejudice financial plan, if there is potential for this to limit the claim and resolve the case.

Court of Protection cases

This brings us to minor cases, and other clients without capacity, where the Court Funds Office (CFO) and the Court of Protection are involved. Apart from issues such as investment returns and cost, the major difficulty clients and solicitors experience in dealing with the CFO is that it can be cumbersome and time-consuming to access funds, even for relatively small amount of money. Inevitably solicitors are spending unrecoverable time cost in fielding queries from clients in relation to CFO procedures. All of this can be obviated by using a PI trust instead.

We believe that there is a good argument for asking the judge to approve the settlement of a PI trust. He would have to be satisfied of the proposed trustees' probity, that the client's interests were paramount in the trust wording, and that the investment strategy was sound, but given the right case, judges will agree to such an application.

If a minor case is brought to trial, the judge will direct the funds to be paid into the CFO. There may be an opportunity to use a PI trust as a negotiating tool in minors cases with liability issues, in that a lower figure can be agreed on the grounds that it is settled into a PI trust, the thinking being that better control and individual investment management will achieve a better growth rate than the discount rate that would be assumed by the judge if the CFO was involved.

In closing, trusts settled with the proceeds of a personal injury settlement are a very useful weapon in the solicitor's armoury. As well as the headline benefit of protecting a client's benefits, the client may be protected against many other eventualities, as well as having the opportunity to mitigate Income Tax and Inheritance Tax.

It is an immutable law of the universe that rights and opportunities always bring responsibilities and dangers – you are responsible to your client to explain the benefits of PI trusts, but it is dangerous to get involved unless you are going to get it absolutely right. Hopefully we have helped in this regard.

Stephen Gray BA & Robert Martin LLB are solicitors in private practice and directors of Professional Controller & Trustee Services Ltd, which provides trustee & administrative services to clients and solicitors involved in PI trusts, and can be contacted on 028 9073 2943

David Crozier FPFS CFP is a financial planner with Navigator Financial Planning Ltd, providing financial planning & investment advice to private clients & trustees, and technical assistance on financial advice matters to solicitors, and can be contacted on 028 3085 1199, or david@navigatorFP.com.

Hurlingham Estates v Wilde & Partners. Irish Law Society Gazette . December 1997. p.31

David Coldrick on Personal Injury Trusts . p.6, para. 1

Solicitors (NI) Order 1976 art.3