Frequently Asked Questions

General

What is a Special Needs Trust and why do I need it for my personal injury compensation?

• A Special Needs Trust is a way of ensuring that you keep your means tested benefits, when you receive a large compensation payment for your personal injury. Many people on benefits, who receive large awards, would find themselves worse off without a special needs trust. For instance a person over 25 living on income support, housing benefit and council tax benefit might lose up to £9000 a year by way of benefits if they could not protect their compensation in this way.

Are there different types of trusts?

• Yes, and they have different legal effects and purposes. Here are some examples:-
  • A bare trust – this is the simplest type of trust where your trustees hold your compensation for your benefit alone. You can call for the money in the trust as and when you wish, but the trustees do not have to pay you if they do not think that the payment is appropriate and they are under certain duties to keep your money safe and invest it wisely. However for tax purposes, you are treated as holding the money yourself and you are taxed personally on the income and/or any capital gains. You can bring a bare trust to an end at any time and have the money. If you die, the trust assets become part of your estate.
  • A life interest trust – this is more complicated than a bare trust. The trustees hold the trust monies, and you, the beneficiary have the right to the trust income for the duration of your life. When you die, the trust assets then go to other beneficiaries, whom you can choose when you set up the trust. One major difference between a life interest trust and a bare trust is that you can’t usually bring a life interest trust to an end. The intention is to preserve the money in the trust but let you live off the income. This type of trust is particularly useful where you are not confident of your ability to hold on to your own money. These trusts tend to be more expensive than bare trusts, because they have to be registered with HM Revenue and Customs and their tax status is very different to that of bare trusts.
  • A discretionary trust – again as with the life interest trust, the trustees hold the trust monies and there will be a group of beneficiaries. However you, as one of those beneficiaries, will not have the right to receive any money, even if you set up the trust yourself, and usually you won’t be able to end the trust. As with the life interest trust, the intention is to preserve the money in the trust if you don’t feel confident about being able to keep your compensation intact, but it gives even more protection. Discretionary trusts have to be registered with HM Revenue and Customs and they have a different tax status to bare trusts.

So what does the law say about benefits and personal injury awards?

• Government regulations say that if you hold a certain amount of money, you may lose your means tested benefits. Typically these are Income Support, Jobseeker’s Allowance, Housing Benefit and Council Tax Benefit, as well as entitlement to long term residential and nursing home fees. However the same regulations also allow people who receive personal injury compensation to keep their means tested benefits by setting up a special needs trust. The capital and the income from such trust is “disregarded.”

I’ve heard that I might be able to keep my compensation for a year and it won’t affect my benefits. Why do I need a special needs trust?

• From October 2006, the government brought in a new 52 week “disregard” for personal injury compensation under Paragraph 12A of Schedule 10 of the  Income Support (General) Regulations 1987 (as amended). However this “disregard” has a number of qualifications, and if you try to rely on Paragraph 12A, it is quite possible that you might still lose your benefits. For instance, the disregard can be triggered by something as simple as an interim payment, which then stops you from relying on it in relation to the final award. We are happy to advise all of our clients on the ins and outs of Paragraph 12A.

Will the government change the rules?

• It is quite possible that the government may change the benefits rules in the future, and this could affect your special needs trust. We cannot guarantee that you will always be able to protect your benefits. In the meantime, the information on this website is believed to be correct to the best of our knowledge and belief, but it cannot be taken as a definitive statement of the law.

Money

How much does it cost?

• You pay nothing until your compensation is paid. We charge a fee for setting up the trust and then an annual administration fee payable either quarterly (for trusts over £50,000) or on the anniversary of the setting up of the trust.
  Our set-up fees are:-
  Under £10,000 £350 plus VAT
  £10,000 to £25,000 £450 plus VAT
  £25,000 to £50,000 £600 plus VAT
  £50,000 to £100,000 £750 plus VAT
  £100,000 and above By negotiation
  For compensation awards over £100,000 fees are set by negotiation because more complex tax and other considerations may apply.Normally we would not agree to set up a trust above £150,000.

  In relation to our administration fees, we charge £100 plus VAT (15%) per hour. However in many cases, the work done by us may be minimal. For instance if you are on benefits and you don’t pay tax, and the award is relatively small (£15,000) then we may need to do no more than £250 worth of work a year. We always consider at the outset of the case, whether our costs are going to make the setting up of your trust worthwhile.  Much depends on the size of the trust, how much you ask us to do and how often you require payments from the trust.

  You can LIMIT THE AMOUNT that you pay for us to administer the trust by prior agreement with us.

  Do not be deterred by the set up costs. The trust can save you much more in benefits than it costs. Whilst we do our best to keep costs down, there is quite a lot of work involved, setting up the trust deed, getting it signed, opening up a bank account and registering your trust with the DWP and HM Revenue and Customs.

  The set up costs can be paid when your compensation is received.

  Finally we reserve the right to increase our hourly rates. We review our hourly rates each January, but you will always be told if there is any increase and again, we will always consider whether the level of our costs make your special needs trust worthwhile.

What will happen to my money?

• Once you have chosen trustees and the Trust Deed is signed, then legally your award belongs to those trustees, but you keep the benefit subject to the terms of the trust. You can bring certain types of trust to an end at any time.

Normally we set up a special bank account to hold the money, and then you and the trustees can decide whether the money should be invested for the long term, and how much should be kept back for your short term needs. We can’t give you financial advice, but we can refer you and the trustees to an Independent Financial Adviser.

Is there any commission?

• Malcolm Johnson & Co. does not receive any commission from any party. That includes any bank or Independent Financial Adviser whom we recommend or suggest. We simply want to find the best place for your money and the best available advice for you.

Does the government recognize these special needs trusts?

• Yes. The setting up of a trust is perfectly acceptable under Department of Work and Pensions and Local Authority means-testing rules but they are unlikely to tell you what you should do. That’s where we come in. We can advise you how best to set up a trust.

What happens when I die, and the money goes to my family? Are their means tested benefits affected?

• Much depends on the type of trust that you set up, but if you do die and your family becomes entitled to the money in your trust, then their means tested benefits may well be affected. However certain types of trusts can avoid this problem, and there are ways of passing the money into another trust on your death, so that your family’s means tested benefits are not affected. We can give you further advice about how this is done.  We can also help you with a will, if you wish.

Will a special needs trust protect my compensation from having to pay the cost of long-term residential and nursing home fees as I get older?

• Yes. Even if you do not get means-tested benefits now, a personal injury trust for your compensation can be of great value to you in the future.

Will a special needs trust protect my compensation from having to pay for the cost of care at home?

• Care at home, as opposed to care in a home/equivalent, supplied by a local authority is subject to local authority discretion. In our view, they should disregard your compensation if it is put in a personal injury trust.

Practicalities

What kinds of injuries are covered by these special needs trusts?

• The regulations use the words “personal injury” which would encompass accidental injuries, criminal injuries, injuries caused by clinical negligence or disease. It also includes both physical and mental injury.

Do I need to notify the DWP that I have set up a special needs trust?

• Yes, you are required by law to notify the DWP of the receipt of any money that might put you over the limit for means tested benefits. We will do this for you. There are severe criminal penalties for failing to do so. If you have set up a special needs trust to hold that money, then your means tested benefits should be protected but we have had requests from the DWP to see the trust deed, and they are particularly keen to see the date on which the trust was set up (see below).

Should the special needs trust be set before the compensation is received?

• Yes. The idea is to stop the recipient of the funds holding or being seen to hold any compensation themselves. So when the compensation comes in, it should be paid directly into the special needs trust. There are regulations that allow you to hold personal injury compensation for a limited period of time without setting up a trust. However in our view, the wording of these regulations still creates the risk of losing means tested benefits.

I’ve got my personal injury compensation, but I’m not on any kind of means tested benefit. Why should I need a special needs trust?

• Your circumstances may change. If for some reason, you suddenly needed long term care from your local authority, then your capital will be taken into account. If some or all of that capital is “ring fenced” within a personal injury special needs trust, then it should be disregarded.

Are there any other reasons, apart from retaining means tested benefits, for setting up a special needs trusts to hold my compensation?

• Yes, there are plenty of reasons. A special needs trust is far more than just protecting your benefit. Here’s why:-
  • You might not have any experience of holding a large amount of money, and you might be worried that you or your partner (however well meaning) will spend the lot.
  • You might want protection against people who want to take the money off you. We do find that this is a frequent problem. Once it is known that one of our clients has a large sum of money coming to them, all sorts of approaches and requests for help are made by friends, family and in some cases complete strangers.
  • You might be worried about your vulnerable mental state, and you need to know that your money is safe.
  • You might want to leave the financial administration of a large sum of money to someone else.
  • You might be worried about the impact of a divorce, and you want to ring fence the compensation, so that at the very least, the intention behind setting up the special needs trust is clear.

I’m acting as litigation friend for a child. What kind of trust should they have?

• Much depends on whether the child has what we call “mental capacity”. If the child is mentally capable, we would normally advise our clients to set up a bare trust. This ensures that no-one else can benefit from the child’s money until they reach the age of 18, although they carry on the trust if they want. On the other hand, if the child has suffered severe brain damage, the position is different.

How do I set up a Special Needs Trust?

• Simply click here, and we can advise you on whether we can help.