If you’ve been awarded compensation for personal injury, you may want to invest this money in a home for your family. However, if that money is currently held in a personal injury trust, or is likely to be placed in trust, you will need to know how you can access those funds to help make your plans a reality.
In this guide, we lookout the rules on buying a house with compensation funds held in a personal injury trust, from how the trust mechanism works and the role of the trustees, to what happens if you want to sell the property.
What is a personal injury trust?
Any one of us can suffer serious personal injury through no fault of our own, for example, following a road traffic accident or an accident at work, or a mistake in medical treatment, in some cases resulting in permanent disability. If someone else was to blame for injuries that are life-changing, the compensation is likely to be significant, possibly hundreds of thousands of pounds or perhaps even more.
Being awarded a large sum of money — even though this is intended to compensate the victim of an accident for their pain and suffering, and to cover the costs of ongoing care, equipment or adapting their living environment, amongst various other things — can give rise to a potentially new set of problems. If the compensation was simply to sit in a personal bank account, it would impact any eligibility when it comes to means-tested benefits or the cost of local authority residential care. This is where a personal injury trust, also commonly referred to as a ‘special needs trust’, can come into play.
The personal injury trust is a legal mechanism which effectively separates the money paid into the trust fund from the personal assets of the trust beneficiary, where anything held in the trust is legally owned by the trustees. The trustees are appointed to manage the trust fund on behalf of the trust beneficiary under the terms of the trust deed. This means that the injured person can still access the trust funds, for defined purposes, but that the assets will not be treated as their own property. This, in turn, means that the funds will not be counted when assessing that person for means-tested benefits or local authority care.
As such, the personal injury trust is a perfectly legitimate way of protecting an award of compensation, and in ensuring that the monies received last for the rest of your life, without running out or being wasted. The trust will also allow you to keep your means-tested state benefits, while using your personal injury compensation to meet other needs.
How does buying a house with a personal injury trust work?
Having suffered a personal injury that is likely to significantly impact your quality of life on an ongoing basis, you may now be looking to use some of your compensation award to buy yourself a home, possibly one suited to your new physical needs, such as a bungalow or ground floor flat, or even a purpose built or specially adapted house. Alternatively, you may also want to use some of the money to pay off your existing mortgage.
In either scenario, you will first need to establish how much money you will need to achieve your goal, as this will be the sum of money that you will need to request from the trustees out of your trust fund.
When the trust fund is first set up, you will need between two to four trustees to manage these monies on your behalf. In theory, the trustees need only be over 18 and have full mental capacity although, in practice, they also need to be people that you can rely upon to act in your best interests. They could be family members or close friends, provided they are willing to act as trustees, or else professionals such as solicitors or accountants. You will then need to have what is known as a trust deed drawn up, setting out the terms on which the trustees will have authority to invest and administer the trust fund on your behalf.
As such, it is the specific terms of the trust deed that will dictate what kind of investments the trustees may make and for what purposes the pot of money that they control can be used, including buying a house or paying off any outstanding mortgage on an existing property. However, since the funds in the trust are not legally yours, any property bought with these funds would still belong to the trust, and not to you as the trust beneficiary.
How do you sell a house wholly or partially owned by a trust?
In the same way as buying a house with a personal injury trust, selling a house bought wholly or partially with trust funds must be authorised by the trustees. This is again because that property, either in part or in full, is legally owned by them.
If you want to sell a house bought with trusts funds, the trustees would be responsible for the sale process, possibly in conjunction with yourself if the money was used to pay off a mortgage on an existing property, and/or with your spouse or partner if they also own a share of the house. In most cases, this money can be used to reinvest in the purchase of another home, where it is not uncommon to have simultaneous exchange and completion on the sale of the old house and purchase of a new place for you to live in moving forward.
Alternatively, the funds from any sale proceeds can be sensibly reinvested by the trustees, giving you a greater pot of money to utilise in the future.
What is the impact of trust-owned property on means-testing?
When it comes to personal injury compensation, you are at risk of having your means-tested benefits reduced or even removed altogether if you receive an award of damages of £6,000 or more. Similarly, if you have help at home or go into local authority care, either temporarily or permanently, and have savings of more than £14,250, you may have to contribute towards some or all of your social care costs. This is known as the means-test threshold, although different local authority thresholds apply in different parts of the UK.
When it comes to means-testing for the purposes of state benefits, the home that you live in does not count as savings in any event. Similarly, if you need a paid carer to come into your home, the value of your house will be disregarded from the means-test. However, the means-test for residential care will factor in your income, savings and assets, including any home that you own, to calculate how much you may need to contribute towards the cost of your care. This means that if you need to go into a care home, its value will be included in any financial assessment, unless your spouse or partner is still living in that property.
As such, if you do need to go into a care home at any point, a personal injury trust will both protect your compensation, as well as means-tested benefits and any funding entitlement from the local authority. The trust mechanism will effectively ring-fence your compensation from your means-tested state benefits claim and any means-tested funding entitlement. Importantly, the disregard of compensation placed in a personal injury trust is not a legal loophole, but rather the government recognises the special circumstances involved here.
Equally, by buying a house with a personal injury trust, provided this is done in the correct way, the value of that house should be wholly disregarded. In this way the trust fund will not impact any local authority funding for future residential care needs. The risk that you will be treated as ineligible for residential care funding will be entirely removed, allowing the trust fund to be used for the intended purpose of maintaining your quality of life.
Key considerations when buying a house with a personal injury trust
If you are yet to receive an award of compensation from a personal injury claim, either by way of settlement via the third party insurers, or court-awarded damages, you may be interested in setting up a personal injury trust. In fact, when you get to the stage at which monies are due to be paid out, and you receive valuable means-tested state benefits, your solicitor is likely to recommend a trust mechanism to hold and protect your compensation.
However, the way in which you set up a personal injury trust, as both the settlor, ie; the person who sets up the trust, and the sole trust beneficiary, ie; the only person who will benefit from the trust fund, is important. As the settlor, you will have the opportunity to establish the terms of the trust deed, where this will determine what latitude the trustees have, not only as to how the trust funds can be invested, but for what purpose they can be used. This means, for example, that if you would like to use some or all of the money to buy a house, the trust deed will need to be set up from the outset to own property.
Even though setting up a trust deed does not legally require a solicitor’s input, it is an especially complex legal document. Any mistakes made could have serious consequences, from problems in the trustees being able to properly administer the funds to the trust itself being declared invalid. However, not all solicitors are equally knowledgeable about personal injury trust mechanisms, where this is a niche area of law. As such, it is always best to seek advice from a solicitor with experience in dealing with these types of trusts.
Equally, it is also important to carefully decide who to appoint as trustees. Many recipients of personal injury compensation are more than happy to appoint friends and family to act as trustees, after all, these are the people most likely to act in their best interests. However, this is not always necessarily the best course of action. It can often be best to additionally or alternatively appoint a professional with experience in how personal injury trusts operate, to ensure that trust investments are made responsibly and the trust funds are used properly. As the trustees are legally responsible for looking after the trust fund on your behalf, their ability to do so effectively and competently is absolutely crucial within this process.
For example, it is not uncommon when buying a house with a personal injury trust, for lay trustees to fall foul of some common mistakes, including purchasing the property in the beneficiary’s name, rather than the names of the trustees, or by failing to assign as an asset of the personal injury trust the appropriate share of any existing property where monies are used to pay off the mortgage. These types of mistakes can cause significant problems, not least the fact that these may impact your entitlement to means-tested benefits, where the capital held in the value of the house may be exposed to being means-tested.
By seeking expert advice from a personal injury trust specialist on how best to protect your award of compensation, and by instructing professional trustees to ensure that this money is best used to maintain your quality of life, you can have the peace of mind that the time invested in fighting for that compensation has not been wasted. You can also then start the exciting process of buying a house with a personal injury trust, suited to your new physical needs, or in using these funds to pay off any existing mortgage, safe in the knowledge that the property will represent a protected investment and help to secure your future lifestyle.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
