Personal Injury Trusts are being under-used by the legal profession in Scotland – and families who have suffered a traumatic incident could lose out financially as a result.
That’s the view of a leading Certified Financial Planner, who believes recipients of personal injury compensation awards need to be more aware of the benefits such Trusts can offer.
Duncan Glassey, founder of Wealthflow LLP, said Personal Injury Trust (PITs) offered an excellent way to avoid an “onerous tax regime”.
He added: “There is a case to be made that Scotland is behind the curve in this area, and that England is doing better. We need to wake up to the fact that PITs have an awful lot to offer – and that at the moment, they are under-used.”
A PIT is typically established following a compensation award to a pursuer who has suffered a serious personal injury. In some instances, the court will give specific direction as to how funds should be used and invested. More commonly, the pursuer (or his representative) will seek professional legal advice in respect of which type of trust should be set up.
Mr Glassey, an expert in sudden wealth based in central Scotland, said families receiving such awards were often ill-equipped to make appropriate decisions as compensation awards were often preceded by a long and traumatic period following the personal injury. In such circumstances, he said, the right advice was crucial.
“Families are not often in the right frame of mind to make complex decisions – so it is vital that the advice given reflects how to make an award work in the best interests of the victim of a personal injury and their family. PITs have a big part to play – and it is important families are well-advised and not just handed the money and left to get on with it by their solicitor.”
Mr Glassey said PITs could ensure the preservation of entitlement to means tested benefits, and offer real tax advantages. He explained: “When a compensation award is paid directly to the pursuer, it will often have an adverse effect on means-tested benefits which may be reduced significantly or even stopped. By setting up a trust to receive the award, most means-tested benefits can be preserved. This is the case irrespective of the size of the award. A personal injury trust could also be used to protect any future entitlement where a client is not currently in receipt of means tested benefits – but might lose benefits in future if they had a large capital sum behind them.”
He added: “In addition, provided the trust is structured correctly and the beneficiary meets the definition of a disabled person, the trust can qualify for beneficial tax treatment. There are different rules for income tax, capital gains tax and inheritance tax but a correctly structured trust can meet the criteria for all three.”
There might be wider personal reasons for using a PIT, said Mr Glassey – for example, a pursuer deciding they did not have the necessary knowledge and experience to invest and manage large sums of money, or if the recipient of an award was a minor or mentally incapable. He concluded: “Basically, unless PITs are fully understood by the legal profession and fully utilised where appropriate, families who most need the right advice and support could lose out financially. For a solicitor, reaching a financial settlement is often the end of the journey with a client. For a client, it is the beginning of a new journey, and one which can be troubling and difficult. At this crucial juncture, they need to make the right financial planning decisions for the future – and that involves laying down and understanding all the appropriate options.”
Mr Glassey said this area was one where solicitors and financial planners could work together more effectively – to mutual interest but more importantly, in the interest of clients. In an article recently, he wrote about the Holy Grail of cooperation on lifetime cashflow modelling. He said: “If solicitor and financial planner can work together on a detailed financial plan, there should be more comfort – and fewer surprises – for the client.”
Charles Ogilvie, a Partner with Drummond Miller, said: “Our clients very rarely have the luxury of treating compensation as a windfall. In the complex cases we deal with, where the pursuers have often suffered severe injury and require ongoing care and support, it is essential that the compensation received is properly managed.
“If the opportunity of setting up a Personal Injury Trust was missed, or inadequate advice was provided, the financial consequences for the injured person could be disastrous. This is an area where we believe that it is important that our clients receive our legal advice in conjunction with the advice of an expert financial planner.”
published in the Scottish Legal News 15 November 2011