Personal Injury Trusts – Getting Your Property in OrderFeb 9th, 2017
Post injury, many clients will find their existing home unsuitable for their needs, possibly due to the impact of a disability or a need to relocate closer to the support network of family and friends.
Those able to hijack their other heads of loss to secure a suitable property once the effect of Roberts -v- Johnstone has taken its toll, may have a myriad of decisions to consider in aiming to maximise their position and financial protection.
From both a claimants' and financial advice perspective, from time to time good reasons arise as to why retention of the existing property is beneficial, necessary or simply desirable. These may include a slump in property prices coupled with an expectation of recovery, which provides an opportunity to purchase the new, often larger, property at a reduced cost, with the potential to release equity from the existing home when values are more buoyant. Equally, it may be necessary to retain the existing property whilst the new home is adapted to meet the specific needs of the claimant. It may even be suitable for someone to let the former home once residing in the new property and hold the property as part of a suitably diversified investment portfolio. These are but a few of the many scenarios that commonly arise.
For those claimants who decide that their award of damages are best protected under the shelter of a personal injury trust ,a range of options arise that, without considered planning, may lead to a series of unintended consequences.
Let us consider a claimant with an existing property valued at £150,000 in which they hold £50,000 equity and £100,000 of mortgage liability. Due to the needs of the claimant post injury let us assume it is necessary to purchase a property costing £350,000.
In this example, it is the claimant’s intention to move into the new property immediately and retain the existing property for letting purposes. In this, all too real, case study the professional trustee recognised the benefit of assigning the new property into the personal injury trust. This would, of course, ensure that should the claimant require residential care in old age the family home would not fall to be assessed against the ability to self-fund.
Subsequently, the trustees released sufficient funds from the trust in order to redeem the mortgage on the former home to reduce the monthly outgoings of the claimant; a logical conclusion given the limited availability of the claimant’s income at that time and interest rates at a point far higher than they stand today.
No attempt was made to assign the former home as an asset of the personal injury trust and, as such, the capital value and rental income has been assessed for many years against the claimant’s ability to claim means-tested support.
It is estimated that this has led to a reduction of income of approximately £1,517 per annum, a loss that continues to escalate today. Whilst it is my belief that it will be possible to unwind this position and assign the correct proportion of each property into the personal injury trust in order to reinstate means-tested entitlements, this has, to date, been met with some resistance from the Decision Makers; the appeal being both time-consuming, costly and avoidable.
Whilst in the above circumstances there was, unusually, a clear advantage of advising a particular alternative course of action than the one advised and implemented by the professional trustee, things are rarely so cut and dry.
Many claimants, despite having no current entitlement to means-tested support, will see the benefit of establishing a personal injury trust to protect the award and the assets purchased from assessment in the event of a change in circumstances.
Remaining with the issue of property purchase it is important that advice does not represent prescriptive solutions. The priorities and objectives of claimants are as individual as they come. Ensuring that claimants are provided with the most appropriate solution for their individual circumstances requires considered and tailored advice.
For example, consider a claimant in similar circumstances to our previous example. This time the claimant has an existing entitlement to means-tested benefits, and a property holding £50,000 equity with the balance mortgaged. If it remains the objective to purchase a new property at a cost of £350,000 but no wish to become a landlord, it may prove the default advice to roll the equity from the existing property as a down payment on the new.
This £50,000 equity stake in the new property would be disregarded in relation to any means-tested assessment as it would be held in the main residence. The personal injury trust would effectively purchase and own the additional £300,000 share in the property.
That is, unless the spectre of residential care arises. In this instance there remains a risk that the personal equity in the property could fall to be assessed in later life.
For those that have no immediate entitlement to means-tested support or, for that matter, have expenditure requirements that would easily exhaust the £50,000 equity released, it may prove beneficial to purchase all of the new property within the personal injury trust in order that its growing value will be entirely disregarded should residential care become necessary. In turn this would release the £50,000 of personal equity held in the existing home to be used as a first port of call in meeting any short term planned expenditure.
Claimants and lay trustees can ill-afford uninformed decisions on how to maximise their financial position but are at liberty to do make such decisions. It is the professional trustees, trust writers and the conveyancers that are faced with advising beneficiaries of personal injury trusts. The room for error is great and the need for holistic advice to bring the various aspects of planning together is clear.