Personal injury trust vs deputyship

The case of SM v HM (unreported, 4 November 2011) concerns the question of when it is appropriate for the Court of Protection to authorise the settlement of funds belonging to a person lacking capacity (P), in particular a damages award (including periodic payments), into a personal injury trust, under section 18(1)(h) of the Mental Capacity Act 2005, rather than appoint a deputy for P, under section 16 of that Act.

S was a seven year old who had sustained injuries at birth which had caused cerebral palsy. S had a personal injury claim that was settled for a lump sum of £450,000 plus periodic payments. As S's litigation friend had been advised that the chances of success in this claim were not good, the amount of the settlement approved by the court was significantly less than that claimed for S's needs. The opinion of counsel, who had recommended the settlement, included a figure for the costs of running a personal injury trust for the rest of S's life. Counsel had assumed that a personal injury trust would be less expensive than the costs of a deputyship.

A partner in S's solicitors made an application for authorisation to settle the award but this was refused by DJ Ashton. The matter was reheard pursuant to rule 89 of the Court of Protection Rules 2007. The Official Solicitor, representing S, argued that as a matter of course the court ought to prefer the use of a deputyship rather than authorising a personal injury trust and in general it would not be in P's best interests for the execution of a personal injury trust to be authorised on his behalf. HHJ Marshall QC, sitting as a judge of the court, agreed, but held that in the particular case of S the authorisation of a personal injury trust was justified in S's best interests.

There were many issues that the court held should be taken into account in deciding whether it would be in P's best interests to authorise a personal injury trust or a deputyship. Deputyship was not a luxury but the regime that parliament has specifically designed to cater for the management of P's finances and affairs.

It would therefore be for the person proposing a trust to show that the trust was better for P than a deputyship. If deputyship was just as good as a trust a deputy would be appointed.

Cost considerations

The court considered that in general a deputy was unlikely to cost substantially more than the establishment of a trust because, since the implementation of the Mental Capacity Act 2005, the court had become more efficient and deputies had wider powers so repeated applications to court were unnecessary. In fact deputyship was in some ways more efficient than a trust because it automatically applied to all P's assets. Deputyship also came with important safeguards including the security bond and automatic costs assessment that did not apply to trusts. There was no means-tested benefits advantage to a personal injury trust because the same capital disregards applied equally to funds held by a deputy as those funds were administered by the court.

When drafting and settling claims in personal injury cases where the claimant is unable to manage his own property and affairs as a result of the injury, the costs of a deputyship should be claimed. In the context of SM it will be difficult for defendants to argue that awards should be restricted to a lower amount because a personal injury trust ought to be used.

Trust conditions

If P's advisers are considering asking the court for authorisation of a personal injury trust then they should take close note of the terms of the judgment because it indicates that the court will only consider a trust to be in P's best interests if the trust drafting makes provision for certain powers '“ for example, that the trust is revocable and that P has the right to remove and appoint trustees. Judge Marshall also suggested that there should be a family trustee who is willing and able to police the charges made by a professional trustee so as to provide adequate protection for P.

Those advising persons lacking capacity who have had substantial personal injury awards should also take account of the decision of Senior Judge Lush in Smyth v JDS (unreported, 19 January 2012). In this case J had had a substantial personal injury award that had in part been used to fund the purchase of a property for him and the property had increased in value. The court was asked to authorise a settlement by J in the nature of a gift with the aim of mitigating the IHT burden on J's death. Judge Lush refused the application as it was not in J's best interests. He commented that the court would be very slow to make gifts out of a damages award as such sums had been specifically calculated to provide for P's needs for the rest of his life.