Judge’s warning to PI Lawyers using Personal Injury Trusts
The use of Personal Injury Trusts to hold clients’ funds from negligence claims has become common practice over the years and is widely thought to be the best way to manage awards for seriously injured clients. However, in the recently reported case of OH v Craven Mr Justice Norris expressed some concerns about personal injury lawyers advising clients to place awards into Personal Injury Trusts, particularly when it is also proposed that the personal injury lawyer’s firm will act as a professional trustee.
This case may come as a surprise to many. It is probably right to say that there is an assumption in the world of personal injury claimant lawyers that a Personal Injury Trust is the best way of managing funds for clients who have the capacity of manage their own property and affairs.
It has been assumed that the Court has no role to play when a client is assessed as having capacity to make their own decisions, but here the Court sees that it has a role to play in providing “… the protection of the Court’s inherent jurisdiction to assist these who are disabled from making a free choice or expressing a real and genuine consent”.
The Judge’s concern here seems to be about the fact that it is often assumed that the personal injury lawyer’s firm will act as professional trustee and be able to charge for doing so for many years to come.
The question to consider is whether personal injury claimants are only left with the choice of having their personal injury lawyer’s firm act as a professional trustee. The Judge seems to be making the point that claimants and their Litigation Friends ought to be given the opportunity to look at other options, rather than having to stick with the firm that dealt with their claim.
The Judge’s concerns about the terms of the trust can be addressed. Clause 19 of the STEP Standard Provisions (2nd Edition) can be expressly excluded. Many practitioners might well say that they would always consult with a beneficiary and their family members, particularly as part of an annual review meeting and ad hoc meetings when required.
Background to the cases
There were in fact two clients being considered by the Judge in this case.
AKB was a young adult when he was involved in a serious cycling accident which left him confined to a wheelchair, with severe speech difficulties and a degree of cognitive impairment. Throughout the personal injury claim AKB was treated as lacking capacity and his mother acted as his Litigation Friend. When a sufficient sum was offered to settle the claim the Court was approached to approve the settlement. The Court authorised the settlement and ordered that an application should be made to the Court of Protection for appointment of a property and affairs deputy.
An application was prepared to the Court of Protection, but everyone was surprised when the Rehabilitation Medical Consultant came back with the opinion that AKB could in fact manage his own property and affairs. It was acknowledged that AKB had cognitive disability and impaired communication skills, but it was felt that this was not so severe to leave him unable to manage his own property and affairs.
Therefore an application was made to Court for the settlement funds to be paid out to a Personal Injury Trust which AKB had set up.
OH was injured in a road traffic accident as a child and remained a minor at the time of the hearing. He sustained a head injury and severe damage to a limb, leading to its amputation. His mother was appointed as his Litigation Friend and his claim was agreed to be settled for a sum just short of £2million. There was no evidence before the Court to suggest that OH would lack the capacity to manage his own property and affairs when he reached adulthood.
Therefore, OH’s personal injury lawyers (a separate firm of solicitors to those representing AKB) had agreed with his mother, his Litigation Friend, that his interests would be best served by transferring his money to a Personal Injury Trust.
In both cases the proposed Personal Injury Trusts had the respective personal injury lawyer’s Trust Corporation appointed as sole trustee.
The Judge’s Concerns
Mr Justice Norris started off by saying that he sensed that the parties to these applications were quite surprised that the Court should have any real part to play in considering whether or not funds should be paid out to the proposed Personal Injury Trusts. He said that “… the Court is not there simply to apply a rubber stamp.”.
He said that the Court must be satisfied that the payments out were sought by “…those who have been able to weight things up and to decide freely what to do”.
He went onto summarise the advantages and disadvantages of such sizeable awards remaining in the Court Funds Office or being paid out to Personal Injury Trusts.
He noted that the Court Funds Office is an entirely secure home for monies, where they are not at risk, but with a very low annual rate of return (presently 0.5% on Special Account) and without any potential for preserving or increasing the real value of the capital over time.
He mentioned the option of the Court Funds Office splitting funds between the Special Account and their Equity Index Tracker Fund, which had the advantage of low charges but the risk of investing only in a single fund without diversification.
He went on to note that funds could be paid out to the capable adult or their representative, with the opportunity of investment, but that that would affect benefit entitlement and most applicants would be unused to receiving such large sums of money and managing them.
Mr Justice Norris noted the advantages of a Personal Injury Trust, in that it does not affect the benefits position of the applicant and provides the opportunity for funds to be invested in a wider range of asset classes. He set out the disadvantages as being a greater exposure to investment risk and the impact of charges upon the real return, being both the charges of the professional trustee and of the appointed investment manager. He saw professional charges as of particular importance in a low return environment.
He went on to consider the standard form of Personal Injury Trust and made the following points:
1. A well drawn up trust should include an express power of revocation so that the claimant/ beneficiary knows that he has ability to bring the trust to an end whenever he should wish to do so.
2. The Society for Trust and Estate Practitioners Standard Provisions (2nd Edition) are often incorporated within Personal Injury Trusts. He was particularly concerned that clause 19 of those provisions relieves trustees of any duty to consult the beneficiary/claimant, or to give effect to his wishes. He questioned whether that provision should be routinely incorporated and questioned whether claimants or Litigation Friends had received any advice about that.
Mr Justice Norris then set out the focus of his concerns; that the personal injury lawyer advises that a Personal Injury Trust should be set up and that their associated Trust Corporation should be appointed as a trustee. They would charge for acting, but of course there are other trust corporations that could fulfil the role. He noted that this meant that personal injury lawyers could provide their clients with “one stop shop”, but was concerned that “…this is a shop that only stocks one product”.
He felt that the law presumed that a solicitor has undue influence over his client and that the burden should lie with a solicitor to provide evidence rebutting that presumption. He felt that the client should be provided with independent advice about the constitution of the proposed Personal Injury Trust and that they should be shown to have had the opportunity to weigh up matters and to exercise their own free will in deciding what to do.
He then set out quite specifically how this ought to be done. He said that where a personal injury lawyer proposes the establishment of a Personal Injury Trust in relation to an award of over £1million and where its in-house Trust Corporation is to be a trustee, a separate partner in that law firm should instruct Chancery Counsel of not less than five years standing to advise the client or their Litigation Friend in writing as to the advantages and disadvantages of the proposed trust. This advice should include both the strategic advantages and advice about the exact provisions of the trust, as well as the trustee arrangements. He said specifically that this exercise should be done at the expense of the personal injury firm.
He felt that the instructions to Counsel and the following Opinion from Counsel should be put in evidence when an application was made to Court for the funds to be put into a Personal Injury Trust.
He went onto express the provisional view that where a trust exceeds say £3million serious thought ought to be given to including the appointment of a suitably qualified family member or an independent professional as a “protector”. That person would then have to give any consent to any changes to the professional trustee’s charge out rates, the engagement of investment advisors and their charges, as well as any trustee acts which might deprive the client/beneficiary of income or capital to which he or she would otherwise entitled.
The Judge’s decision
In the case of AKB the Judge felt that he was able to communicate with him, having done so in Court, and he had expressed the view that he did not wish to review his decision to put funds into a Personal Injury Trust and so the judge authorised the payment of funds out to that Trust.
In the case of OH the Judge was not satisfied that the Litigation Friend (mother) had made a decision from unconstrained free choice and he felt that she should be given the benefit of Opinion from Chancery Counsel (as described above) before coming back to Court to seek further directions.
Case Report: OH v Craven  EWHC 3146 (QB) (07 December 2016)