Personal injury trusts and professional trustees

A recent High Court case in England introduces some interesting questions about the formation of personal injury (PI) trusts by and for vulnerable people, the appointment of professional trustees, and even the practice of referrals between PI and private client colleagues.

In particular, it raises questions around whether the appointment of a sole professional trustee may be tainted by undue influence.

We believe the concerns about the impacts of the English case in Scotland are unwarranted, and that the decision has limited application for trusts here. However, the decision does highlight some useful points for practitioners in Scotland – both around PI trusts and, more broadly, the appointment of professional trustees, especially those who are sole trustees or have veto rights.

PI trusts under threat?

Personal injury trusts have a relatively low profile, even among PI lawyers, and suffer, to an extent, from being misunderstood and underused. They are used as a legitimate mechanism for protecting PI payments from assessment to means-tested benefits and care contributions, both north and south of the border.

PI trusts can potentially include any payment received in consequence of the injury – not just court-awarded damages and negotiated settlement sums, but also insurance payments, other forms of compensation or even charitable donations (though it is important not to mix these sums with other funds). Their use and the treatment of the trusts is governed by UK benefits legislation and the Charging for Residential Accommodation Guidance.

The English case at the heart of this issue is OH v Craven [2016] EWHC 3146 (QB), which considered the protection of vulnerable clients receiving large PI payments.

The judgment in the case highlighted concerns that the formation of PI trusts with a sole professional trustee, either belonging to or connected with the firm dealing with the PI claim, may be tainted by undue influence, or indicate that insufficient consideration was given to alternative arrangements. Some practitioners are uneasy that the judgment could impact their current practices in this area.

The case background

OH v Craven involved two separate PI trusts: one for an adult with capacity, and the other for a capax child with a litigation friend making decisions on their behalf.

In the case of the former – the adult with capacity – the judge (Mr Justice Norris) believed him sufficiently informed about the decision to make use of a trust. However, the position was different with the second recipient, the capax child. The judgment stated that “a separate partner in the law firm should instruct Chancery counsel of not less than five years’ standing to advise the claimant or the litigation friend in writing as to the advantages and disadvantages of the proposed private trust… and as to the trusteeship arrangements: and this should be done at the expense of the firm”.

The opinion of the instructed counsel will form part of the evidence to be submitted when the case returns to court.

The decision strongly emphasises the requirement of practitioners in England & Wales to rebut the presumption of undue influence in solicitor/client relationships (Etridge [2001] UKHL 44). Further, recent English commentary following OH v Craven goes so far as to infer conflict of interest from the appointment of a sole trustee connected with the firm.

English and Scottish differences

While the judgment in this case has resonance for lawyers in Scotland, there are important jurisdictional differences at play here.

First, we believe that, in Scots law terms, it is unnecessary to consider conflict of interest in the circumstances of this case. Referring work from one department of a law firm to another does not automatically create a conflict of interest simply on account of being commercial.

Secondly, Scots law does not operate a presumption of undue influence in relationships between solicitors and their clients (McBryde, The Law of Contract in Scotland (3rd ed), para 16-30).

Thirdly, English PI trusts governance for people who are vulnerable or lacking capacity is not the same as in Scotland, nor is practice. The Offices of the Public Guardian and Accountant of Court in Scotland assume a similar function to the court in England for equivalent Scottish matters.

In practice, this means that agents will ordinarily seek the authority of the Office of the Public Guardian to settle trusts for an incapable/incapax adult. The court has powers under s 13 of the Children (Scotland) Act 1995 to refer PI award matters to the Accountant of Court to hold or manage for a child. However, in practice, this is understood to be very rare – it is more common for funds to be advanced to a child’s parent or guardian and they have powers to set up a trust on behalf of the child under s 10 of the 1995 Act.

Fourthly, the practice highlighted by the judge in this case was a “standard form” English one, in which a bare trust is operated solely by a corporate trustee or firm partner. This practice is not the standard form in Scotland: more commonly, professional trustees will be appointed to act alongside family members. 

The need for transparency

For those reasons, we believe the decision in OH v Craven has limited application for trust settlement in Scotland, and certainly will not pull the rug from under the feet of practitioners who regularly use PI trusts or are considering using one.

That said, however, the case raises some learning points and useful reminders.

First, the High Court’s emphasis on the protection of clients highlights the importance of transparent practices when administering trusts that have professional trustees. This is especially the case with trusts involving vulnerable beneficiaries – such as PI trusts.

Law Society of Scotland guidance on executries, for example, where there is a sole professional trustee, states that agents should ensure beneficiaries are kept informed of how fees are assessed. Given that the beneficiaries of discretionary trusts may vary throughout the trust administration, there are practical limitations to doing so for this type of trust and the advice may be redundant for bare trusts. However, this guidance may be relevant where a PI trust is a liferent trust or a discretionary trust with an interest in possession.

Secondly, in the interests of transparency and independence, where there is a sole professional trustee it may be appropriate (if not a stipulation at law) for legal fees to be set independently (subject to this being cost-effective). For ongoing trust arrangements, it may be good practice to change auditors regularly. The trust deed should allow for charges for professional services, and the fee structure should be clear and included in the terms of engagement.

The third reminder is that – irrespective of whether a professional trustee acts alone or otherwise – practitioners should be mindful that their own interests are subordinate to the interests of the client. In particular, it may not be appropriate to appoint a professional trustee acting with others as a sine quo non trustee (i.e. a trustee with a veto).

In summary

The decision in OH v Craven is largely based on a presumption of undue influence. However, there is no Scottish parallel for this presumption.

In addition, talk of the case implying conflicts of interest in situations where a trust has a sole professional trustee is premature, as far as Scottish practitioners are concerned. Even so, it is valuable to remember the need for transparency around sole professional trustees’ fees.

If personal trusts are appropriately instructed, constituted and managed, there should be no cause for alarm from this case south of the border, especially with trusts where capacity is not an issue. And even where capacity is an issue, in Scotland the Office of the Public Guardian provides a strong protective function for beneficiaries and their agents.

In our view, PI trusts remain a legitimate means of planning to protect PI payments, and ring-fence them from assessments for means-tested benefits and community care contributions.