Personal Injury (PI) Trust work is both challenging and rewarding. The circumstances are often harrowing, the people involved may have little experience of large sums of money and the importance of getting the numbers right is critical. The reward comes in the feeling of satisfaction in helping to explain a financial plan in terms the clients understand, and in putting an effective plan in place which takes away the individual’s or family’s financial worries.
Carbon was recently asked to advise the trustees of a PI Trust which had been set up with the proceeds of a PI compensation claim. The young man, for whose benefit the trust was set up, was acting as trustee alongside his mum and the firm of lawyers who had been successful in claiming the compensation.
Suffering a serious physical or mental injury is likely to have a profound effect on a person’s life and adapting to these changes will take time and personal strength. In cases where there has been fault or negligence, lawyers may be successful in claiming financial compensation for the individual and this can go some way towards alleviating the financial burden. But it is important that any compensation is used wisely, as it may be needed to support the individual for the rest of his or her life.
For many people, being in receipt of a compensation payment will be the first time they have had the responsibility for investing a large sum of money and understandably, most feel daunted by the prospect. Engaging with experienced legal and financial advisers, however, can help ease the concerns, and this then allows them to concentrate on living their own life. Carbon specialises in explaining potentially complex issues in simple terms, something the trustees of PI Trusts tell us they really appreciate.
The traditional approach taken by many investment managers is to determine how much risk the trustees are willing to take and then invest the capital accordingly – without any assessment of how long the capital will last, and whether the trustees’ objectives could still be achieved by adopting a lower level of risk. Trustees have many duties and responsibilities and most would welcome the information that they could adopt a lower-risk approach, while still achieving the longer-term goals. Building a financial plan which incorporates a lifetime cashflow is the most critical step.
At Carbon, we begin by looking at what sums are likely to be needed over the very long-term. This could be regular income to meet day-to-day needs like therapy or other specialist medical help plus annual amounts to meet the cost of a well earned holiday for the family etc, as well as ad hoc amounts for one-off expenses, such as moving home and costs to adapt the home. Once the cost of living has been accurately forecast, we can work back and calculate the rate of return required on the capital sum awarded and the monies are invested to achieve the required return. This allows us to invest the monies with the minimum amount of risk to ensure the money doesn’t run out.
The cost of fund management is also critical as an extra 1% per annum is costs can have a dramatic impact on the future value of the settlement. At Carbon we invest monies as cheaply and effectively as possible to give trustees the confidence that more of the returns earned are retained by the client and not wasted in the layers of cost associated with traditional active fund management.
We also take the view that the capital sum itself can be gradually depleted in the later years. Why keep the capital if it can be spent in a controlled manner to enhance our client’s standard of living? This can also serve to reduce the pressure to earn higher returns and take more risk which PI Trust clients typically aren’t comfortable with.
Trustees are often surprised to learn that they don’t actually need to take as much risk as they anticipated (or in the case of trusts which are already invested, as much risk as they have been taking) to meet the goals of the trust.
For more information contact Barry O’Neill, investment director on email@example.com or Amanda Downie, financial planner and trust specialist on firstname.lastname@example.org or on 0131 220 0000.
We have offices in Edinburgh, Glasgow, Aberdeen, Perth and London. You can contact us at any of our offices, or by email.
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