In part one of this series, Divorce and Family partner Jenny Bowden and Personal Injury associate James Philpott considered the division of assets on divorce and treatment of personal injury damages in such circumstances. This second part will explore the practical steps that can be taken to protect personal injury awards with the intention of preserving the funds for the injured person’s future needs.
Personal injury damages are awarded to restore an injured person as closely as possible to the position they were in before their injury. They are not intended to be shared or used for other purposes. However, it is the injured person’s prerogative (provided they have the capacity to manage their finances) to spend their compensation award on whatever they wish.
Awards may comprise various elements, including compensation for pain, suffering and loss of amenity, past and future loss of earnings, pensions, care, accommodation, treatment and equipment. Damages may be awarded as a lump sum, periodical payments or a combination of both. Understanding the purpose of each element of an award, its structure and how it is intended to be used may help to protect the award should your relationship later come to an end. However, the family’s intentions and actions following the award, including how the funds have been treated over time, may lead the family court to regard the assets as having become ‘matrimonialised’ and so the initial purpose behind elements of the award, may not be determinative.
Personal injury awards can be at risk on divorce when determining the division of assets. They must be fully disclosed and will be recognised as a financial resource of (at least one of) the parties. They are not automatically excluded from the matrimonial pot, though the source of the funds will remain relevant. Without early planning and the right legal strategy, protection of the funds can be undermined, especially where they have become intermingled with family resources or where there are limited other resources available.
This article sets out five steps that can be taken to help ring-fence and protect personal injury awards for the injured person’s benefit. That said, the court retains ultimate discretion and must balance the competing needs of both parties and any minor children.
1. Cohabitation or nuptial agreements
One of the most effective ways to protect a personal injury award is to reach an agreement with your partner about how your assets should be treated both during the relationship and if the relationship later ends. This is something to consider as soon as possible after settling a personal injury claim (or even before). Parties can enter a written agreement that sets out who owns what and how their assets should be divided on separation. They can expressly agree to ring-fence personal injury awards to demonstrate that they are not intended to be a shared resource.
The right type of agreement will depend on your situation or relationship status: you may wish to enter into a cohabitation agreement (if you are living together), a pre-nuptial agreement (if you are planning to get married), a post-nuptial agreement (if you are already married) or a separation agreement (if you wish to formalise arrangements pending a possible divorce). A well-drafted agreement can provide clarity and reduce the risk of costly disputes later on, provided certain safeguards are in place.
While a nuptial agreement is not legally binding in England and Wales, the Supreme Court’s decision in Radmacher v Granatino [2010] UKSC 42 means that it can be highly persuasive and will usually carry significant weight if both parties entered into it freely, understood its implications and it would be fair to uphold the agreement taking into account the factors in section 25 of the Matrimonial Causes Act 1973. The burden will be on the party seeking to depart from the agreement to demonstrate why the court should not uphold it. More details on nuptial agreements can be found here.
2. Structuring the settlement
If your personal injury claim has not yet settled, it is important to think carefully about what form your award should take. When considering a claim for future losses following injury, the court may order either a lump sum or periodical payments, or a combination of both.
A lump sum that has already been paid and is in existence at the point of separation is necessarily more vulnerable to attack. It is an available resource, and its treatment over time may undermine the assumption that it should be ringfenced. It follows that compensation in the form of periodical payments may offer greater protection should a relationship break down, as there is less liquidity and the payments are more likely to meet specified needs. It is worth noting, however, that the majority of personal injury claims are settled on a lump sum-only basis.
The family court must weigh up the (sometimes competing) needs of both parties, and the structure of the injury settlement may help identify the injured party’s asserted financial needs. The court’s decision in C v C [1995] 2 FLR 171 demonstrates this: the court ordered a clean break because there was no capital readily available to divide, due to the structure of the husband’s personal injury settlement.
It can also assist in prioritising the allocation of funds from the award to specific future needs, such as care or equipment, over more general heads of loss, such as loss of earnings, as these are more likely to be susceptible to redistribution upon divorce.
Having a clear record of how the award was calculated can provide a useful reference point in a future separation.
3. Setting up a personal injury trust
Individuals with a serious personal injury claim should consider setting up a personal injury trust at the outset of their case. Throughout the life of their claim and before settlement, usually when liability is not in issue, the injured person is likely to receive interim payments of their damages. It is important to keep interim payments separate from other finances so that they are not taken into account when the injured person is assessed by the Department for Work and Pensions (DWP) for means-tested benefits. Access to those benefits can be incredibly helpful to an injured person during their case.
It is also particularly important to set up a personal injury trust for an individual who has yet to receive their final damages settlement, whether as a lump sum or periodical payments, as it can help keep those funds distinct from other family resources. Setting up a trust does not automatically remove it from the court’s consideration on divorce (see, for example, this article which considers trusts on divorce), but the court will take into account why the trust was created and how it has been used in the relationship.
The court will consider the purpose of the trust, the intention with which it was created and whether the funds have been used mainly to meet the injured person’s needs or mixed with family funds for shared spending. The court will also look at of the nature of the assets held within the trust along with any underlying schedule of loss or breakdown of how the award was quantified (where available). The court will be less likely to ‘invade’ trust funds that have been specifically and exclusively allocated for the injured person’s needs. Both parties have a duty of full and frank disclosure and thought will need to be given to any ‘privilege’ arguments in relation to any documents arising in connection with the injury claim.
When setting up a trust, it is important to document clearly the intention for which it is being established, as well as to maintain records of how those funds are used. With the right legal advice, a trust can help demonstrate that the award is a resource intended primarily for the injured person’s ongoing needs, thereby minimising the extent to which it is considered a resource for distribution on divorce.
4. Keeping funds separate and maintaining records
Whether or not damages are kept in a personal injury trust, it is important to keep these funds separate from day-to-day family finances. Mixing these funds should be avoided where possible, and it is wise to maintain clear, detailed and dated records of how the award has been assessed and used.
Where the funds are used to purchase or improve the marital home, advice should be taken on how the property should be owned, and how to record the couple’s intentions in a deed or written agreement (see section 1 above regarding agreements). Clear separation and documentation make it easier to show that the damages should be treated as non-matrimonial funds needed exclusively to meet the future needs of the injured person. Good financial housekeeping can make a significant difference to how well the award is protected.
5. Early, joined-up legal advice
Taking advice as early as possible can make a real difference to protecting your personal injury award. Stewarts’ personal injury and family teams can provide joined-up advice, so you can plan ahead, structure and preserve your award for your future needs and avoid disputes later on.
As dispute resolution specialists with expertise in both serious and catastrophic personal injury claims and complex high net worth divorce, Stewarts is well-positioned to offer specialist advice while guiding you through the implications of separation post-serious injury. Please refer to our website for further information on how Stewarts can help with a personal injury claim or divorce and separation.
With thanks to paralegals Ellen Watson and Olivia Beauchamp for their assistance with this article.
