Most personal injury practitioners will at some time or another act for vulnerable clients such as those with head injuries, learning disabilities or mental illness. Whilst these clients may have enough capacity to give instructions on the conduct of their claim, this does not necessarily mean they have the capacity to manage large sums of money. Failure to properly consider a client’s capacity to handle a damages award can have disastrous consequences.
Practitioners may also find that they are passing on damages to clients who are currently receiving benefits or may do so in the future. Again, special care is needed here as failure to take account of this could mean an individual losing the right to benefits or publicly funded social care.
Mental Capacity Act 2005
The Mental Capacity Act 2005 (MCA) safeguards the interests of people over the age of 16 who lack mental capacity. Under the Act, there is an assumption that every client has capacity unless there is evidence to the contrary. The test for capacity is issue specific which means that even if you have established that the client has sufficient capacity to give instructions during the claim, you must reassess whether they have sufficient capacity to manage the damages award when the case settles.
If you have any concerns, request a formal capacity assessment. It may be that the client can manage his own finances with support and should consider appointing an attorney or setting up a PI trust.
What can go wrong?
A client with a severe head injury may be vulnerable to financial exploitation. In one case the client recovered damages of £200,000 after a road accident. Disinhibited due to his head injury, he boasted loudly in his local pub about the money he had been awarded. A number of people persuaded the client to “invest” his money with them and within six months the client had spent his entire award.
Unfortunately, family members cannot always be relied upon to act in the client’s best interests. In a Court of Protection case the parents of an adult daughter with cerebral palsy were appointed as her deputies and went on to squander most of their daughter’s £2.6 million settlement on houses, cars, cosmetic surgery and holidays.
Where benefits are concerned, for most means tested benefits the client must have less than £16,000 in capital to receive the benefit at all. If they hold more than £6,000 they would receive a reduced level of benefit. Any income in addition to benefits is taken into account when calculating entitlement and usually reduces them. For social and residential care, the capital limit is £23,350 and if a claimant has over £14,250 they will have to pay some contribution.
Potentially, without proper management of the situation, a client or their parents could find themselves faced with financial hardship or a loss of care if benefits are taken away as the result of a damages pay-out taking them over these thresholds.
Safeguarding the vulnerable client
If there is any risk the client may not be able to manage the damages award in their own best interests, the first step is to obtain a formal assessment of capacity from a treating medical practitioner or an independent medical expert who specialises in capacity assessments. When instructing them, clarify all relevant issues including the size of the award, any specific expenditure the compensation is intended to cover, the skills needed to manage the money and any vulnerability to financial abuse.
Powers of attorney
If the client has sufficient capacity to appoint an attorney, they can appoint someone to manage their finances for them under a General or Lasting Power of Attorney.
A General Power of Attorney comes to an end if the client loses capacity in the future.
A Lasting Power of Attorney remains valid even if the client loses capacity in the future.
The client may choose to appoint a family member or a professional attorney and then agree with them to what extent they must be consulted in decision making.
Alternatively, the client could set up a PI trust so that instead of a struggling to manage the money on their own they have the assistance of a co-trustee.
PI trusts also safeguard the compensation against means testing for benefits or local authority funding. For the first year after the first damages payment is made, benefits remain unaffected so if a client spends all the damages within a year, there is no problem.
If, however, there is any possibility they will still have in excess of £6,000 at the end of the year, it is vital they set up a PI trust well before the one year period is up. Placing their damages in the trust will mean they will not lose benefits or face prosecution if they continue to claim them.
A PI trust would also ring fence the damages award in divorce proceedings and safeguard the compensation in the event of any future loss of mental capacity.
If the client does not have sufficient capacity to appoint an attorney, the only option is to apply to the Court of Protection to appoint a deputy for property and finance, a process that takes about six months. An application must include evidence from a medical practitioner confirming that the client lacks sufficient mental capacity to manage their own finances.
The deputy can be a family member or a professional, or a combination of both acting jointly.
Deputies are supervised by the Office of the Public Guardian (OPG) and must keep accounts and file an annual report with the OPG.
If a pay-out is held by a deputy it will be disregarded for means testing benefits in the same way as funds held in a PI trust, although any payments from the deputy to the injured person will not be disregarded.
When a severely disabled child is awarded a large sum, the decision about whether to appoint a deputy or set up a PI trust depends on whether the child will have capacity at 18. If they will have capacity, a trust should be set up with a professional trustee appointed with the parents.
If they will not, a deputy must be appointed. Often the parents are keen to act as deputies, however, there are a number of complicated issues to deal with when the settlement money comes in and many would benefit from acting jointly with a professional during this period.
The deputy is required to keep detailed records and accounts and ensure that the money is invested to achieve the best possible return. They must also carefully budget to ensure the compensation lasts for the duration of the injured person’s life.
When the money is used to buy a property, detailed calculations must be made to work out how much can be spent on the purchase and adaptations and how much must be retained. There must be enough left to pay for care, equipment and household running costs in the future.
Parent and child conflict of interest
Potentially a conflict of interest can arise between parent and child. This is partly because as they are living together, it can be difficult to disentangle the finances of both parties. The deputy has a duty to keep the client’s finances completely separate from their own personal finances.
After the settlement, the parents are entitled to care payments to compensate them for care provided over and above what the child would have needed if not disabled. An obvious conflict of interest arises if the parent is left to work out the amount due to themselves.
The deputy will agree a personal allowance to be paid to the parents to cover all additional expenses due to the disability which are not covered by Disability Living Allowance. Again, a conflict of interest arises if the parent is left to calculate this.
For these reasons, it often makes sense for a professional deputy to be involved for a few years after the case settles to help with the difficult decisions such as how the compensation will be used, to set up appropriate investments and decide on the payments to the parents.
The personal allowance will affect the parents’ benefits unless they are irregular and the parents’ capital remains below £6,000. The alternative is to agree with the DWP that these payments constitute a specific purpose trust as the money has been given to the parents for an express purpose and they cannot spend the money as they wish.
There are a number of possible pitfalls when acting for vulnerable clients and those who are in receipt of benefits or publicly funded social care. If mistakes are made there is a real danger of considerable financial hardship for clients and in the worst-case scenario, damages that were meant to last a lifetime could be spent or lost in a matter of months.
This means particular care should be taken to ensure that the client does have sufficient capacity to handle the damages award before any money is sent out and if not, appropriate measures are taken. If they are receiving benefits, where possible the situation should be managed to prevent the loss of these benefits.
This article first appeared in the Solicitors Journal.