Why a trust requires its own bank account

Often people are of the view that trusts do not require their own bank accounts. Trustees and even service providers justify why separate trust bank accounts are not maintained for trusts – from being convenient, to saving costs, to being ‘dormant’ trusts - to name a few. Little do they know that it is in fact a legal requirement for each trust to have a separate bank account. The main rationale is to prevent any mingling of trust funds with any other non-trust funds, which may place the trust at financial risk.
 
Legal requirement to have a separate bank account
Section 10 of the Trust Property Control Act (the Act) specifically provides that “whenever a person receives money in his/her capacity as trustee, he/she shall deposit such money in a separate trust account at a banking institution…”. This section has two requirements – each trust should have its own bank account and trustees are not allowed to hold trust cash in their hands. This is required by law, which means that trustees have no discretion in terms of whether they want to open a bank account or, for example, use one or more of their personal accounts, or even for service providers to operate a single, combined bank account for all their clients’ trusts. The funds of one trust cannot be mixed with those of another. It must be a separate bank account in the trust’s name. It is clear that the Master of the High Court requires each trust to have its own bank account and for trustees to deposit all receipts into such bank account.
 
Section 11 of the Act also specifically requires the separate identification of trust property. Any bank account, or investment at any financial institution, should be identifiable as a trust bank account or investment. This will prevent exposing the trust assets to risk in the event of a trustee, or any other person in whose name the bank account is operated, is sequestrated or liquidated. Although Section 12 of the Act provides a statutory safeguard by stipulating that trust property will not form part of the personal estate of a trustee (except in so far as the trustee, as a trust beneficiary, is entitled to trust property), it will only be effective if the requirements of Section 11 are met, by clearly identifying and recording trust property.
 
Trust deeds (in most cases) also require that the trustees open bank accounts. A bank account should therefore be opened as soon as the trust is registered with the Master of the High Court, as trustees have to adhere to the requirements of the trust deed.
 
For a trust to be validly formed, the founder is required to make a donation to the trust. In most cases, the founder stipulates an amount of money as the initial donation. Even if the amount is small (sometimes as little as R 100), it must be deposited into the trust’s bank account by law. The trustees are not allowed (in terms of this section) to hold the cash in their hands on behalf of the trust and are also not allowed to deposit it into any other bank account, which is not a bank account in the trust’s name. Although a trust bank account is not an essential requirement for the formation of a valid trust, the absence of a trust bank account could serve as evidence of a lack of the requisite intention to create a trust in the first place.
 
All payments to be made from, and trust money to be received in, the trust’s bank account
Trustees should maintain a separate bank account for all monies flowing in and out of the trust. It is important to demonstrate that the trust is managed as a separate entity to the founder and its beneficiaries. SARS and creditors, including a soon-to-be-ex-spouse, can rely on a combination of factors (lack of resolutions, minutes, or a bank account) to request that a court declares the trust the “alter ego” (an extension of oneself) of the founder or controlling trustee, resulting in the disregard of the trust to penetrate the trust. This “cost” may be significantly higher than the effort or the cost required to simply maintain a separate trust bank account.
 
In the FNB v Brits case of 2011 the judge found that the trust did not have a bank account into which any rent could have been paid, and that, together with other administration issues relating to the trust, caused the trust to be declared the alter ego of the husband and wife, resulting in FNB penetrating the trusts to recover the debt owed to it.
 
Trustees do not have a choice whether they want to open a bank account or not – it is required by law, and the trustees have to deposit all trust money into the trust’s bank account and make payments from this account to demonstrate that the trust is administered as a separate entity from the founder and trustees.