Trust Account
A trust account is an account whose contents are held by one party for the benefit of others under a trust. Where a valid trust exists, the money is generally not available to the account holder's own creditors — which is the entire point, and also the part that is easiest to get wrong.
Also called: trust structure
A trust account holds property that legally belongs to a trustee but beneficially belongs to somebody else. In payments and financial services the structure is used to keep customer money separate from the operating company’s own funds, so that if the operator fails the customers’ money is not simply part of the estate.
Three things have to be true for that to work, and the account alone is only one of them. There must be a properly constituted trust — a declaration of trust or a statutory trust, with identifiable beneficiaries and trust property. The account must be designated at the bank so that the bank, and later an insolvency practitioner, can see what it is. And the operator’s own ledger must be capable of showing which beneficiary owns which part of the balance, because a trust over an unallocatable pool is a much weaker thing than it looks.
The law that governs all of this is national. UK safeguarding and client money rules impose their own conditions on where relevant funds may sit and how the account must be titled; a US FBO account is a banking arrangement that may or may not sit over a trust. The words on the account-opening form are not what decides it.
In practice
Calling an account a trust account does not create a trust. If the declaration is missing, the designation is wrong or the funds have been mixed with the operator's own money, a court may find there is no trust at all — and the customers become unsecured creditors, which is precisely the outcome the structure was chosen to prevent.
Example
Two operators each hold customer money in an account labelled "Trust". One has a declaration of trust, a bank-recognised designation and a ledger reconciled daily. The other has the label. On an insolvency the first set of customers has a claim to identifiable property; the second set has a claim in the queue.
Commonly confused with
| Term | How it differs |
|---|---|
| FBO Account | An FBO account is a US banking structure held in the operator's name for the benefit of customers. Whether it also creates a trust depends on the documents behind it. |
| Escrow Account | Escrow holds money for a specific transaction until a condition is met, usually with a third-party escrow agent. A trust account is an ongoing custody arrangement. |
| Safeguarding Account | A safeguarding account is a UK regulatory requirement with prescribed conditions. A trust account is a legal structure that may be used to satisfy it, but the rules come first. |
See also
- FBO AccountAn FBO account is a bank account held in one company’s name for the benefit of its underlying customers. The company controls the account; the money inside belongs to the customers. The bank’s relationship is with the account holder, not with them.
- Escrow AccountAn escrow account holds funds with a neutral third party until conditions both sides agreed to are met, at which point the money is released to whichever side the conditions point to. Neither party can move it unilaterally while it sits there.
- Safeguarding AccountA safeguarding account is the account at an eligible institution in which a UK payment or e-money firm places the customer funds it must safeguard, held and designated the way the applicable rules require rather than the way a bank chooses to label its product.
- Segregated AccountA segregated account holds customer money apart from the firm’s own money, so the two are never mixed and the customer balance is identifiable as customer balance in both the firm’s and the bank’s records.
- Client MoneyIn the United Kingdom, client money is a defined regulatory term: money a firm holds for customers under one of the FCA’s client asset regimes, covering investment business, insurance distribution, debt management and claims management. It must be segregated, identifiable, and — in investment business — held on trust for the customers it belongs to.
- Pooled AccountA pooled account holds several customers’ money together in one bank account, with ownership of the individual balances tracked off the bank’s books in the firm’s own records. The bank knows the account holder and knows nothing of the customers inside.