In banking, the relationship between a banker and a customer is not always limited to that of a debtor and creditor. In certain situations, the bank holds money or property not as its own, but for a specific purpose and for the benefit of another person. In such cases, the bank acts as a trustee, and the relationship between the bank and the customer becomes that of trustee and beneficiary.
For JAIIB and CAIIB exams, it is important to understand when a bank acts as a trustee, how this relationship differs from a normal deposit account, and what duties and responsibilities arise from this relationship.
Meaning of Trust and Trustee
A trust is an obligation attached to ownership of property, arising out of confidence reposed in a person, to deal with the property for the benefit of another. The person who holds and manages the property is called the trustee, and the person for whose benefit the trust is created is called the beneficiary.
When a bank receives money or assets with clear instructions to use or hold them for a specific purpose, and not to treat them as its own funds, the bank becomes a trustee.
When Does a Bank Act as a Trustee?
A bank acts as a trustee when it receives money or property under a special arrangement and not as a general deposit. In such cases, the bank does not become the owner of the funds and cannot use them for lending or investment.
Some common situations where a bank acts as a trustee include:
- Money deposited for a specific purpose, such as payment of dividends, salaries, or refunds
- Funds kept in escrow accounts
- Amounts received by a bank as trustee of a will or settlement
- Funds held under court orders
- Amounts kept in suspense or earmarked accounts for identified beneficiaries
In all these cases, the bank must use the money strictly according to the instructions given.
Difference Between Banker as Trustee and Banker as Debtor
In a normal deposit account, the relationship is that of debtor and creditor. The bank becomes the owner of the deposited money and can use it freely, subject to repayment on demand or maturity.
However, when a bank acts as a trustee:
- The ownership of money does not pass to the bank
- The bank cannot mix the trust money with its own funds
- The bank must use the funds only for the stated purpose
- The bank has a fiduciary responsibility
This distinction is very important for exam questions.
Examples of Bank Acting as Trustee
Dividend and Refund Accounts
When a company deposits money with a bank for paying dividends or refunds to shareholders, the bank holds this money in trust. The bank must pay the amount only to the rightful beneficiaries and cannot use the funds for any other purpose.
Escrow Accounts
In large transactions such as mergers, acquisitions, or property deals, banks often operate escrow accounts. Here, the bank holds funds on behalf of two parties and releases them only when agreed conditions are fulfilled. In this case, the bank acts as a trustee for both parties.
Executor or Trustee of a Will
A bank may be appointed as an executor or trustee under a will. In such cases, the bank manages the estate of the deceased strictly as per the terms of the will and the applicable law.
Court-Attached Funds
When money is deposited in a bank under court orders, the bank holds the amount as a trustee and releases it only as per court directions.
Duties of a Bank as a Trustee
When acting as a trustee, the bank has higher responsibilities compared to ordinary banking transactions. The main duties include:
- To act honestly and in good faith
- To strictly follow the instructions of the trust
- To not misuse or misappropriate trust funds
- To maintain proper records and accounts
- To not derive any unauthorised benefit from trust property
Any breach of these duties can result in civil and criminal liability for the bank.
Rights of a Bank as a Trustee
While acting as a trustee, a bank also has certain rights:
- Right to receive trustee fees or commission, if agreed
- Right to seek clarification or directions in case of doubt
- Right to recover expenses incurred while managing the trust
However, these rights must always be exercised in line with the trust deed or agreement.
Termination of Trustee Relationship
The relationship of trustee comes to an end when:
- The purpose of the trust is fulfilled
- Trust property is fully distributed
- Trust is lawfully revoked
- Court orders termination
- Trustee resigns or is removed as per law
After termination, the bank must hand over the remaining assets to the rightful beneficiaries.