Legal Definitions - trust indorsement

A trust indorsement occurs when someone signs a negotiable instrument, such as a check, to transfer it to another person, but with a specific instruction that the recipient must hold or use the instrument (or the funds it represents) for the benefit of a third party or for a particular purpose, rather than for their own unrestricted use. Essentially, it creates a fiduciary duty, meaning the person receiving the instrument is obligated to act in good faith on behalf of someone else or for a designated objective.

Here are some examples illustrating a trust indorsement:

• Example 1: Managing Funds for a Minor

  A grandmother wants to give a financial gift to her young grandchild for future education expenses. She writes a check payable to her adult daughter, Sarah, knowing Sarah is responsible and will manage the funds wisely. On the back of the check, Sarah indorses it with the words: "Pay to Bank X for deposit into the college fund of [Grandchild's Name], held in trust by Sarah Smith."

  This illustrates a trust indorsement because Sarah is not taking the money for her personal use. By adding the phrase "held in trust for," she is legally obligating herself to deposit the funds into a specific account for her grandchild's benefit, establishing a fiduciary relationship where she manages the money on behalf of the grandchild.

• Example 2: Client Funds in a Law Firm

  A client pays their lawyer, Mr. Davis, with a check for a settlement amount. The check is made out directly to the client. The client then indorses the check on the back with the instruction: "Pay to John Davis, Attorney, in trust for [Client's Name]."

  This is a trust indorsement because the client is transferring the check to Mr. Davis, but explicitly stating that Mr. Davis must hold these funds in a trust capacity for the client. This ensures the money will be deposited into a client trust account, separate from Mr. Davis's personal or firm operating funds, and managed according to the client's instructions and legal ethical obligations.

• Example 3: Funds for an Organization

  The treasurer of a local community garden organization, Ms. Chen, receives a donation check made out to her personally by mistake, even though it was intended for the garden. To ensure the funds go to the correct recipient, Ms. Chen indorses the check: "Pay to the [Community Garden Organization Name] for deposit only."

  This acts as a trust indorsement because Ms. Chen, by her indorsement, is directing that the funds be held and used solely for the benefit of the community garden organization, not for her personal gain. She is acting as a fiduciary, ensuring the donation reaches its intended beneficiary.