The many benefits of maintaining an investment in terms of Section 86(3) are often overlooked. In fact, the administration of such accounts is limited to only a few annual transactions and the long term financial benefits may be substantial. It is seldom that for doing very little work, a recurring passive income stream can be generated, even if the benefits are only periodic and indirect.
An investment in terms of Section 86(3) deals with trust funds and are invested by the law firm from the amount available in its operating trust accounts kept in terms of Section 86(2). Funds taken from the Section 86(2) account and invested in terms of Section 86(3) retains its trust characteristics.
The logic is simple: the total obligation towards trust creditors must be met by trust cash kept in Section 86(2) and Section 86(3) accounts. The combined total value of funds in the trust cash book (Section 86(2)) may be such that it justifies a viable investment.
If the general trust bank balance exceeds operational requirements, these funds can be invested. The interest generated can then be applied to defray bank charges. Otherwise, such bank charges may have to be covered by the business account.
What is a Section 86(3) Investment?
The Legal Practice Act (28/2014) contains the following:
Section 86 (3) A trust account practice may, of its own accord, invest in a separate trust savings account or other interest-bearing account any money which is not immediately required for any particular purpose. [Formerly s78(2)(a)]
Section 86 (5) Interest accrued on money deposited in terms of this section must, in the case of money deposited in terms of—
(a) subsections (2) and (3), be paid over to the Fund and vests in the Fund; and
(b) subsection (4), be paid over to the person referred to in that subsection: Provided that 5% of the interest accrued on money in terms of this paragraph must be paid over to the Fund and vests in the Fund.
This should be read with the following accounting Rules:
54.14.16.3 Any interest referred to in section 86(5) of the Act which relates to an account opened in terms of section 86(3) of the Act accrued on money deposited in respect of any period ending on the last day of February in each year shall, on or before the last day of May in that year, be paid to the Fund or its nominee.
54.14.16.5 A legal practitioner shall be guilty of misconduct if he or she fails to pay over, in accordance with this rule 54.14.16, any interest that vests in the Fund.
Where may Section 86(3) Investment be kept?
Trust funds may only be invested in an interest bearing account at a commercial bank, authorized by the Fidelity Fund. Investments in terms of the Section 86(3) should be 24 hour call accounts and the name of the account should refer to the law firm and contain a reference to Section 86(3). There is no obligation to open these investment accounts at the same bank where the current account in terms of Section 86(2) is kept.
Section 63(1) (g) make an arrangement with any bank for the keeping of trust accounts opened in terms of section 86(2) and for the investment of money in separate trust savings or other interest bearing accounts opened in terms of section 86(3) and (4) to provide for one or more of the following:
(i) The payment of interest to the Fund on the whole or any part of the money deposited in terms of section 86(2) and the money invested in terms of section 86(3) and (4), as contemplated in section 86(5);
(ii) the manner in which the Fund is informed of amounts held in the accounts opened in terms of section 86(2), (3) and (4);
(iii) the auditing of interest calculations and account balances in the accounts opened in terms of section 86(2), (3) and (4) in the bank accounts; and
(iv) any other relevant matter;
At the time of writing a current list of banks can be found here http://www.fidfund.co.za/wp-content/uploads/2020/02/List-of-banks-that-have-entered-into-a-banking-arrangement-with-the-Fund.pdf
As an example the account may be opened as “My Law Firm S86(3) Investment” at MyBank, account 932200300 etc.
How to calculate the amount of money you may invest in terms of Section 86(3)?
Consider the Section 86(3) Investment as a long term, annual commitment. For a practice with a small trust account balance, or a balance that fluctuates sharply from month to month, an investment such as this may not be under consideration.
Also, to obtain any reasonable benefit, a minimum amount invested of at least R25000.00 should be considered.
- Inspect the Section 86(2) bank statements for the previous twelve months.
- Determine the highest and lowest balances at any point, for each month, not only at month end.
- List the highest and lowest balances for every month (not necessarily month ends).
- Calculate values at 80%, 60%, 50%, 30% of the minimum balance. Round this amount to nearest thousand. Do not invest 123987.21, rather invest R124000.00, it just reads easier.
- Consider the implications if this amount was withdrawn from the account. Would making an investment of 80% of the minimum balance adversely affect operations? If the answer is Yes, consider a lesser amount.
- Once the actual amount to be invested has been determined pay this amount out of the Section 86(2) current trust account to the Section 86(3) account.
How to keep track of the investment?
Open a client ledger account with the same name as the account kept at the bank. The account should be administered much the same way as client investments in terms of Section 86(2).
Process the payment against this ledger account. Note that this will reduce the trust cash and create a ledger debit balance. The investment account bank statements should be retained. The amount invested must equal the debit balance on this ledger account. Since this money is invested, the ledger balance should be maintained and reported in terms of Rule 54.15.
54.15.1 Every firm shall extract monthly, and in a clearly legible manner, a list showing all persons on whose account money is held or has been received and the amount of all such moneys standing to the credit of each such person, who shall be identified therein by name, and shall total such list and compare the said total with the total of the balance standing to the credit of the firm’s trust banking account, trust investment account and amounts held by it as trust cash, in the estates of deceased persons and other trust assets in order to ensure compliance with the accounting rules.
Note that commercial accounting systems to do not provide for investment mechanisms and that generally trust ledger accounts should not reflect debit balances. Interest generated by the trust can never be designated as “income.”
It is not required to process the interest received monthly. Rule 54.14.16.3 provides that interest may be processed either annually or at the termination of the investment.
Reduce administrative overhead by keeping one such investment; recall this investment annually, at the end of February in order to accurately account for both the capital and interest. Reinvest the funds on 1 March, and repeat. Interest earned now resides in the current trust account and must be paid to the Fidelity Fund before end of May.
The screen shot below shows the life cycle of a typical Section 86(3) Investment account.
Since the trust cash is withdrawn from the current account, it is no longer kept in a current cash book, which means that it is not subject to monthly bank reconciliation.
Show me the benefits?
Cash back is just one of several benefits. Ultimately the cost of maintaining trust banking accounts fall on the attorney. Where trust bank charges exceed interest received this is generally recovered by the bank from the trust banking account, which over time may erode the current account trust balance.
Investment accounts generally generate interest at a higher rate than current accounts. With current commercial rates at between 2%-5%, interest yield is at its lowest ever (not really, but it is very low, and hasn’t been this low for decades). It should be expected that bank charges will exceed the interest available and this must be paid by the attorney.
By increasing the interest yield generated by the trust funds, additional cash becomes available to cover bank charges and audit costs.
Refunds to Practitioners – Legal Practitioners Fidelity Fund Legal Practitioners Fidelity Fund
Sep 30, 2015 — The maximum contribution remains at 20% of net trust interest. Practitioners are entitled to a 100% refund of their trust account bank charges subject to: Compliance with the preferential banking arrangements for trust banking accounts, as shown on the Fund’s website under banking options.
There are also other benefits discussed here http://www.fidfund.co.za/refunds-to-practitioners/
Conceptually it works like this:
- Calculate all interest generated by the investment account.
- Add this to the interest generated by the current accounts.
- An amount equal to 20% of trust interest earned, may be applied towards trust bank charges and audit costs.
- Deduct bank charges and audit costs from this amount to a maximum of R4500 per firm.
- Practitioners are entitled to a 100% refund of their trust account bank charges subject to:
- Compliance with the preferential banking arrangements for trust banking accounts, as shown on the Fund’s website under banking options.
- Sufficient trust interest being generated by a firm to defray such bank charges
- The higher the interest, the bigger the cash back.
Think of it like this: a small investment in terms of Section 86(3) should generate sufficient additional interest to cover the operating costs of all the trust banking accounts. A substantial investment should provide sufficient refund to cover audit expenses.
The interest generated by a Section 86(3) Investment provides both direct and indirect benefits that should be considered as a matter of course by any serious law firm. Ask yourself, Do we maintain a Section 86(3) Investment, and if not, why not?
For more information on how Dynamic’ custom Lawyers Trust Account software solution provides for keeping your trust and business books, and manages Section 86(3) investments, please scan the QR tag below.
