Navigating The Differences Between Trust And Escrow Accounts

03 Nov Navigating The Differences Between Trust And Escrow Accounts

The purchase of a home is unlike almost any other transaction. Not only does a large amount of money have to exchange hands, but important legal documents need to be drawn up and exchanged as well to ensure the entire process is following every regulation that protects both the buyer and seller. In many cases, these exchanges are not made at the same time as many preconditions need to be met in order for the property to be handed over and money for the property collected.

This is often where escrow comes in. Funds that are required for a buyer to purchase a home are often placed into an escrow account so as to provide a safe place administered by a third party that protects all sides of the transaction. Although, escrow is often used interchangeably with the term “trust arrangement” the two are commonly misconstrued to be one in the same. There are actually substantial differences between the two, and the knowledge of both can be an extremely important asset to anyone considering buying or selling a home.

What is escrow?

Despite being an important part of the transaction, mention of the word escrow can often supplant confused looks on the faces of home buyers, especially those delving into the market for the very first time. In its most simple terms, escrow is a contractual arrangement in which a third party receives and disburses money on behalf of a home buyer and seller, contingent upon all sale conditions being agreed upon and fulfilled by each party. An escrow account, which is essentially a bank account, is created by a broker to hold the funds while other parts of the transaction come together.

The agent or broker is an independent, third party who holds funds. If the transaction falls through or goes through, the agent can then return the money to the buyer or pay to the seller accordingly.

The difference between trust and escrow

A trust operates in a similar fashion, but differs from escrow in a few key ways. Both operate as a glorified bank account that holds funds to be dispersed to a designated party upon the completion or fulfillment of an agreement.

A trust can generally be used for either of two purposes. It can be opened by a trustee to hold trust funds or it can be opened to deposit funds for a service only to be paid on completion of service. A popular example of this is an attorney that is paid a retainer. These funds can be held in a trust until the lawyer completes a service that earns the money from the client.

The difference in escrow and trust lies in the relationship between the trustee and an escrow agent. An escrow agent’s work is determined by the terms of the contractual agreement, acting as a fiduciary between buyer and seller. As such, their responsibilities and duties to both parties are strictly defined. On the flip side, a trustee is responsible for maintaining the assets so that they benefit their beneficiary above all others. In this sense, the duties of a trustee are much more loosely defined and may only pertain to one party.