What is Escrow, and Why Is It Tricky?
March 25, 2024
What Is escrow?
Escrow can be a confusing term for many. Essentially the retaining of funds for someone else. Usually, this means money or assets that are being set aside to be disbursed later to the individual or entity they are being held for. Whoever is holding the funds has a responsibility to keep those funds separated from their own monies, to ensure accurate accounting, and in some instances to accrue interest that is transferred to the individual or business the funds are being held for. The funds are typically held in an account at a financial institution with an account title that may spell out the fiduciary relationship. Some examples of an escrow account include an attorney trust account, IOLTA or IOLA, or a rent security account/landlord tenant account for retaining tenant’s security deposits while they reside in an apartment. Aside from attorneys, there are others that may utilize this structure such as title agencies, real estate agents or in some cases non-profit organizations.
Why should I be concerned?
It is important to understand the fiduciary responsibilities in each case based on potential laws. Attorneys must comply with State Bar Association guidelines for their trust accounts. Rent security accounts must comply with state guidelines regarding how funds should be held and reported, as well as guidelines concerning the rights of the tenants. In many cases, non-compliance can carry penalties; always refer to relevant statutes for this information and consult counsel for further information.
Trusts can be tricky, as accounting is extremely important for attorneys because these funds do not belong to them. Attorneys and other trustees have an ethical obligation to manage the funds appropriately. If they are audited, each penny must be accounted for, and a very clear debit and credit must be reflected on their ledgers for every transaction. This accounting must be kept up-to-date and reconciled regularly.
In cases such a landlord/tenant relationship, the landlord typically collects funds at the start of a lease and retains those funds separately for their tenant. New Jersey requires a W-9 or W-8BEN be collected and the titling of the account must include the tenant’s name as though the funds are in trust for them. Once these accounts are established at a financial institution, the landlord does not need to access anything, and the financial institution sends any necessary tax documents out.
How can I make escrow accounts easier?
These are common examples of how escrow accounts can cause challenges when managing many clients or tenants. However, there are resources and tools available to support the accounting and management of escrow and make life for attorneys or other trustees much easier. Property management software exists for managing landlord/tenant accounts and many financial institutions offer various escrow servicing. Some attorneys use multiple ledgers to manage their clients, and many find accounting software makes the job even easier. Kearny Bank offers digital services that can accommodate both of these needs. Through the ZEscrow platform, tenants are separated and easily organized for convenience. Attorneys can have a separate subaccount for every client with clear accounting ledgers for each. All necessary tasks can be completed quickly and easily online, including opening and closing the subaccounts, and there is quick access to reporting.
If this sounds like something that might make your work with escrow accounts easier or more well organized, contact me and I’d be happy to tell you more.
By Xenia Ambatzoglou, Vice President | Treasury Management Relationship Officer
About Xenia:
In her role as Treasury Management Relationship Office, Xenia Ambatzoglou works with Kearny Bank’s business development and local branch teams to provide business clients with customized treasury management solutions. She holds a Master of Science in Strategic Design and Management from Parsons School of Design / The New School, and has nearly 15 years of professional experience in the banking and financial services sector. A passionate advocate for women in business, Xenia focuses on providing mentorship, support, and developing networks for women-owned businesses.
To learn more about zEscrow or Kearny Bank’s other Treasury Management capabilities, contact Xenia.