American Trust Escrow | What’s the Difference Between an Escrow Account and a Trust Account?
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What’s the Difference Between an Escrow Account and a Trust Account?

What’s the Difference Between an Escrow Account and a Trust Account?

Buying a home is an exciting life event and is unlike any other experience in life.

Amongst other things, during the home buying process, there are a lot of parties involved in the process, large amounts of money move between parties and there a quite a few legal documents that are drawn up and signed to ensure that the transaction is following each and every regulation that protects both the buyer and seller.

In many situations, there are dependent tasks that must be completed or conditions that need to be met before the property can be passed over and the money can be collected.

This is where escrow plays a very important role!

Funds that are required for a buyer to purchase a home are commonly put into an escrow account. This provides a safe and secure place that protects all parties involved in the transaction, since the escrow company is a third-party.

Escrow Accounts and Trust Accounts

Unfortunately, the terms escrow account and trust account are often misused and can cause some confusion. There are big differences between these two words, so it’s important to understand how they differ. To help shed some light on the topic, let’s look at each one individually before comparing them.

What is Escrow?

Escrow is a crucial part of any real estate transaction. But, it can often create confusion for home buyers, especially first time home buyers. In the most simple terms, escrow is a contractual arrangement where a third-party receives and disperses funds on behalf of the home buyer and seller.

The distribution of funds is contingent upon all conditions being set, agreed upon and completed by each party involved in the transaction. An escrow account, which is similar to a bank account, is setup by a broker. This is where the funds are held until all pieces of the transaction have come together.

The escrow agent or broker is an independent, third party. This role ensures that both the home buyer and home seller are protected as there are no biases from escrows prospective.  

The Difference Between an Escrow Account and Trust Account

Although very different, a trust account operates in a similar way to an escrow account. But, there are key differences.

Both operate like a bank account that holds funds to be dispersed to a designated party upon the completion or fulfillment of an agreement. 

 

A trust account is typically used for two things:

  • Opened by a trustee to hold trust funds.
  • Opened to deposit funds for a service only to be paid on completion of service.
  • A good example of this is a retainer fee to an attorney. The money is held in a trust account until the lawyer completes the service contracted to do and then is able to collect the money.

 

Key Differences between trust account and escrow account: The Relationship

 

  • Escrow’s role 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. A trustee is responsible for maintaining the assets so that they benefit their beneficiary above all others.
  • The duties of a trustee are much more loosely defined and may only pertain to one party.

 


If you have any questions about the escrow process, please don’t hesitate to contact us. We are here and ready to help you with any questions or needs you have!