Escrow funds are amounts deposited by a buyer or seller into a neutral, third-party escrow account where the funds are held until completion of an escrow. Funds held in an escrow account are considered funds held in trust. They may only be disbursed upon written authorization by all parties to an escrow. Strict rules apply to the type of account where they must be held as well as to the record-keeping involved.
Things You'll Need
- Fictitious business name filing
- Federal identification number
- Corporate resolution to set up an account
- Double-entry accounting system with subsidiary ledgers
- Initial bank deposit
Set Up a Trust Account
Contact a business bank about setting up a trust account. Most commercial banks offer this service, as well as business banks. It is a separate account that may only be used for trust funds received and disbursed. Most banks will ask for a fictitious business name filing statement if the trust account is set up in the name of anyone other than an individual. They will also ask for a federal identification number for the business. This is obtained from the Internal Revenue Service. If the account is being opened by a corporation, the bank will require a copy of the corporate resolution authorizing the account to be established. The account must also say “trust account” in the title.
Make the initial deposit to the escrow account. State laws vary as to how much money can be deposited into an escrow account by the owner of the account. This is to avoid commingling of funds between the owner of the account and customer deposits. For example, in California, the maximum deposit to a trust account by an owner is $200. You should contact your state department of corporations to determine the limits that apply.
Set up an accounting system for the trust account. The system must contain a general ledger showing all funds deposited and withdrawn from the account including any bank charges and fees. The ledger must also contain a subsidiary ledger for each transaction that takes place. For example, if an escrow is opened on a home purchase, it should be assigned an identification number. This number is entered into the subsidiary ledger, where any deposits or withdrawals on that escrow must be recorded separately in the subsidiary ledger.
Record-Keeping for Escrow Funds
Deposit the escrow funds received into the escrow trust account. Always give customers a copy for the receipt of the funds they gave you and a copy of the deposit slip made out to the bank. Also, keep a copy of the deposit for your records.
Make an entry into the general ledger showing the funds received, and also in the subsidiary ledger assigned to the specific transaction that relates to the deposited funds.
Balance all of the subsidiary ledgers each month so that the total of all subsidiary ledgers combined equals the general ledger balance of the trust account.
Disburse Escrow Funds and Balance the Account
Disburse funds by writing a check against the trust account payable to whoever is authorized to receive the funds.
Make an entry into the general ledger showing the funds disbursed as well as into the subsidiary ledger showing the same disbursement.
Balance the account at the end of the transaction by making sure that there is a zero balance shown in the subsidiary ledger for the transaction. For example, if during the escrow a deposit was received and held in the amount of $5,000, then when the transaction closes, this amount should be disbursed so that the balance in the trust account for that transaction is zero
Reconcile the trust account with the bank account at the end of the month. For example, the balance in the trust account should equal the adjusted balance of the bank account at the end of each month. The adjusted balance of the bank account is the ending balance per the bank statement plus any deposits not yet shown by the bank, less any checks not yet cleared by the bank.