When people hear the terms trust or escrow accounting, their first thoughts may be “that does not apply to me” or “I am not regulated by a real estate commission.” Although these statements may be true—as most states do not have a real estate commission that regulates reporting rules—using trust account software is still a best practice and will give you peace of mind, and the reporting provided will assist in keeping your accounts in balance.
What Constitutes a Trust Account?
A trust account, or escrow, is an account into which trust money (and only trust money) is deposited. The four primary features of a trust account are the following:
- Separate: They contain only money belonging to others.
- Custodial: They are held in name of a licensee or real estate company.
- Available on demand: Funds may be withdrawn without prior notice.
- Secure: “Trust” or “Escrow Account” must appear on signature cards, bank statements, deposit tickets, and checks.
What are Trust Account Records?
Each state determines what and how trust account records are to be maintained. Most reporting guidelines require a clear audit trail, including the following:
- Deposit tickets
- Cancelled checks
- Check stubs
- Journals
- Property ledger sheets
Trust Account Reports
In software applications, such as Streamline’s StreamTrust, your property management software likely provides the following reports to keep your trust account in balance:
- Trust Account Summary: This report provides a comprehensive view of all transactions within a date range and a breakdown of owner balances, advanced deposits, operating accounts, security deposits, and tax accounts.
- Property Trial Balance: As reported by individual properties, this report shows the total amount of each account.
- Property Ledger Summary Report: This report provides all transactions for an individual property within a date range, broken down by each account and fees.
- Bank Deposit Report: This is a reprint of each bank deposit that includes all relevant information and individual totals.
- Guest Advanced Deposits: Broken down by each reservation, this report shows all the money for past or future reservations that should be in your trust account.
- Security Deposits Held: This report shows all the security deposits you currently have on hand.
Frequently Asked Questions
Q: Can I allow bank service fees to be charged against the trust account and reimburse the account after the fact?
A: If you are in a trust account state, the answer is NO! This would cause a deficit in the account. Work with your bank and have any bank charges or credit card fees debited from your operating account.
Q: Can I allow commissions, interest, or any other earned fee to stay in my trust account beyond 30 days?
A: If you are in a trust account state, the answer is NO! This is considered commingling. If you are not in a trust account state, you may leave the funds in the account, but it is recommended that you clear out the funds due to you at the end of each month to make balancing easier.
Q: Can I pay for owner repairs for a unit that does not have enough money to cover it?
A: If you are in a trust account state, the answer is NO! In Streamline, for example, StreamTrust uses “held invoice logic,” so if the owner does not have the funds available, the invoice is automatically held. Depending on your company policies, you can pay the bill; however, this will cause a deficit in the trust account.
In summary, to date, everyone has a different perception of what trust accounting entails. Although it is critical to check the laws in your state, I recommend you play it safe.
People are enTRUSTing you with their money. I have seen many companies have hundreds of thousands of dollars in their trust bank accounts and make payments that did not truly have funding. The moment all the money was due to vendors, owners, and the property management companies, that trust bank account went to zero very quickly.
Using a property management system that is well-versed in trust accounting helps in simplifying the process by:
- Making sure you know how much money you have and who it belongs to.
- Ensuring you know whether the owner paying an invoice has the money to pay.
- Reconciling your bank account daily (this sounds tough but it’s easier to find discrepancies in smaller sets of data).
- Paying owners and vendors while tracking how money is moving.
At the end of the day, you should feel comfortable knowing you can run an audit report and compare it to the balance in your bank account to give an accurate justification of why your company is in trust. It is a great feeling!
An auditor can come along in any state at any time. Don’t make that a stressful moment. Just follow a daily, weekly, and monthly routine, and your company will pass an audit with flying colors.
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