Here is your first Forum » The best applications of an escrow account

An escrow account is a temporary account held by a third party - an escrow agent - during the process of a purchase transaction between two parties. As this is a temporary account, it will only operate until the conditions agreed between the two parties - usually a buyer and a seller - are met so that the transaction can be completed.

A trust account can be set up to hold funds, stocks, money or other assets. While the most common use of escrow accounts is real estate transactions, they can have various other purposes. For example, they can be used during a mortgage transaction between the lender and the borrower. Typically, a lender will require the borrower to make regular deposits into the escrow account. The funds deposited are then used to pay an insurance policy or property tax.

Escrow accounts are also becoming increasingly popular in the business world. The opening of such an account in business transactions can replace a letter of credit. In this case, the bank or other trustee receives money from the buyer and notifies the other party that the payment has been made. The seller company can now rest assured that it will receive the money as soon as it fulfills its legal obligations and therefore sends the goods to the buyer. When the buyer company receives the goods and is satisfied with the quality of the products, it sends a confirmation to the bank with instructions to release the funds.

Another use of a trust account for companies is to transfer company shares to employees as part of their compensation package. In this way, employees become shareholders in the company, but have limited use or sale of the shares during the escrow period. The reason for such a policy is to protect the market price of the company's stock and to discourage employees from leaving the company, at least until the escrow period has expired.

Opening an escrow account can remove most of the uncertainties associated with the safe and honest delivery of funds or other assets under a purchase agreement. For example, if a buyer wishes to view the property he or she is interested in or perform other due diligence, an escrow account can be used to confirm that the buyer has sufficient funds to actually complete the transaction. If the buyer is satisfied with the property, he instructs the third party to release the escrow account. This way the buyer can be sure that the money is safe until he or she is ready to close the deal and the seller can be sure that the buyer has sufficient funds and is genuinely interested in the property.

Benefits of using an escrow account
An escrow account is beneficial to both parties to the transaction. As discussed above, the involvement of a third party to temporarily hold the money while some aspects of the agreement remain unsatisfied can facilitate the real estate or business transaction, particularly when one or both parties lack confidence in the other.

Still, trusting the trustee is crucial for both the buyer and seller as he or she is the only one with access to the funds during a given period of time. Therefore, it is very important to choose a trustworthy broker with a good reputation.