What Is the Difference Between a Trust Account & an Escrow Account?

A real estate purchase involves the exchange of money and important legal documents such as the deed to a home. The exchange is often not simultaneous, and certain preconditions must be met before conveyance of the property and payment of money. Funds required for closing are often placed in an escrow account to protect the interests of all parties to the transaction. While the terms are often used interchangeably, an escrow arrangement can be significantly different than a trust arrangement.

An escrow account is a bank account in which escrow funds are deposited by an escrow agent. An escrow agent is an independent and impartial third party who holds money, documents and other property for parties involved in a transaction pursuant to an escrow agreement. The escrow agent will only release money from an escrow account pursuant to the terms and conditions of the escrow instructions. Escrow accounts are ubiquitous in real estate transactions.

A trust account is generally used for one of two purposes. It may be opened by a trustee to hold trust funds. Sometimes money is given to a third party to hold "in trust" without the existence of a formal trust. A common example is a retainer paid to a lawyer that has not been earned or an account opened by a mortgage company to pay expenses like homeowner's insurance and property tax on a homeowner's behalf. Since the lawyer hasn't earned the money, he holds it in trust for the client until such time as it is either earned or returned to the client.

A trust account and escrow account don't have significant differences from the standpoint of a banking account. However, the relationship between a trustee and an escrow agent can be quite different. An escrow agent's duties and responsibilities are largely defined by the escrow agreement, and she serves as a fiduciary for both buyer and seller. A trust is a broader and more flexible relationship. A trustee's duties are to take care of the trust assets for the benefit of its beneficiary above all others. Escrow accounts can be considered a special and narrow type of trust relationship.

Sometimes an escrow agent gets caught in the middle of a dispute about the release of funds or property from an escrow account. If the escrow agreement cannot resolve the dispute, the escrow agent may have to commence a court proceeding not only to protect the rights of both parties, but also to protect herself from liability. An interpleader is a special court action that enables an escrow agent to force the parties to have a court determine who's entitled to the escrow funds.