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What is Escrow Management?

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  • Written By: John Lister
  • Edited By: Kristen Osborne
  • Last Modified Date: 16 November 2016
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Escrow management involves bridging the gap between the bank account of an individual or a company, and the bank account of a person handling their money, such as a financial advisor or mortgage lender. It usually involves the person handling the money setting up a separate account for the money they are in charge of handling. This means that the control of that money remains with the person handling the money, but the actual money and related transactions are clearly identifiable, rather than being mixed up with other funds.

One example of escrow management is with real estate. Some mortgage lenders will agree to pay property tax and buildings insurance on behalf of the homeowner. To keep track of this, they set up an escrow account and pay some of the money from the mortgage accounts into it. The lender than uses this account to pay the tax and insurance premiums.

Another example is in court cases where damages are owed to a range of claimants. This is most common in a class action suit by which claims from multiple people with similar situations are heard through a single case. Using an escrow account means the losing defendant does not have to take care of the administration of paying each claimant individually. Instead, the defendant pays a single amount, ordered by the court, into the escrow account. The court then distributes this money to claimants, a process that may take some time.

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The most common use of escrow management is with financial advisors and clients. Most banks that offer such a service to financial advisors will allow them to set up a master account and then linked sub-accounts. Each sub-account will relate to an individual client. There are several advantages to using this type of escrow account. One is that any of the clients' money that is in the account, rather than invested, will accrue interest. Escrow management means that the correct amount of interest will be applied to each client's money, rather than the financial advisor having to work out and distribute the correct amounts. It also makes it much easier for individual clients to list their individual interest receipts upon tax returns.

In most cases, escrow management of this type will take account of the set-up and lower costs. For example, the financial advisor may pay little or no extra transaction fees for moving funds between the main and client accounts, or vice versa. They may also be able to count the transactions of all the client accounts as if they were part of a single account and thus get a bulk discount on banking fees.

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