Trust accounts are used to hold money for other people until a trigger of some kind releases it. In the property management industry, these accounts hold funds for customers who are entitled to the money being held there. However, some bankers make a common mistake by opening a general business account and calling it a trust account. This article covers the terminology and regulation of trust accounts in the property management industry to ensure that property management companies and their clients are protected.
What is a Trust Account?
Most people associate trust accounts with family trusts that are set up at banks to secure funds for their beneficiaries. However, property management trust accounts have a different purpose. These accounts hold money that belongs to the customers of the property manager, who are entitled to these funds. This typically includes tenant security deposits & landlord funds.
How do I open the right account?
As a property management company owner, opening a bank account may seem like a simple task, but it's crucial to take the right steps to ensure that you're opening the correct account. While a regular operating account is easy to open, a trust account requires more attention and consideration. It's essential to choose a bank that has a good understanding of the property management industry and the unique needs of businesses within that industry.
Unfortunately, many bankers are unaware of the legal and regulatory complexities involved in a property management trust account. As a result, they often open a general business account and label it as a trust account. Although the account may have a nickname such as "trust account," it's merely a business account, and there is not the adequate FDIC protection for the funds held within it. This can be a dangerous situation for property managers and their customers, who are entitled to the money being held in the trust account.
In the incorrect bank account setup, FDIC protects only one beneficiary worth of $250,000 which is the property management company entity. If set up correctly, FDIC covers every single client and beneficiary individually within the same bank account. As an example, a management company that has 200 Landlords/Clients would have upwards of 200 beneficiaries and FDIC would cover $250,000 for each of them.
How do I know if my account is a trust account?
Bankers don’t always know the difference so it is important to find out whether you have a trust account or if what you think is a trust account is actually just a regular business account. To ensure that you have a genuine trust account, you need to ask your banker these two questions:
- If the bank went under tomorrow, how much is my account insured for?
- If there was a lien on your accounts due to a governing entity, lawsuit, or judgment, would the trust account have its assets frozen?
If your trust account is only insured for $250,000 and those funds can be frozen in the event of a lien or lawsuit, then it's possible that you do not have a trust account. Keep in mind that the money in a trust account doesn't belong to you. If you're sued and those funds are frozen, you could find yourself in serious trouble.
It is crucial to ensure that the trust account is set up correctly to protect the property management company and their clients. If the account is not set up correctly, it is at risk of being frozen due to tax liabilities or other charges. It is important to ask the right questions and to understand FDIC insurance to ensure all funds are protected.
If you have any questions about trust accounts, other property management concerns, or need a bank recommendation, please don't hesitate to reach out to APM Help, your trusted partner in real estate and property management accounting. Our team of experienced property management accountants can introduce you to our banking partners such as Enterprise Bank.