Trust administration involves creating separate accounts for money handled by a financial advisor or mortgage lender. Examples include escrow management for property taxes and insurance, court cases with multiple plaintiffs, and custody management for financial advisors and clients. This type of management can result in lower costs and easier tax reporting.
Trust administration involves bridging the gap between an individual or business bank account and the bank account of a person who handles their money, such as a financial adviser or mortgage lender. It usually involves the person handling the money creating a separate account for the money he is in charge of handling. This means that control of that money remains with the person handling the money, but the actual money and related transactions are clearly identifiable, rather than commingled with other funds.
An example of escrow management is with real estate. Some mortgage lenders will agree to pay property tax and buildings insurance on the owner’s behalf. To keep track of this, they set up an escrow account and pay you some of the money from the mortgage accounts. The lender that uses this account to pay tax and insurance premiums.
Another example is in court cases where damages are owed to a variety of plaintiffs. This is most common in a class action lawsuit whereby the claims of multiple people with similar situations are heard through a single case. Using an escrow account means that the losing defendant does not have to deal with the administration of paying each claimant individually. Instead, the defendant pays a single, court-ordered amount into the escrow account. The court then distributes this money to the plaintiffs, a process that can take some time.
The most common use of custody 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 customer. There are several advantages to using this type of escrow account. One is that the clients’ money that is in the account, instead of being invested, will earn interest. Trust administration means that the correct amount of interest will be applied to each client’s money, rather than the financial adviser having to calculate and distribute the correct amounts. It also makes it much easier for individual customers to list their individual interest receipts on tax returns.
In most cases, escrow management of this type will take lower costs and configuration into account. For example, the financial adviser may pay little or no additional transaction fees to move funds between the main and client accounts, or vice versa. They can also count transactions from all customer accounts as if they were part of a single account and therefore get a volume discount on bank fees.
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