Escrow Account
An escrow account is used to hold assets that are not owned by the account holder. The account holder therefore maintains the account for the account of another person. Depending on the type and agreement, a distinction is made between open and hidden trust accounts; a special form is the escrow account. The account holders are usually notaries, lawyers and tax consultants or private trustees; this type of account management is also common in the payment sector. In this context, the account holder is also referred to as a trustee.
Purpose of fiduciary accounts
A trust account is always required when the assets of a person, the so-called trustor, are to be managed by a trustee. It is usually held as a bank account, for example, a custody account, current account, savings account or time deposit account. The trustee has sole power of disposal over the account. Fiduciary accounts are mainly used for construction or real estate financing, and this type of money management is also used in the payment service sector. The purpose of the account is that the buyer does not yet completely lose the influence on the purchase sum and, in contrast, the seller does not yet completely receive this influence. At the same time, however, he has the certainty that the flow of money will take place as soon as the goods are handed over – or in the area of real estate trade – a land charge is registered. Payment service providers use this type of account to manage security deposits, among other things.
Open and hidden escrow account
In this type of escrow account, the escrow relationship is indicated in the account name, which then reads: Muster GmbH(Limited Liability company), Max Mustermann. An open trust account can take different forms. For example, there is the escrow account, which can only be opened for notaries, lawyers, auditors and related professional groups. The special feature of the escrow account is that it is particularly protected. In the event of the trustee’s insolvency, it does not become part of the trustee’s assets; the banks set special conditions for this type of account. Other open trust accounts can be opened and managed by legal trustees such as executors or administrators of estates, or by private trustees, including administrators of condominium associations or landlords. In the case of a hidden trust account, it is not apparent at the time of opening that it is a trust account.
Tax and other regulations for the escrow account
Taxes due on the assets held in the escrow account are not payable by the trustee, but by the trustor. This is stipulated in Section 39 of the German Tax Code (AO). However, the trustee is liable for ensuring that the taxes are paid properly and on time. Furthermore, it must be stated at the time of opening to whom the assets belong. Account overdrafts are not permitted, nor is there any right of attachment or retention on the part of the bank. Furthermore, the bank is not liable for unlawful dispositions by the trustee. The trustor, in turn, has no right to dispose of the invested assets or to obtain information about them.
