Lawyers have different legal and business strategies to carry out other procedures. Among these strategies is the utility of the IOLTA and Escrow account types. Although they are different and have alternative benefits, many people are unaware of these discrepancies.
Lawyer trust accounts are complicated and are handled differently than traditional accounts. They have specific rules about what can and cannot be done with them and provide for penalties that can be severe, depending on the violation, up to and including disbarment. This guide will review the differences between an IOLTA and an escrow account.
What is an IOLTA?
An Interest on Lawyers Trust Account (IOLTA) is an interest-bearing account focused on meeting the needs of law partners. Real estate attorneys have separate IOLTA and Escrow accounts for receiving and disbursing funds related to property purchases.
The money in an IOLTA does not belong to the attorney or the interest earned on the account. Assets and bank fees often have different uses, depending on the state where the activity is conducted; in Georgia, they go to fund the Legal Aid Program.
Concerning the IOLTA account, these considerations are taken into account:
- Large law firms handle their clients’ money. If the amount withheld from an individual client is substantial, it is deposited into an interest-bearing trust account. When attorneys have applicable client funds, they must follow the Trust and IOLTA rules, as their state bar association dictates
- Interest earned on the account more than the associated deposit is turned over to the bar through a bank deposit. Interest from these accounts is often used to pay for legal assistance for low-income citizens
- Benefits of an IOLTA Account
Here are some of the benefits of an IOLTA account:
- It is not taxable to the law firm or its client
- Interest generated by IOLTA accounts goes to help the community and promote responsible legal assistance
What is an escrow account?
An escrow account is a type of account used when you close on a mortgage. Your monthly loan payment is deposited into the escrow account to cover the costs associated with purchasing the home. These payments may include Real Estate Tax, insurance premiums, and private mortgage insurance.
The objective is to make payments on time to third parties, local tax authorities, and insurance companies. Thanks to an escrow account, the legal settlement of funds is simplified and secured.
How does an escrow account work?
To establish an escrow account, the lender must calculate the annual tax and insurance amounts and divide them by 12. This result is placed in the mortgagee’s monthly account. Each month, the lender deposits the escrow portion of the payment into the account. It also pays the insurance premiums and taxes associated with the transaction.
Benefits of an escrow account
Among the most important benefits of an escrow account are:
- Provides peace of mind by leveraging key validations and trade protection
- Allows flexibility to meet different payment needs
- Simplifies the management and deployment of customer funds
- Differences between an IOLTA and an escrow account
In many respects, an IOLTA and an escrow account do not differ much when viewed from the standpoint of a bank account. However, the relationship between a trustee and an escrow agent is often different. The responsibilities and duties of an escrow agent are largely defined by the escrow agreement, which functions as a trustee for the buyer and seller. Otherwise, escrow is a broader and more flexible relationship.
The purpose of an escrow is to care for the assets for the benefit of its beneficiary above all else. Escrow accounts are considered to be in a special trust field.
Which account is better? IOLTA Account VS Escrow Account
Both types of accounts are indispensable in purchasing and selling a property. It is not a matter of recognizing which is better, but rather which of these two is more convenient, depending on your case. One of the most important aspects that will allow you to identify which account you need is the following premise:
While an escrow account is a security that holds money that can only be released when a specific transaction is completed, trust accounts also have funds that the trustee can use as needed. Which of these two options is more important to you?