You're not alone if you're not sure what makes a trust account different from an escrow account. They shouldn't be confused because they serve distinct, unrelated purposes. An escrow account contains funds used to pay expenses associated with real property you buy, while a trust account holds funds the account owner plans to distribute to beneficiaries when he dies.
While a trust account has a personal element, an escrow account is strictly business. The beneficiaries of a trust account get the money upon the owner’s death. They're usually someone the owner loved and trusted. In contrast, an escrow account is used by mortgage lenders to ensure borrowers have enough funds set aside for the deal. That could include a down payment, an insurance premium, or property taxes. Because the funds are deposited upfront, the lender protects himself from the potential default of the borrower.
The owner of a trust account, also known as the trustor, has control over the account while she's alive. If the trust account is revocable, the owner can change the terms of the trust account or have it terminated. Conversely, the lender can use the escrow account to collect funds from the borrower to pay important things like property taxes. The lender, unlike a trustor, can't use the funds for any other purpose than what is the established reason for the account.
The owner of the trust has complete control over her account. While she lives, the beneficiaries can't say how she uses the money. The owner can deposit or withdraw funds into the account without the permission of the beneficiaries. It is, after all, her money. The funds in an escrow account, on the other hand, are collected and disbursed when a debt like property tax comes due. It will not be used to cover a monthly bill, such as the mortgage.
While a trust owner can deposit as much money as he wants in an account, the Federal Deposit Insurance Corporation (FDIC) does limit insurance coverage of the funds to $250,000 for each unique beneficiary. An escrow account does not have the same insurance limitations. However, the Real Estate Settlement Procedures limits the amount the lender can require the borrower to keep in the account to one-sixth of the total amount of the items paid with the escrow proceeds.
Jessica McElrath has been a freelance writer since 2000. McElrath is the author of "The Everything John F. Kennedy Book" and "The Everything Martin Luther King Jr. Book." McElrath has a Bachelor of Arts in history from the University of California at Berkeley and a Juris Doctor from Santa Clara University School of Law.