Advising clients involves myriad legal, financial, and personal considerations to ensure client assets are managed and transferred according to their wishes. Often, clients seek advice and wise counsel before a liquidity event. Whether it is the sale of a closely-held business, real estate parcel, minerals or some other asset, attorneys can leverage the use of escrow accounts for the safety and benefit of their clients.
Providing significant benefits in terms of security, efficiency, and clarity, escrow accounts are used to manage and distribute assets, pay taxes, and settle debts.
Of course, attorneys are well-versed in the concept of escrows, but what about your clients? At Argent, we’ve found that clients often struggle with understanding the types, benefits and nuances of escrow accounts.
To clear it up for our clients, we crafted some simple language and we’re happy to share what’s working for us with our colleagues.
WHAT IS AN ESCROW ACCOUNT?
An escrow is a financial arrangement where a third party, the escrow agent, holds and regulates the payments required for the two parties involved in a transaction. It’s the escrow agent’s fiduciary responsibity to ensure that all conditions of the agreement are met before releasing the funds.
WHAT ARE THE BENEFITS OF ESCROW ACCOUNTS?
Security and Trust – Escrows offer a secure way to manage assets, ensuring that funds are only released when specific conditions are met. All parties find peace of mind knowing that assets are protected and distributed according to the decedent’s wishes.
Efficient Asset Distribution – Using escrows can streamline asset distribution. The escrow agent handles the disbursement of funds, reducing delays and administrative burdens for the executor and beneficiaries.
Tax and Debt Management – Escrow accounts are used to set aside funds for paying taxes and settling debts, ensuring that obligations are met promptly and without complications.
Conflict Avoidance – By clearly outlining the conditions under which funds are released, escrows help avoid disputes by beneficiaries.
WHAT ARE THE COMMON TYPES OF ESCROW ACCOUNTS?
Merger and Acquisition (M&A) Escrows – M&A escrow accounts are often established as part of the acquisition of a company. The escrow agent is tasked with safekeeping funds until a time certain or triggering event requiring the disbursement of funds to the buyer or seller in a transaction.
Stock Escrows – For certain clients with stock in a closely-held or publicly traded company, an escrow agent is responsible holding stock or cash until certain conditions are met, such as a specific vesting period for employee stock options.
Real Estate Escrows – Commonly used when transferring real estate as part of a transaction, Real Estate Escrows hold the deed and funds until all conditions of the sale are met, ensuring a smooth property ownership transfer. Similar escrow arrangements are utilized when minerals are bought and sold.
WHAT’S THE BEST WAY TO IMPLEMENT ESCROW ACCOUNTS?
Selecting a Reputable Escrow Agent – Choosing a trustworthy, experienced escrow agent is crucial. This could be a bank, a title company, or a specialized escrow service. The escrow agent should have a clear understanding of transaction, deliverables, processes and the legal requirements involved.
Drafting Clear Escrow Agreements – Terms and conditions of the escrow should be explicitly stated in the escrow agreement, including specifying the triggering events for releasing funds, the responsibilities of the escrow agent, and the rights of beneficiaries.
Regular Reviews and Updates – Escrow agreements should be reviewed regularly to ensure they reflect the client’s understanding and deal terms.
We hope this language helps your clients better understand the purpose and benefits of using escrow accounts. For more insights into escrows, or any trust, wealth or mineral management questions, talk to Argent.