Understanding the Types of Escrows

Tazapay
Feb 18, 2021
4 minutes of read

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If we were to define escrow account in simple language, it is an account held by a neutral third party for temporary safekeeping of funds, deposited by buyers until their sellers have fulfilled all obligations. The main purpose of an escrow account is to ensure that everybody sticks to their end of the bargain.

The escrow provider holds the funds of a transaction temporarily without favouring the buyer or seller and follows the rules agreed to by both parties. The funds kept in the escrow account are released only when all terms of the agreement have been met. Creating a high degree of safety, trust, and convenience, for both parties in a transaction, are some of the main benefits of an escrow account.

Different Types of Escrow

In modern times, escrow accounts have become increasingly dynamic, covering several types of transactions. Some of them are quite common and used by many of us regularly.

1. Online Wallets

If a buyer is using an online payment app of e-commerce companies like Amazon or Lazada, then they are using an escrow account. When a buyer places an order on these platforms,they work on the concept of escrow account by holding the buyer’s money and releasing it to the seller only when the seller ships the purchased goods. They give protection to the buyer against non fulfilment of seller’s obligations. 

2. Mortgage Accounts

A mortgage escrow account is basically an agreement that a buyer gets into with his/her mortgage lender for ensuring payments of property tax bill, homeowners insurance and private mortgage insurance (which is usually required if the down payment is lesser than 20%). Escrow plays a role, both in  home purchase and the subsequent monthly mortgage payments that follow. After the buyer and the seller agree on a sale, a neutral third party will receive the signed purchase agreement to be able to act as an escrow agent.

To sum up, there are typically 2 types of escrow accounts in real estate:

Homebuying:

This is one of the most common types of escrow accounts. During a real estate transaction, an earnest money deposit is held in escrow to protect both the buyer and the seller.

Monthly payments

Homeowners can make payments into an escrow account at the same time as their monthly mortgage payment. This helps with larger annual expenses like insurance and property taxes.

3. Software Escrow Account

Software escrow reduces the risk for both the buyer(the licensee) as well as the software developer (the vendor) when negotiating an agreement to license the software. It acts like an insurance because the buyer is assured of the fact that they’ll have all the critical resources to keep their software running even if the software vendor disappears or fails to support their software. The release conditions are agreed upon by the buyer and the software developer. The source code and all the associated material including the inventory of the material will be sent out by the buyer to the escrow agent, who will confirm the receipt of the material and the contents of the inventory with both the buyer and the vendor. The material received is held securely in the escrow vaults and released after the release conditions are met.

4. Freelancer Escrow Account

After the pandemic, there has been a rising trend of freelance or part-time jobs worldwide. But when it comes to payments, this employment sector faces a lot of uncertainties. As a freelancer, you would want guarantees that the employer will pay. Therefore, many employers using freelance jobs and part-time work create escrow accounts in partnership with their freelancers to hold the money due in payments. This means a freelancer gets the money for their work once they have delivered their services.

5. Cash & Document Escrow Account

Cash and document escrow account service is usually available from large banks and financial institutions in extremely high-value transactions. These accounts are formed at the time of company mergers and acquisitions. Banks and financial institutions hold the cash and documents of all transacting parties until the merger gets approved by all stakeholders. After that, the cash and documents are deposited in their destination accounts.

6. Inheritance Tax Escrow Account

This type of account is usually opened by tax authorities when a person dies intestate. A portion of the assets of the deceased person is kept in this account to clear any unpaid taxes and dues. An inheritance tax escrow account also plays a key role for surviving relatives if the departed person had left a will. This account helps all heirs to pay taxes before inheriting the property.

7. Cross-border Trade Escrow Account

An escrow service for cross-border trade is an easy and hassle-free way for exporters and importers to conduct business. It eliminates all legal headaches and reduces the potential risk of fraud, allowing for secure transactions between buyers and sellers. The importer sends the agreed amount to the escrow account. After payment is verified by the escrow service provider, the exporter is asked to ship the goods. Payment is released to the seller based on pre-determined conditions which could be upon shipment, upon delivery or after a fixed number of days post shipment or delivery. 

In the aftermath of the COVID-19 outbreak last year and looming uncertainties in business transactions, escrow accounts are doubly relevant. The transaction can be carried out safely between two businesses without the risk of losing money or merchandise due to fraud. Tazapay Digital Escrow Service provides safe and efficient online escrow services for international trade at a very reasonable price.

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