Trust Accounts 101 – Getting trust accounting right

If mathematics was not your forte and you chose a career in property management to avoid crunching the numbers, we can imagine the shock when you learned you would be managing real estate trust accounts. So let’s start at the start.

What is trust accounting?

When a business has to hold onto other people’s money, the law requires the money be kept in a particular type of bank account called a trust account.

There are three closely-related, but unique terms that are key to this area:

Trust account – This is a particular type of business bank account used for holding money that does not belong to your business.

Trust accounting – This is the processes involved in bookkeeping, auditing and reporting so that your trust account remains compliant with the laws and regulations.

Trust accountant – This is an accountant that specialises in overseeing trust accounts. Some property management companies have a trust accountant on as full-time staff. However, more and more, property managers are using trust accounting software to manage this part of their business.

Why do property managers need trust accounts anyway?

For a property management company, holding money for both property owners and tenants is a critical function of the business.

Let’s imagine a worst-case scenario: Say a tenant puts down the first and last months rent as a deposit for a security bond on a unit. With the best of intentions, the property manager puts the money under their mattress for safekeeping. Later, the property manager has a big unexpected bill come through, and they use the tenant’s deposit to cover it. When the lease is up, the property manager has not been able to replace the money, and now they are not able to give the tenant their deposit back.

You can probably guess that this type of situation has arisen in the past and this is the reason why there are laws and regulations to prevent such an unfortunate situation.

Car dealers, attorneys, real estate companies and many other businesses are also required to have trust accounts. If you think about it, the real estate agency acts like a mini bank while holding funds, so it makes sense for the financial regulators to put these laws in place to protect all concerned.

How do property managers open a trust account?

For a property manager, trust accounting begins with a special business bank account. Each state has its own list of authorised deposit-taking institutions (see table below).

Your situation may vary, but most likely, the only person who can open the account will be the owner or a director of your property management business.

If you are going to open a trust account for your business, you must ensure you are meeting legal obligations for your state or territory. States and local governments vary in their regulations. It is best to find out what is required by your local government to make sure you are compliant.

What kind of payments are held in a trust account?

If you are the owner of a real estate business, you are responsible for ensuring the right funds go into the right accounts. All transactions will either be trust money that needs to be deposited into a trust account, or money that is not connected to a trust and therefore belongs in a general business account.

 

Here are the differences between the two types of accounts: 

General Business Account
Trust Account
  1. Payments for real estate agency services that are not required to be deposited into a trust accountThese include property management fees and commissions
  2. Payments from trust accounts that the estate agent is entitled to receive:These payments incorporate general business expenses, disbursements, commissions and property management fees.
  1. Rental bonds or security deposits on:
  • Residential land, buildings and company assets
  • Holiday accommodation that exceeds a 90-day period
  • Industrial, commercial or storage buildings, land and other necessary assets
  1. Deposits on or payments for:
  • Sales of a business
  • Sales of land, buildings, and other accompanying assets (e.g. off the plan sales etc.)
  • Shares in an organisation that entitles the shareholder to occupy land, property and any other relevant assets
  • Options to purchase buildings, land and other accompanying assets
  • Options to purchase shares in an organisation that entitles the shareholder to occupy property, land and other necessary assets
  1. Rent on:
  • Commercial, industrial or residential leased property, land and associated assets
  • Residential accommodation for a term that exceeds 90 days
  1. Fees received ahead of advertising for:
  • Organisations for sale
  • Property/buildings, land and other relevant assets for either lease or sale
  1. Costs:
  • Utilities and outgoings related to property/buildings, land and accompanying assets for either sale or lease
  • E.g. Water, electricity, insurance, council rates etc.

 

Avoid These Common Mistakes:

Keep in mind these common errors as you develop your trust accounting systems and processes. Getting the right processes in place will go far to keep you compliant.

  • Absence of guidelines – controls and processes. If your process documentation is missing key components or is non-existent it is advisable that you get this documentation in order.
  • Absence of assets: Small offices and solo specialists battle to keep up with accurate bookkeeping. They may not have the resources to prepare and maintain their trust bookkeeping routines for end-of-month. These types of businesses are an excellent candidate for scalable trust accounting software which can make their workflow significantly less demanding.
  • Manual frameworks: Recording exchanges physically is the prime reason bookkeeping is botched and can frequently be tracked back to human error.
  • Trust reserves become coexisted: A classic no-no is the blending of put stock in reserves. And, once the assets intermix it is significantly more difficult to track them precisely. If this happens, it can give an appearance that you are up to something dodgy if you get audited.

Trust Accounts Requirements Vary From State to State

To guarantee lawful commitments are met in your trust accounting processes, it is essential to understand that requirements vary from state to state. States typically will post their guidelines online, but again, you are best to seek professional legal advice for your specific situation.

Trust accounts best practice guiding principles:

While these may seem like common sense, we recommend you take the below into consideration to keep your trust accounts operating at optimum efficiency, and to ensure everything runs smoothly:

  1. Be transparent – Note why you’re withdrawing or receipting money. It will save you a lot of time and hassle both now and in the future
  2. Leave a digital paper trail – Report and track every deposit that enters your trust account
  3. Reconciling regularly is key – Your bank account transactions need to match your trust accounting software transactions. This demonstrates that you’re on top of everything, and that nothing has been missed.

Want to know more about Palace’s trust accounting abilities? Contact one of our experts by calling 1300 778 733, or by clicking here.

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