Proper trust accounting makes trust unnecessary

Geoff Roberts
Geoff Roberts | 6 min. read

Published on September 2, 2008

As a property manager, you handle other people’s money on a regular basis. For example, when you collect a security deposit, you’re handling your tenant’s money; when you collect rent or pay a bill on behalf of a property owner, you’re handling the property owner’s money.

With all this money floating around, it’s critical to know exactly which money belongs to whom. That’s where specialized property management accounting software comes in. But having the right property management software is only half the battle. You also need to know your options for handling other people’s money (and the rules that go along with them).

Trust accounting to the rescue.
Your first option is to keep everyone’s money in a separate bank account. It’s the obvious choice and may be the only one you’ve considered. It’s straight-forward and simple, so what’s the catch? Time. Think about how long it takes to balance your own checkbook. Now multiply that by five, ten, or two hundred! That’s the number of checkbooks you have to balance when you have one bank account for each property owner.

So what’s the alternative? A little bit of trust accounting applied to a single bank account. Trust accounting sounds intimidating, but it really entails nothing more than keeping track of the money you’ve received, held and paid out on behalf of each property owner.

A bank vault full of safe deposit boxes.
Think of trust accounting as a bank vault filled with safe deposit boxes, each designated to a specific property owner. Although everyone’s money is kept in the same vault, each person’s stash is separate. Likewise with trust accounting, even though everyone’s money is held in the same bank account, each owner’s money is tracked and accounted for separately.

Know the rules.
As with many other aspects of property management, the first step to setting up a trust account is checking your state’s specific laws; after all, no one wants to be the next Kenneth Lay. Bear in mind that the account should be set up in the name of your company, not under the property owner’s name. In past cases where such accounts have been set up under a property owner’s name, the IRS has seized funds based on a lien against the property owner. Obviously, you don’t want this to happen to you. Remember, an IRS agent won’t be the one to explain why your tenants’ deposits were seized to pay a tax bill. You will.

Don’t commingle monies.
While you’re allowed to hold money from different property owners in a single trust account, you’re not allowed to commingle their money from an accounting perspective. In other words, you’re not allowed to pay money out on a property owner’s behalf using other people’s money, even if you square things up later.

The rules are even more strict when it comes to your money. It’s not enough to keep your money separate from an accounting perspective. In most cases, you must keep your money in a separate bank account altogether.

How hard can trust accounting actually be?
Trust accounting isn’t difficult, but it is easy to slip up if you’re not careful. For example, suppose you’re holding two different property owners’ funds in a trust account. We’ll call these two owners Sam Shortfall and William Windfall.

Trust Account
Property Owner Owner Balance
Sam Shortfall $600
William Windfall $1000
Trust Account Balance $1600

Now let’s say a washing machine in one of Sam Shortfall’s properties is on the fritz. A pipe bursts and there’s water everywhere. When all is said and done, the bill for all of this is $800. But wai—Sam Shortfall doesn’t have enough money in his trust account to cover the bill. What do you do?

The wrong way: Use someone else’s money.
No worries … there’s enough money in the trust account to cover the washing machine expenses. You’ll pay the bill and withhold $200 ($800 bill – $600 cash-on-hand = $200 “loan”) from Sam next month when his rents come in. Sure, technically you’re using William Windfall’s money, but you’ll square things up next month. No big deal, right? Wrong. For starters, it’s bad accounting. What happens when Sam Shortfall is short again next month? Are you going to continue to rob Peter to pay Paul? If that’s not reason enough, here’s the best reason not to do it: it’s against the law.

Wrong again: Use your money.
Okay, so you can’t use someone else’s money. That makes sense. But what if you use your own money? You’ll just deduct it from Sam’s rents next month. Since it’s your money, you can do what you want, right? Wrong again. Do you really want to be in the loan business? Besides, commingling your own funds is, once again, almost always illegal.

The right way: Ask Sam for more money.
You read that correctly. The right answer here is to ask Sam for more money. As a property manger you may be thinking, “But he hired me to manage his property. He doesn’t want to be bothered with bursting pipes and pesky bills!” Let’s do a quick reality check. Sam may have hired you to manage his property and pay bills on his behalf, but Sam still owns the property. That means Sam—not you—is responsible for coming up with the money and paying the bills.

Use trust accounting.
The bottom line here is that trust accounting works. Fewer bank accounts and fewer signature cards mean less time spent opening new accounts and reconciling each one on a monthly basis. But make it easy for yourself—know the rules and get the right software. Before long, you’ll wonder how you got along doing things any other way.

Read more on Accounting & Reporting
Geoff Roberts

Geoff is a marketer, surfer, musician, and writer. He lives in San Diego, CA.

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