An escrow account payout occurs in a variety of business situations. This type of payout constitutes a very specific transaction involving a refined financial process. A number of Americans make escrow account payouts on a regular basis but live unaware of what this means and why it happens. An examination of escrow accounts, payouts and common situations for escrow payouts gives a better portrait of what an escrow account payout is and why it exists.
Escrow constitutes a special type of account, maintained by a financial institution for the purpose of holding funds on behalf of an individual, couple, group or institution. An escrow account differs from a bank account in that it works as a third-party intermediary account rather than as an account to which an individual has direct access. Money deposited into an escrow account cannot be withdrawn as cash from a bank account; rather, it must be paid out. Sometimes individuals or couples use escrow accounts without knowing it; a company such as a bank may receive payments and store them in an escrow account without the knowledge of the payee.
Escrow Account Payouts
An escrow account payout occurs when money held in an escrow account pays out. This means that the money is distributed to an agency, individual, group or a number of individuals. Escrow accounts exist to accrue money for mass payouts such as real estate taxes and property insurance. For example, real estate taxes commonly come due once or twice a year. To save homeowners from making large bulk payments, mortgage companies charge a small monthly fee to cover these payments and hold that fee in an escrow account. When real estate tax comes due, the accrued capital in the escrow account pays out to cover those taxes.
Situation for Escrow Payouts
The most common reason for the use of escrow accounts, particularly for the average American, is real estate. Most homeowners, whether or not they know it, use escrow accounts to pay property taxes and insurance. Escrow accounts figure in a number of other applications. Poker tournaments sometimes use escrow accounts to collect entrance fees and payout winnings, while some agencies providing credit for export services use offshore escrow accounts to store profits of debtors to ensure payment. In the early 2000s, Microsoft used an escrow account payout to distribute a $97-million payoff to former temporary workers of the company. In this instance, Microsoft deposited portions of this payoff amount in an escrow account over several years and made the final payout when the full amount accrued.
Benefits and Drawbacks of Escrow for Payouts
Escrow accounts offer the benefit of security. No party may withdraw money from the account. One party makes payment into the account while another party receives payments form the account. Neither may withdraw money from the account at any time, meaning the money held in the escrow account is completely secure. However, escrow accounts offer little interest. Money deposited in an escrow account simply sits there, while in a bank that money would accrue interest. Those storing money in escrow accounts rather than banks lose money from unearned or low interest rates while waiting for escrow payouts to occur. Furthermore, payees have no control over money stored in an escrow account.