Trust Accounting: What Is It and Why Is It Important for Rental Managers?

Nov 30th, 2023

Are you implementing trust accounting in your everyday services? Large-scale and enterprise rental managers use trust accounting, but smaller ones often do not, much to the detriment of their financial clarity and transparency. After all, it’s easy to skip past trust accounting and keep doing things the same as you always have.

Opening a property management trust account can help your business scale up and stay organized as you grow. In this guide, we will walk you through everything you need to know about understanding and implementing trust accounting in your rental business.

What is Trust Accounting?

Trust accounting is an important business concept that is relatively easy to understand despite its complex sound. Small rental managers often do not utilize this tool, but it can be beneficial for a rental manager of any size to include it as part of your vacation rental business plan.

Let’s take a closer look at exactly what trust accounting is in reference to property management.

Simply put, trust accounting is the process of using a separate account for client payments and security deposits. This account does not mingle with your business operations bank account. In turn, this makes it easier for managers to keep client funds away from their day-to-day accounting processes.

This is ultimately very similar to the concept of an escrow account. In fact, many people use these terms almost interchangeably. The client deposits their funds into the trust account where they are held in escrow until they are ready to be moved into the operating account as income after the guest's stay has occurred and the payment is being dispersed.

The Role of Trust Accounting in Rental Management

Rental managers often deal with significant sums of money on behalf of property owners and tenants. This can include rent, security deposits, and sometimes even maintenance funds. Keeping this money safe is paramount. It can be detrimental to have these sums all mingling with the business funds, as these transactions may not have been completed yet.

In many states, you might be required by local law to deposit these funds into a trust rather than a business account. One account takes care of your overhead operating expenses and another holds the funds from a tenant toward their rental until the rental has been completed.

Trust accounting is a clear way to keep money straight on behalf of property owners. Let’s take a closer look at the benefits of trust accounting.

Benefits of Trust Accounting

Why do many property managers have separate operating and trust accounts? When you set up your operating accounts to include trust accounting, you reap the benefits of doing things the right way.

Here are some of the benefits of implementing trust accounting in your rental management business.

Trust, Transparency, and Credibility

One of the major issues with keeping your business bank account and trust account as one and the same is the lack of clarity on beneficiaries. When it comes to your operating account, you are the one who pays the bills and reaps the rewards. In a trust account, the property owner is the real person who benefits from rent and security deposits.

In other words, you gain more clarity on which funds should be deposited and where they should be deposited.

The result is that you can build more trust with property owners and provide transparency about the funds in each account. This lends credibility which leads to client retention. Because it is less expensive to retain a client than to find a new one, this is a valuable metric.

Financial Accuracy

Another significant benefit of trust accounting is that it lends you a greater degree of financial accuracy and reporting. You can clearly identify monies in your operating account from transactions that have been completed and dispersed versus monies in your trust or escrow account for unfulfilled reservations that will be dispersed in due time.

With your funds separated, you don’t need to worry about co-mingling funds, which can reduce risk to the business as well as improve operational efficiency.

Compliance and Legal Protection

In addition to client retention, trust accounting is also necessary from a compliance perspective. Most states require you to hold funds in a trust account for a given period of time, though it varies from state to state. You may have 48 hours or less to deposit your rental funds into a trust account.

This separation of funds also helps when handling advanced deposit payments. Payments made for future reservations should be kept in escrow until the reservation is complete. In some states, this is legally required.

It’s important to understand that the Merchant of Record is liable for all chargebacks and refunds processed through the account, regardless of whether or not they have already paid the property owner. Holding the funds in escrow ensures the rental manager can easily return the funds if a guest cancels.

Refunds will debit from the merchant’s bank account. Without trust accounting, if too many guests cancel at the same time, like we’ve seen in cases of natural disaster or pandemics like COVID, the merchant may be unable to cover the influx of debits. Holding advanced deposits separate in a trust account reduces the risk for both the merchant and their payment processor.

Best Practices for Trust Accounting

If you’ve decided to open a trust account for property management, you have come to the right place. Trust accounting does not have to be overly complex and can actually make your life easier with these best practices in place.

Make Sure You Have an Actual Trust Account

When you read about “trusts,” you might be thinking of trusts as they relate to your estate planning. However, a property management trust account is entirely different, and it doesn’t require an attorney’s help to set up.

That said, it’s not enough to simply open a bank account titled “trust” or tell your accountant that the bank account serves as a trust. While that method will help you stay organized, the account must be properly established if you want to reap the real legal benefits of having one.

So how do you open a trust account for property management? The specifics will vary based on your financial institution, but it must be set up through your banker.

An official trust set up by your bank may afford you financial and legal protection that a traditional bank account doesn't. Work with your bank to choose options that are best suited for your business.

Understand State Laws

Keep in mind that some states only permit you to have one trust account while others permit two or more. For example, you could use your trust account to separate out operating expenses versus security deposit payments. Consult with an expert on your state’s laws to ensure you are following the letter of the law.

In addition to the time constraints placed on deposits, you should know the legal structure for your trust accounts.

Get Help for Payment Processing

If you’re ready to take your rental management business to the next level and you don’t already have a trust account, you can take the first steps today. We are partnered with several rental software companies that offer rental trust accounting, including Streamline, Escapia, Barefoot, Resort Management System, and others.

Ascent Payment Solutions is here to help you collect and distribute funds for your rental with speed, security, and the highest level of customer service. With more than 20 years in the lodging industry, we understand how your business works and have solutions to fit your specific needs. Contact us today to learn more about how we can help!