Trust accounting is a popular option for property managers. When done correctly, it can help with audits, offer additional FDIC protection, and even keep the accounts safe from legal judgments made against the property managers. However, there are several rules and regulations you must follow in order to get the protection that trust accounting offers.
Here’s what you need to know about trust accounting for property managers.
What Is Trust Accounting?
A trust is a legal arrangement that allows for certain assets and funds to be set aside, only to be used in pre-determined ways which are laid out in the trust agreement. Then a fiduciary, either an individual or an entity, is in charge of handling all of the trust’s assets in compliance with the trust document’s terms.
Money is placed into a specialized account called a trust account. The trust account is managed by the fiduciary on behalf of its beneficiaries. The laws and regulations for trust accounting can change based on your location, but generally speaking, trust accounting is a detailed record of all the transactions related to a trust.
Why It’s So Complicated
When property managers use trust accounting, they are pledging to keep all of their business finances separate from the finances of their property owners. With multiple trust accounts to manage, along with the business account of the property management company, keeping detailed records is a must when using trust accounting.
Commingling funds is a serious misuse of a trust account. What exactly entails “commingling” depends on the laws in your state, but typically it’s any time the money from the trust accounts gets mixed up with the money from the property manager’s account. Keeping a record of each transaction, including a paper trail, can be difficult, especially when managing several different trust accounts.
But if you can be organized and detailed enough to keep all of the funds separated and your records stay up to date, trust accounting offers several advantages. FDIC protection is undoubtedly one of the biggest pros. Under normal circumstances, the FDIC will insure up to $250,000 should a bank fail. However, that $250,000 includes all business accounts under a single tax ID.
That means that if a property management company were to have everything set up as simple business accounts, they would still only be covered up to $250,000 should the worst occur.
When using trust accounts, the accounts are in the name of the beneficiaries and not the property management company. Each account would be covered up to $250,000, even if they are managed by the same fiduciary (in this case, the property management company).
Most Accounting Software Falls Short
At its core, trust accounting allows property managers to easily see what money belongs to them and what money belongs to others. However, finding accounting software that can adequately integrate trust accounting can be difficult because of how complicated the process is. Many of the most popular accounting software options out there, used by small businesses across all industries, struggle when it comes to trust accounting.
These software options claim that they can handle trust accounting, but the features are often lacking and not intuitive for the average user.
Does this mean that trust accounting is too difficult for small to medium-sized property managers? Will only the companies able to afford expensive accounting departments be able to reap the numerous benefits of trust accounting?
Not at all. There is a software solution available for everybody.
Trust Accounting Made Easy
Property management software like CiiRUS, Hostaway, Hostfully, and Owner Rez are an all-in-one solutions designed specifically for property managers and vacation rental companies. They have many features that include aspects like a reservations manager, an advanced reporting system to track critical insights into your business, and a trust accounting module that actually works.
With software like those mentioned above, it’s easy to manage your trust accounts, intuitively see what money is yours and what money is in the trust accounts, and even automate your end-of-month financial process.
Trust In GCO
Many property managers and others who have entered into the vacation rental market quickly realize just how time-consuming the work actually is. This can be very frustrating for individuals in the vacation rental market specifically, as many believe they can quickly earn a high level of passive income. Too many people learn the hard way that this is not the case.
Truth be told, we did the same exact thing. Luckily, we learned the hard way how to have an efficient and profitable property management company. And now, we’ve started GCO Property Management Consulting so that we can pass that knowledge and expertise on to you.
With GCO’s guidance and continued assistance, you’re ready for anything!