Mark Pestronk
Q: From time to time, our agency operates tours for church and synagogue groups, alumni associations and other organizations. In most cases, the participants pay us directly. One group leader recently told me that we are legally required to escrow that group's funds until all the travel suppliers get paid. Is that true? I know that in California some agencies and tour operators must have a trust account for client deposits, but what about the other states? What's the difference between an escrow account and a trust account?
A: With few exceptions, you are not legally required to keep client funds in escrow until you pay suppliers. You are free to spend the money as you wish and when you wish.
While it is prudent to keep enough cash in the bank to pay suppliers, you can put all the money into one bank account, money market account or stock account. You can commingle (mix) it with any other money you have.
I know of three kinds of exceptions to the general rule that no escrow or trust account is needed. The first one is the case where the client organization wants such an account as part of your relationship, and you agree to provide it.
In my experience, group contracts that require such an account are unusual. Sometimes an established association such as an alumni association may even want a joint account requiring both parties' signatures for withdrawals, but such arrangements are not the general rule.
The second exception is for public charters operated under DOT regulations. If you charter from an airline and resell seats to the public, you must put the passengers' money in an escrow account administered by you, the bank and the airline, unless you have a bond equal to the entire cost of the package you are selling.
The third kind of exception is the trust account required under state seller of travel laws. Two states, Hawaii and Washington, require a trust account with no exceptions. California requires a trust account or a bond.
Illinois requires a trust account if you don't have an ARC appointment. Florida and Iowa, which are the only other states with laws applicable to all agencies selling there, do not require a trust or escrow account.
As far as I know, California is the only state that polices both registration and trust-account compliance, so every agency registered under the California law needs to know how to operate the trust account, unless you have a bond.
The California registration instructions state that "escrow accounts are not permitted," which raises the question of the difference between a trust account and an escrow account.
The concepts are similar, and the terms are often used interchangeably in the travel industry.
However, legally, a trust account means that the account owner holds the money of another person (the client) separately for the benefit of the client.
An escrow account is a subset of trust account that adds a third party (an escrow agent or escrow holder) into the mix. If you cannot withdraw money from an account without the consent of that third party, then you have an escrow account.