Escrow is a financial arrangement where a third party holds and regulates payment of the funds required for the two parties involved in a transaction. Escrow arrangements make transactions more secure by keeping the payment in a secure account which is only released when all the terms of a given agreement are met.

An escrow is also a contractual arrangement in which a neutral third party/escrow agent receives and disburses money for the primary transacting parties e.g., the buyer and seller. The escrow protects both parties by keeping the payment in a secure escrow account which is only released when all the terms of an agreement are met as overseen by the neutral escrow agent.

What is an Iolta Account

IOLTA or “Interest on Lawyers Trust Accounts “are essentially an attorney’s version of an escrow account. Primarily, these are used for funds that are deposited by Clients into IOLTA accounts for unearned and/or future legal services and costs. Funds are held “in trust” within an IOLTA and are the Client’s funds until earned by the attorney or transferred back to the Client. IOLTA accounts are also used to facilitate the transfer of funds between other parties and Clients.

A lawyer who receives funds that belong to a client must place those funds in a trust account separate from the lawyer’s own money. Client funds are deposited in an IOLTA account when the funds cannot otherwise earn enough income for the client or be more than the cost of securing that income. These funds, together with state and federal appropriations as well as private grants and donations, enable nonprofit legal aid providers to help low-income people with civil legal matters such as landlord/tenant issues, child custody disputes and advocacy for those with disabilities.

Escrow-type Services Provided by The Law Office of David Watson, LLC

Escrow as a Neutral 3rd Party (“Paymaster”)

Paymasters do not have to be attorneys or even licensed in Wisconsin. However, attorneys often serve in the role of a Paymaster because they can use Attorney’s Trust Accounts (IOLTA accounts and used for short term escrow transactions). Further, these accounts are monitored by the Wisconsin State Bar and the Wisconsin Office of Lawyer Regulation which provide an additional measure of security for handling large sums of money.

As a licensed attorney, the attorney Paymaster is subject to large penalties and serious licensing consequences, up and to including disbarment, if any funds are misappropriated. More importantly, the attorney Paymaster has a specific duty to maintain a neutral 3rd party relationship with the parties by not providing legal services for any of the clients in the transaction to avoid a conflict of interest.

As licensed professionals and officers of the court, attorneys are held to higher standards, thereby making them a legitimate and sometimes better alternative to other “escrow agents” and online services that are not structured to escrow larger transactions. Further, additional malpractice and liability protection ensure against fraudulent transactions.

Key elements of The Law Office of David Watson, LLC Paymaster services include but are not limited to:

• The Firm as Paymaster has a limited duty to act as a neutral “transferrer of funds”
• A specific IOLTA account may be established to support the Firm’s necessity to act as a neutral 3rd party
• Neither party in the transaction is formally represented by the Firm as relates to the structure of the transaction, nor the enforcement of the terms of the transaction
• A disclosure is made to both parties confirming the Firm is acting as a neutral and does not “represent” either of the parties
• The Firm must adhere to strict anti-money laundering laws set forth by the Financial Action Task Force (FATF)
• IRS Form W-9 must be completed by all parties in the transaction
• All such transactions must be compliant with federal authorities including the U.S. Treasury Department and the Department of Homeland Security
• A comprehensive and detailed “intake” process is followed whereby the Firm collects information to confirm the parties are authorized to participate in the transaction
• All payments made by check are held a minimum of ten (10) business days to verify funds
• Fees as Paymaster may include a small administrative fee and a tiered gross transaction fee

Example: Two parties working with their own counsel have agreed to a large transaction involving the purchase of 4 million widgets for $8M. The terms of the agreement state that a neutral 3rd party (defined by “escrow”) will be used to facilitate the transfer of funds. In such a case, Watson Law will act as a neutral Paymaster and facilitate the transfer of $8M between the parties as per the terms of the transaction (whereby both parties agree to the release of the funds). 

A typical Paymaster arrangement occurs as follows:

1. Buyer and Seller agree to contractual terms – Either the Buyer or Seller contacts an escrow/paymaster attorney. Both parties agree to the terms of the legally drafted escrow agreement (without counsel by the Paymaster). Buyer is provided the Paymaster’s specific IOLTA banking information. Seller also gives the Paymaster its banking information.
2. Buyer Funds the Paymaster IOLTA Account – The Buyer submits a payment by wire transfer or check to the Paymaster IOLTA account. The attorney verifies the payment, and all payment by checks are held for a minimum of 10 business days. Both the Buyer and Seller are notified that funds have been secured in the Paymaster account.
3. Terms of the Agreement are followed by the Parties – Funds are held by the Paymaster as per the terms of the agreement as the Buyer and Seller verify or inspect as defined by the contract.
4. Buyer and Seller approve the release of funds from the Paymaster – The Buyer and Seller sign an agreement allowing for the release of the specified funds (or portion thereof as per terms of the agreement).
5. Paymaster releases funds – Paymaster releases funds from the Trust Account to the seller as per agreement.

Escrow as Non-Neutral Agent (“Facilitation of Funds”)

Funds are deposited to one of the Firm’s general client IOLTA account (as opposed to a Client-specific account). In such a scenario, the Firm is offering the use of its IOLTA account as a financial tool to facilitate a funds transfer between another party and the Firm’s Client. The Firm has an ethical duty to the client engaged and not any other party. These transactions are usually not considered to be a form of “escrow”.

• Use of the Firm’s IOLTA account specific to a Client’s transaction (as opposed to the Client’s account)
• The Firm can both accept and distribute funds on behalf of the Client as per the Client’s direction
• Funds deposit to the Firm’s general client trust account (IOLTA) and “credited” as the Client’s funds
• Funds held in escrow do not earn interest (technically interest is accrued but is directly deposited with the State Bar by the bank)
• The Firm is not neutral and acts in the best interest of Client
• Funds are transferred/released as per Client directives

Example: A Client sells their business and in consideration of a fully executed Asset Purchase Agreement, the buyer deposits funds into the Firm’s IOLTA account (instead of directly into the Client’s bank account). The funds are then transferred out of the IOLTA per the instructions of the Client.

Example: A Client is buying a business and instead of the Client wiring the seller the funds directly, the Client deposits funds within the Firm’s IOLTA and upon the Client’s authorization, the funds are released by the Firm on behalf of the Client.