Escrow Basics for Surrogates: Who Should Hold the Money?
Colorado surrogates: It’s very important that your surrogacy compensation be held in escrow. There are only a few exceptions to this rule (and if you think your case is an exception, please discuss that with your lawyer).
The best way to ensure that the money will be there when it’s due to you is to have an escrow provider hold the money. Otherwise, you may find yourself pregnant and the intended parents can claim they don’t have the funds to pay you. Or the intended parents can refuse to pay your compensation because you ate cold deli meat or got your hair colored or whatever it is that they claim you are not allowed to do according to your surrogacy contract. Plus, escrow agents have obligations toward the money itself. Don’t give up this critical protection.
So let’s talk about the types of escrow arrangements that surrogates and intended parents can use:
Specialized Surrogacy Escrow Company
A specialized surrogacy escrow company is one that only provides escrow management (or fund holding) services for surrogacy (and egg donor) arrangements. These escrow companies will typically work with many different agencies, as well as with both independent surrogacy arrangements and uncompensated arrangements between family members/friends. There are several companies that provide this service, such as SEAM, SeedTrust, and Alison McCloskey Escrow Company. When you are considering a specialized surrogacy escrow company, you should do due diligence to make sure they are legitimate and bonded and insured.
A surrogacy escrow company can act as either a funds manager (meaning they rely on your surrogacy contract to disburse the funds) or a funds holder (meaning they rely on instructions, such as from the agency, to disburse the funds). Learn more about the difference between fund management and fund holding here.
Independent Attorney Escrow
The next type of escrow arrangement is when the money is held by an independent, licensed attorney in an escrow account. Independent means that the attorney does not represent either the surrogate or the intended parents for the surrogacy contract process.
The attorney may use an IOLTA / IOLA type account in which money from different clients is in a pooled account, but records are kept for each individual client. Or the attorney may open a new escrow account for each client. Attorneys generally carry liability insurance, and in some states (such as Colorado) you can check on the bar website to see if the attorney has reported whether or not they carry insurance. An additional reassurance is that state bar associations and the courts take attorney misconduct regarding escrow accounts very seriously and attorneys can lose their law licenses for this misconduct. This is a powerful deterrent. The state may also have funds to reimburse clients who have been the victim of attorney theft (fortunately, a relatively rare occurrence).
Party’s Attorney Escrow
Another option for attorney held escrow is to have the surrogacy contract lawyer for either the intended parents or the surrogate hold the funds in an escrow account. This works much the same as with an independent attorney, with one important caution: the attorney has a potential conflict of interest, meaning that they owe obligations to their client as well as to the money. These obligations may diverge if there is a dispute over payout of the money. The attorney cannot simply follow their client’s instructions, because of the obligations they have to the money. But the attorney has a conflict because they are supposed to be advocating on behalf of their clients. The end result is that the lawyer may be forced to withdraw from the case and then the clients may have to find a new attorney as well as transfer the funds to another escrow holder (who will then also want a fee). This is a risk you take when working with an attorney who represents one of the parties to the surrogacy contract. Fortunately, these kinds of disputes rarely crop up in reality.
Surrogacy Agency Managed Escrow
Another type of arrangement is using a surrogacy agency’s own escrow account. FYI: Colorado Surrogacy does notoffer this service.
The problem with this arrangement is that over the years we have seen mismanagement of such funds all too often. While your agency may be completely honest and legitimate (and most are), it can be hard for a surrogate or intended parent to conduct the necessary due diligence to ensure that their money stays safe. There is minimal to zero regulation of surrogacy agencies, so there is no governmental oversight as with licensed attorneys.
All-too-common mismanagement of money can occur in several ways. First, the agency may simply comingle your funds with their own funds, instead of keeping your money in a separate account. This can happen even if the agency has told you that there will be a separate escrow account. Second, the agency may “borrow” from your funds to either meet the needs of another surrogacy match or for their own financial purposes, such as payroll or business debts. The agency might do this with every intention of replacing your money, but don’t count on that actually happening. At some point, robbing Peter to pay Paul will catch up with them. Do you want to take this risk?
However--know that the risks are going to be lower if the agency is owned or operated by a lawyer, simply because that lawyer faces disciplinary proceedings (and possible loss of their law license) if they mismanage the money. So that extra level of protection exists when a licensed lawyer is involved, even if the lawyer is not acting with their lawyer hat on.
General Escrow Company
Another type of arrangement is using a general escrow company, such as one that typically handles real estate closings. We don’t recommend this path because surrogacy is too specialized of a field. You don’t want your case to be the first time that an escrow agent has seen a surrogacy contract. You really need to be working with an escrow provider who understands the nuances of surrogacy.
So these are your options with regards to setting up an escrow account. Ready to get started as a surrogate or intended parent?