Sequestered Account: Meaning, Pros and Cons, Example

What Is a Sequestered Account?

A sequestered account is a deposit account that is seized through legal action or court order. Funds cannot be removed from a sequestered account without the approval of the seizing party. Sequestered accounts are usually separated from other accounts and kept in a separate file.

The term sequestered account is sometimes also used to refer to keeping escrowed funds safe and secure in a segmented custodial account.

Understanding Sequestered Accounts

Virtually any type of account can be sequestered, including bank and brokerage accounts. Individual Retirement Accounts (IRAs) and qualified plans are more difficult to sequester as they are protected by federal law from most types of creditors. Usually, only the Internal Revenue Service (IRS) has the authority to sequester these accounts.

If a sequester is approved, a notice of seizure provides written notice from the IRS to inform either an individual taxpayer or business that the government has seized its property. In a sequestered account, the account holder won't have access to the account balance without a court's approval.

Sequestered accounts may not always be permanently sequestered. However, they generally require specific actions from the account holder before restrictions can be lifted. For instance, a sequester might end when payment is made in full to clear an outstanding debt. In some cases, the creditor may be able to settle the debt for a lower amount.

In cases of suspicious activity, a bank generally lifts a sequester order after an investigation is complete. Suppose illegal activity is detected or the account holder is found to be complicit in any fraud through the account. Then, the account may be permanently closed, and any remaining funds may be seized.

Sequestered Accounts vs. Escrow Accounts

Sequestered accounts cannot be accessed by their owner because of legal actions taken against them, while escrow accounts cannot be accessed without the consent of multiple parties to an agreement. The financial term "in escrow" refers to a temporary hold on a sum of money. This money has been transferred to a third party, usually on behalf of a buyer and seller.

The funds in a real estate transaction, for instance, can be held in escrow, even on the date of the sale. These funds won't be released until all parties—the buyer, seller, and the mortgage company—agree that all of the escrow agreement conditions have been satisfied. The intention of keeping the funds in escrow is to assure all parties that the mutual responsibilities outlined in the escrow agreement will be fulfilled.

Advantages and Disadvantages of Sequestered Accounts

Sequestering accounts can help prevent crimes, but it can also deprive people of their assets without a fair trial. In some cases, such as when accounts themselves are used as part of a crime, sequestering the account is the easiest way to prevent additional crimes from taking place.

On the other hand, taking away the use of assets from people before they are put on trial undermines the principle of innocent until proven guilty. In the worst cases, sequestering the account can prevent defendants from using their funds to hire attorneys to prove their innocence and regain access to the account.

Fortunately, courts can grant access to sequestered account funds for necessary expenses, such as paying rent and legal bills. Sequestering funds in this way still prevents guilty defendants from converting the money to a difficult-to-trace cryptocurrency before fleeing the country.

Example of a Sequestered Account

Suppose an individual or corporation is accused of using a bank account to launder money for an illegal drug cartel. A court could order that the account be sequestered until a hearing took place.

Sequestering an account potentially used for unlawful activities like this would serve several purposes. Firstly, it would stop the alleged criminal activity, such as money laundering, from continuing. Secondly, the defendants cannot remove any ill-gotten gains from a sequestered account. Finally, the sequestering of the account gives an innocent defendant an incentive to come forward to unlock the account.