What Is Trust Account in Real Estate?

Every trust account question, answered

Every question above with its correct answer and the reasoning behind it. Read the explanations for the ones you answered correctly too. A lucky guess and knowing the rule look identical on a score report. These are sample questions from our larger bank.

1. 1. A judgment creditor of a brokerage tries to garnish the firm’s trust account to collect a debt the brokerage owes. The creditor will most likely:

   • AFail, because the funds belong to the clients rather than to the brokeragecorrect
   • BSucceed as to any deposit held longer than 90 days
   • CFail only if the broker first moves the funds elsewhere
   • DSucceed, because the account is in the brokerage’s name

   Why: A broker holds trust money as a custodian and never as an owner, so it is not an asset of the brokerage and is beyond the reach of the brokerage’s own creditors. That is the practical reason segregation is required: mixing client money with firm money destroys the very protection that keeps clients whole.

   Practice of real estate

2. 2. A broker deposits a $12,000 earnest money check into her personal operating account, intending to move it to the trust account the following week. She has violated the duty of:

   • ADisclosure
   • BLoyalty
   • CAccountingcorrect
   • DConfidentiality

   Why: Handling other people's money (prompt deposit, accurate records, and no mixing with the broker's own funds) is the duty of accounting, and depositing it personally is commingling. Intent to move it later is not a defense.

   Agency

3. 3. Money that a broker holds on behalf of others in a trust account is best described as:

   • Afunds owned by the brokerage that must be reported as income the moment they are received
   • Bfunds belonging to the clients and customers for whom the broker holds themcorrect
   • Cfunds owned jointly by the broker and the principal until the transaction closes
   • Dfunds owned by the state until the transaction closes or is terminated

   Why: Trust money is held as a fiduciary, so it remains funds belonging to the clients and customers for whom the broker holds them. Joint ownership with the principal is wrong because the broker never acquires an ownership interest, only custodial responsibility and a duty to account.

   Practice of real estate

4. 4. A buyer hands the listing broker a $6,000 earnest money check when the offer is written. What governs how quickly that check must reach the trust account?

   • AThe brokerage policy manual, which may set whatever deadline the firm prefers
   • BThe lender, which schedules the deposit along with the appraisal order
   • CState license law, which sets a short deadline measured in banking dayscorrect
   • DA uniform federal rule requiring deposit within three business days of receipt

   Why: Deposit timing comes from state license law, which sets a short deadline measured in banking days, commonly running from acceptance. There is no uniform federal deposit rule for earnest money, so the three-business-day answer describes a requirement that does not exist.

   Practice of real estate

5. 5. Which set of records must a broker normally maintain for a trust account?

   • AA single running total, because individual amounts already appear on the statement
   • BA chronological journal of receipts and disbursements plus a ledger for each beneficiarycorrect
   • COnly the monthly bank statements supplied by the depository, since the bank is the official record of every entry
   • DOnly the canceled checks covering disbursements above one thousand dollars

   Why: Trust recordkeeping requires a chronological journal of receipts and disbursements plus a ledger for each beneficiary, so any single party balance can be proved. Relying on bank statements alone fails because the statement shows the pooled balance and never shows who owns which dollars.

   Practice of real estate

6. 6. In a monthly three-way reconciliation of a trust account, which figures must agree?

   • ABank balance, the operating account balance, and gross commission income reported for the month
   • BDeposits in transit, outstanding checks, and the small broker balance kept for service charges
   • CBank balance, journal balance, and the total of the individual ledger balancescorrect
   • DEarnest money received, commission earned, and the amount actually disbursed at closing

   Why: A three-way reconciliation proves that bank balance, journal balance, and the total of the individual ledger balances all agree. The operating account and commission income belong to the brokerage and have no place in a trust reconciliation, so mixing them in defeats the purpose of the exercise.

   Practice of real estate

7. 7. Interest actually earned on a client deposit held in an interest-bearing trust account generally:

   • Amust be divided evenly between the buyer and the seller at the closing table
   • Bmust be paid to the listing brokerage and the cooperating brokerage in equal shares
   • Cbelongs to the party entitled to the principal, or is handled as state law directscorrect
   • Dbelongs to the broker as compensation for administering the account each month

   Why: Interest follows the money, so it belongs to the party entitled to the principal, or is handled as state law directs, sometimes into a state housing program. A broker keeping the interest as an administration fee is taking a benefit from client funds, which is exactly what trust rules forbid.

   Practice of real estate

8. 8. Who is ultimately accountable for every disbursement made from a brokerage trust account?

   • Athe broker, even where state law lets other authorized signers write checkscorrect
   • Bthe title company or settlement agent that closes the transaction
   • Cthe bookkeeper who physically prepares and mails the checks each week
   • Dthe client whose funds happen to be on deposit at the time of the disbursement

   Why: Accountability rests with the broker, even where state law lets other authorized signers write checks. Delegating signing authority to a bookkeeper spreads the work but never the liability, so a clerical error by staff is still charged against the broker's license.

   Practice of real estate