Unit 1.4 - Trust Account Rules (Quiz from LTP) Flashcards
A sales transaction has been under contract for several months but unfortunately the buyer has chosen to breach the contract and not close on the property. The contract calls for the Earnest Money Deposit to be forefeited to the seller in such instances. The Earnest Money is being held in Trust by the listing firm, ABC Real Estate. What should the listing firm do?
Choose only ONE best answer.
A
Hold the Earnest Money in trust until both buyer and seller agree on how it should be disbursed
B
Release the Earnest Money to the seller per the terms of the contract
C
Refund the Earnest Money to the buyer since they did not close on the property
D
Contact the North Carolina Real Estate Commission for guidance
This answer is incorrect. The correct answer is ‘A’
Holding money “in trust” means that the money should be safeguarded because it belongs to both parties in the transaction equally. No matter what a contract might say about disbursing money, real estate firms/brokers/agents/offices who are holding money in trust must have the written permission of BOTH parties in a transaction before releasing money. In this case, ABC Realty may represent the seller, but when holding money, they are the guard. The firm must wait for written permission from both.
A
Hold the Earnest Money in trust until both buyer and seller agree on how it should be disbursed
Holding money “in trust” means that the money should be safeguarded because it belongs to both parties in the transaction equally. No matter what a contract might say about disbursing money, real estate firms/brokers/agents/offices who are holding money in trust must have the written permission of BOTH parties in a transaction before releasing money. In this case, ABC Realty may represent the seller, but when holding money, they are the guard. The firm must wait for written permission from both.
Which of the following statements is NOT accurate regarding trust account rules in North Carolina?
Choose only ONE best answer.
A
Any brokerage trust account must be held in a federally insured banking institution
B
Any banking institution holding a trust account for a licensed real estate broker must agree to make the records of the account available on demand from NCREC
C
No money other than client money may be kept in a NC trust account
D
All checks, deposit slips, account ledgers, etc must clearly state that the account is a trust or escrow account
C
No money other than client money may be kept in a NC trust account
All of these statements are true with the exception of the statement about what money can be held in a trust account. Generally speaking, only money being safeguarded for clients or customers may be held in the account, however, NCREC rules allow the Broker in Charge to keep up to $100 of personal/firm money so that any banking fees would not be deducted from client/customer funds.
What is the best description of an eligible financial institution for holding a trust account in North Carolina?
Choose only ONE best answer.
A
The institution can be any deposit institution that has a physical branch location in North Carolina
B
The institution should be a bank that does business in the State of North Carolina (even if only electronically)
C
The bank must offer specialized accounts capable of handling trust money
D
The institution must be licensed to do business in all 50 states
B
The institution should be a bank that does business in the State of North Carolina (even if only electronically)
A trust account must be held in a bank (no savings and loan or credit unions) and the bank must be doing business in North Carolina. There is no requirement of a physical branch location in the state. The bank must also be FDIC insured for deposits.
Which of the following statements is accurate of trust accounts in North Carolina?
Choose only ONE best answer.
A
A trust account in North Carolina may not contain interest
B
A trust account that earns interest in North Carolina must disburse the interest to the clients whose money is being held in the account
C
The firm must have a separate trust account for each client for whom it holds money
D
A trust account in North Carolina may be interest bearing so long as the clients are made aware and approve
D
A trust account in North Carolina may be interest bearing so long as the clients are made aware and approve
North Carolina real estate trust accounts may be interest bearing so long as the clients are aware. Any interest earned on the account would belong to the broker/firm who is managing the account, not the clients. The interest would need to be removed monthly and transferred to the normal operating account of the firm/broker. A firm/broker can decide if they want to only use one trust account or several. There is no requirement that the firm/broker have more than one account unless the broker/firm is managing more than one Homeowner’s Association.
Which of the following would be an example of commingling?
Choose only ONE best answer.
A
A licensed real estate broker in North Carolina keeps security deposits from a property they personally own in the same trust account with the security deposits they are holding for landlord clients
B
An audit of a trust account reveals a shortage of $425
C
Placing deposits from sales transactions and rentals into the same trust account
D
A real estate broker does not have access to a trust account
A
A licensed real estate broker in North Carolina keeps security deposits from a property they personally own in the same trust account with the security deposits they are holding for landlord clients
Commingling happens when funds belonging personally to the broker or to the firm are placed into contact with the funds that are being safeguarded for clients or customers. If a broker personally owns rental property, they could not place the security deposits from their own property in a trust account with deposits being held for clients. This would require a separate trust account for the broker’s personal properties. Real estate brokers in North Carolina can keep multiple types of money for multiple clients in the same trust account. Brokers are not required to have a trust account at all if they do not handle trust money. Finally, having a shortage in a trust account would be called “conversion” not commingling.
A tenant security deposit is received by a broker property manager on Tuesday July 12 and accompanies a lease application. The tenant is accepted and the lease signed on Friday July 15. Based on this information, when is the last possible day that the tenant security deposit can be placed into the trust account of the property manager?
Choose only ONE best answer.
A Monday July 18 B Wednesday July 20 C Friday July 15 D Tuesday July 19
B
Wednesday July 20
Funds that are to be held in trust must be deposited no later than 3 banking days after the funds are received AND after the contract that the funds are related to has been accepted. In this case, the clock does not begin to tick on the 3 banking days until the lease has been accepted on Friday July 15. Banking days do not include Saturday and Sunday so day #1 would be Monday July 18 with Wednesday July 20 being banking day #3
Which statement is most accurate regarding the handling of funds by a licensed real estate broker in North Carolina?
Choose only ONE best answer.
A
The proper handling of real estate commission payments is to place them into trust
B
All funds handled by licensed real estate brokers must be placed into trust without exception
C
There are only two exceptions where money may be handled without placing it into trust: option/due diligence fees and earnest money deposits made payable to an outside escrow agent
D
All licensed brokers must have access to a trust account for use in their business
C
There are only two exceptions where money may be handled without placing it into trust: option/due diligence fees and earnest money deposits made payable to an outside escrow agent
In general, all funds that a broker in North Carolina touches should be deposited into the trust fund of that broker/firm. However, two exceptions are made for option/due diligence fees and for earnest money deposits that will be held by an outside escrow agent or closing attorney. In those exceptions, the broker licensee is allowed to handle the funds as a delivery person or courier in order to get them to wherever the buyer demands. If a broker is not going to handle funds at all or is only going to handle funds that fit these two exceptions, the broker will not need to have access to a trust account.
Susan is a licensed broker in North Carolina who is handling her newest listing in Cary. She has presented the seller with an offer that calls for the delivery of an option fee to the seller immediately upon acceptance of the sales contract. The offer is accepted and the buyer has given susan the $10,000 option fee made payable to the seller. Before Susan can turn the payment over to the seller, the buyer calls and demands return of the money in spite of the contract calling for its payment. What is the appropriate action for Susan to take?
Choose only ONE best answer.
A
Susan should return the option fee to the buyer immediately.
B
Susan should council the buyer that they would be in breach of contract
C
Susan should continue to deliver the option fee to her seller client as specified in the contract
D
Susan should place the option fee into her firm’s trust account
A
Susan should return the option fee to the buyer immediately.
An option fee is one of the two exceptions to the trust account rule. As such, an option fee would NOT be considered trust funds and should not be handled as trust funds. Option fees can be handled for delivery purposes, but the instructions of the buyer are the only ones that matter when a broker is functioning as a delivery person/courier. If these were trust funds, they would get deposited into the trust account and then the broker would need to wait for the permission of both parties to release the money. Make sure you understand this rule!
