One of the most common violations of the real estate law is improper establishment, handling and maintenance of a trust account. Many of these violations result from a lack of understanding as to the purpose of a trust account and a lack of specific instructions on how to establish and maintain a trust account.
The following information is strictly a suggested guideline of the recommended accounting procedures approved by the South Dakota Real Estate Commission, and is meant to be supplemental to the basic fundamentals of bookkeeping necessary for sound accounting in the business of real estate. The information contained in the guidelines is only intended to provide information and assistance to the South Dakota real estate broker. Because some of these guidelines have been established pursuant to South Dakota real estate license laws and rules, all persons maintaining a trust account are urged to review and examine their own practices to determine if they are in compliance with the intent of the license laws and rules.
A special non-interest bearing trust account must be established in a federally insured financial institution, unless specific agreements provide otherwise. The name of the account must be identified by the words "Trust Account" or "Escrow Account." An example of this would be "Smith Realty Trust Account." The bank account deposit slips, bank statements and trust account checks must be identified by the words "Trust Account." All funds received by a real estate licensee in connection with a specific transaction must be deposited in to said trust account, and such money may not be used except in connection with that specific transaction, as authorized by the principal. Money received must be deposited into this special trust account within the next legal banking day after the acceptance of the contract. The licensee shall inform the South Dakota Real Estate Commission of the name of the financial institution, the name of the account and the account number. Whenever there is a change in the trust account, the Commission must be notified of the change in writing, including but not limited to change of broker, depository, account number or change of business name.
There are occasions when interest bearing trust accounts are permissible. They are not intended for funds being held for a relatively short period of time, and are not to be used in the normal routine of business. Interest bearing trust accounts are permitted only when substantial sums of money are to be deposited which relate to a specific transaction and those funds will be held for a lengthy period of time. When the time comes for the closing, the funds are transferred from the interest bearing trust account to the regular real estate trust account and then disbursed. The broker maintaining the interest bearing trust account cannot benefit from the interest earned on the account.
To establish an interest bearing trust account, all persons having an interest in the funds must agree to the deposit in writing. This written agreement must include instructions regarding the allocation or division of the interest. A copy of the agreement must be maintained in the specific file of the particular transaction to which it pertains; this file must be accessible to the South Dakota Real Estate Commission at any time.
The authority and responsibility for the proper handling of the trust account ultimately rests with the broker. Brokers may delegate their authority regarding the handling and deposit of trust funds, maintenance of trust account records and even the authority to sign checks, but the broker is ultimately responsible regarding the handling of trust funds and trust accounts. The trust account should be closely and diligently supervised by the responsible broker and strict procedures should be followed by all persons associated with the handling of a trust account.
Brokers and their associates are reminded that violations regarding the handling of their trust account may result in civil suits, criminal proceedings and disciplinary action by the South Dakota Real Estate Commission, which could result in possible monetary fine and/or suspension or revocation of their real estate license.
The majority of trust accounts do not incur standard bank service charges. If a bank assesses a service charge or makes a deduction from the account for printed deposit tickets or checks, returned check charges or overdraft charges, the South Dakota Real Estate Commission permits a broker to deposit a sum of his own money to cover such bank charges. An amount not to exceed $100.00 is allowed from the broker's personal funds to cover bank charges. An alternative to this would be to have all bank charges on the trust account automatically deducted from the business operating account.
All earnest money and other trust funds received are to be deposited timely, within the next legal banking day after acceptance of the contract. Deviations or failure to do so is a violation of South Dakota Real Estate License Law and could result in disciplinary action against the licensee.
Trust account funds shall be retained in the trust account until the transaction is either consummated or terminated, at which time full accounting of the funds must be made. If an accepted offer and agreement to purchase does not close, the trust funds cannot be disbursed except pursuant to a written instruction of all parties to the transaction or pursuant to a court order.
The broker must maintain the funds in his trust account until the matter is resolved and a written release to the disposition of funds has been obtained from both parties involved. If this cannot be accomplished, the matter should be taken to Small Claims Court, whereby, the court will decide the disposition of the funds. Small Claims Court will handle amounts up to and not exceeding $12,000.
When a transaction is consummated, the broker is required by law to deliver detailed closing statements to the buyer and to the seller for every real estate transaction handled. In multiple listing transactions, all earnest monies paid shall be held in the listing broker's trust account. A broker remains liable for any corrections that need to be made to the closing statement. It is the responsibility of the broker to provide both the buyer and the seller with a completed closing statement, showing all receipts and disbursements in the transaction. The broker is required to keep true copies of these statements in his file. For added protection, the broker's copies of the closing statement should contain both buyer and seller signatures as proof of delivery.
Brokers need to be extremely cautious and watchful that they do not commingle their personal funds and other non-trust funds into the trust account. Payment of any personal indebtedness is not allowed from the trust account.
In summary, the following items are of extreme importance in handling a trust account:
South Dakota License Law, Rules and Regulations require that each Broker maintain an accounting system to record the receipt, deposit and disbursement of real estate funds. There must be separate books of entry in addition to the checkbook. The following items are necessary for recording the necessary entries:
The broker is required to maintain duplicate deposit slips of all deposits made into the trust account. If the bank keeps the original deposit slip, then you must keep the duplicate of the original and the deposit receipt given to you by the bank. Bank deposit slips must show the date of the deposit, the amount, a description of the money source and where deposited.
Trust account checks should be pre-numbered and all voided checks retained. The checkbook should be balanced at the closing of each transaction, and this total compared to the amount of the remaining open accounts in your ledger book. All checks should state the broker's business name, address and the words "Trust Account."
The ledger book is considered to be the control book of a trust account. The ledger book is a record of receipts and disbursements that affect a single transaction between buyer and seller. Each transaction requires an individual ledger sheet. A ledger sheet must be made showing broker's equity, deposits and disbursements. The individual ledger sheet should contain the following:
Upon completion of a transaction, the closed ledger sheet should be filed in the completed transaction file. A separate file folder should be maintained for each individual transaction. This file should contain the listing contract, agency agreement addendum, seller's property condition disclosure statement, purchase agreement copies of closing statements and any other forms relevant to the transaction and required by law. The closed ledger sheet or a copy should be kept with this file. The closed sale file may also contain any documents or notes which the broker determines to be of importance to that specific transaction.
A trust account must be reconciled at least monthly with the exception of cases where there was absolutely no activity during the month. A copy of this reconciliation should be retained by the broker, along with copies of the bank statements. The account should be balanced or reconciled more frequently if the volume of activity merits it. The total of the ledger sheets with open balances, the trust account checkbook balance and the reconciled bank statement must equal. (A trust account reconciliation form is available in Adobe .pdf format on our Forms page. )
All records must be retained by the broker for a minimum of four years from the final closing of the transaction. These records shall be held at the broker's place of business, and must be made available for examination and audit by the South Dakota Real Estate Commission, or a designated agent, upon request.