Key Takeaways
- Kentucky principal brokers must maintain a trust account (escrow account) at a federally insured financial institution
- All client funds (earnest money, security deposits, rent) must be deposited into the trust account promptly
- Commingling broker funds with client funds is strictly prohibited
- Trust account records must be maintained for at least 5 years in Kentucky
- KREC has authority to audit trust accounts at any time without prior notice
Kentucky Trust Account Requirements
Kentucky principal brokers must maintain trust accounts to hold client funds separate from their operating funds.
Trust Account Basics
What is a Trust Account?
A trust account (also called an escrow account) is a bank account where brokers hold funds belonging to others:
| Fund Type | Examples |
|---|---|
| Earnest money deposits | Buyer's good faith deposit |
| Security deposits | Tenant deposits on rentals |
| Rent collections | Collected on behalf of landlords |
| Other client funds | Closing proceeds pending disbursement |
Where to Open
Trust accounts must be at:
- A federally insured financial institution
- Located in Kentucky or accessible in Kentucky
- Properly titled in the brokerage name
Account Naming
The trust account must be titled to clearly indicate its purpose:
| Required | Example |
|---|---|
| Brokerage name | ABC Realty Trust Account |
| Trust designation | ABC Realty Escrow Account |
| Clear identification | Cannot be personal account |
Deposit Requirements
Timing
| Situation | Deposit Deadline |
|---|---|
| Earnest money | Promptly, as specified in contract |
| Security deposits | Per lease agreement |
| Rent | Per management agreement |
Key Rule: "Promptly" typically means within 3 business days of receipt unless otherwise specified.
Proper Deposits
All client funds must be deposited into the broker's trust account - not:
- Sales associate's personal account
- Broker's operating account
- Any other non-trust account
Critical Rule: Sales associates cannot hold client funds. Only principal brokers maintain trust accounts.
Prohibited Practices
Commingling
Commingling is mixing client funds with broker's personal or business funds. It is strictly prohibited.
| Allowed | NOT Allowed |
|---|---|
| Client funds in trust account | Client funds in operating account |
| Small broker deposit to maintain minimum balance | Large broker funds in trust account |
| Interest earned (per agreement) | Using client funds for business expenses |
Conversion
Conversion is using client funds for unauthorized purposes. It is a serious violation that can result in:
- License revocation
- Criminal charges
- Civil liability
- Payment from Recovery Fund
Record Keeping
Required Records
Brokers must maintain:
| Record | Description |
|---|---|
| Bank statements | Monthly statements from financial institution |
| Deposit receipts | Documentation of each deposit |
| Check records | Documentation of each disbursement |
| Client ledgers | Individual records for each client |
| Transaction records | All transaction documentation |
Retention Period
| Requirement | Duration |
|---|---|
| Trust account records | 5 years minimum in Kentucky |
| Transaction files | 5 years minimum |
Kentucky Specific: The 5-year retention requirement is longer than some other states.
KREC Audits
KREC has authority to:
- Audit trust accounts at any time without prior notice
- Review records during investigations
- Take disciplinary action for violations
Common Audit Findings
| Issue | Consequence |
|---|---|
| Shortage of funds | Serious violation - potential revocation |
| Poor record keeping | Warning to suspension |
| Late deposits | Warning to fine |
| Commingling | Fine to revocation |
How long must Kentucky brokers maintain trust account records?
Who is authorized to maintain a trust account for client funds in Kentucky?