4.1 Arkansas Trust Account Requirements
Key Takeaways
- Only a principal broker maintains the trust (escrow) account; salespersons must promptly turn over all client funds to the broker.
- Client funds must be deposited no later than 3 days after contract execution in an FDIC-insured trust account (AREC Reg. 10.7).
- Trust-account records, including monthly written reconciliations, must be retained for 3 years.
- Commingling is prohibited; a broker may keep only the minimum to open the account plus a reasonable amount for up to 6 months of service charges.
- AREC may audit trust accounts at any time; shortages and commingling are among the most serious violations.
Handling other people's money correctly is one of the most heavily disciplined areas in real estate. Arkansas's rules live in AREC Regulation 10.7, and the specifics (deposit timing, retention, broker's own funds) are exactly what the state portion tests.
Trust Account Basics
A trust account (escrow account) is a bank account where the principal broker holds money belonging to others, separate from the firm's operating funds.
| Fund Type | Examples |
|---|---|
| Earnest money deposits | The buyer's good-faith deposit |
| Security deposits | Tenant deposits on managed rentals |
| Rent collections | Collected for property-owner clients |
| Other client funds | Proceeds pending disbursement |
Account Requirements
- Held at an institution insured by the FDIC (Reg. 10.7(c)).
- A demand (checking) account, properly designated as a trust/escrow account.
- Maintained and controlled by the principal broker.
Critical Rule: A salesperson cannot hold client funds. A salesperson who receives an earnest-money check must promptly deliver it to the principal broker for deposit. Only the broker maintains and signs on the trust account.
Deposit Timing and Proper Handling
| Requirement | Detail (Reg. 10.7(g)) |
|---|---|
| Deposit deadline | No later than 3 days after the contract is executed |
| Weekend/holiday | Extends to the next business day |
| Alternatives | Deliver to an escrow agent, or hold per written buyer/seller agreement |
All client funds must go into the trust account — never the salesperson's personal account, the broker's operating account, or any other non-trust account.
Prohibited Practices
Commingling
Commingling means mixing client funds with the broker's personal or business funds. It is prohibited. Arkansas does not set a flat "$500" allowance; instead, Reg. 10.7(d) permits the broker's own funds in the trust account only when clearly identified and limited to:
- The minimum the bank requires to keep the account open, and
- A reasonable amount to cover up to 6 months of service charges.
| Allowed (clearly identified) | NOT Allowed |
|---|---|
| Minimum to keep account open | Operating funds parked in the trust account |
| Reasonable buffer for ~6 months of bank fees | Using client funds for business expenses |
| Client funds awaiting disbursement | Client funds in a personal/business account |
Common Trap: The old "$500 maximum personal funds" figure is not the Arkansas rule. The correct standard is minimum-to-open + a reasonable amount for ~6 months of service charges, all clearly identified.
Conversion
Conversion is using client funds for an unauthorized purpose. It is among the most serious violations and can lead to revocation, criminal liability, and a Recovery Fund payout that suspends the license until repaid.
Record Keeping and Reconciliation
Brokers must keep complete trust records and perform a monthly written reconciliation that ties the bank statement, the broker's running balance, and the sum of individual client ledgers together.
| Record | Description |
|---|---|
| Bank statements | Monthly institution statements |
| Deposit records | Documentation of each deposit |
| Disbursement records | Each check/withdrawal |
| Client ledgers | A separate ledger per client/transaction |
| Monthly reconciliation | Written, signed monthly tie-out |
Retention Period (3 Years)
| Requirement | Duration |
|---|---|
| Trust-account records and reconciliations | 3 years (Reg. 10.7(b)/(g)) |
Common Trap: Arkansas trust-account record retention is 3 years, not 5. Older guides overstate this — use 3 years.
AREC Audits
AREC may audit a broker's trust account at any time, with or without notice, and during any investigation. The Commission reviews deposits, disbursements, ledgers, and the monthly reconciliations.
| Audit Finding | Typical Consequence |
|---|---|
| Shortage of trust funds | Very serious — potential revocation |
| Commingling | Fine to revocation |
| Late deposits | Warning to fine |
| Missing/disorganized records | Warning to suspension |
| Failure to reconcile monthly | Warning to fine |
Key Point: The fastest way to lose a license in Arkansas is a trust-account shortage or conversion. Treat client money as sacred: deposit on time (within 3 days), reconcile monthly, keep records 3 years, and never commingle beyond the narrow Reg. 10.7(d) allowance.
Disputed Earnest Money
A frequent real-world (and exam) scenario: a deal falls through and the buyer and seller both demand the earnest money. The broker holding the funds in trust is in a difficult spot — releasing to either party without authority risks a claim from the other.
| Option | When Appropriate |
|---|---|
| Release per contract terms | The contract clearly entitles one party (e.g., a met contingency) |
| Release per mutual written agreement | Both parties sign a release directing disbursement |
| Hold pending resolution | Keep funds in trust until the parties agree or a court decides |
| Interpleader | Deposit the disputed funds with a court and let it decide |
Critical Rule: When ownership of trust funds is genuinely disputed, the broker should not unilaterally decide who is right. The safe paths are a mutual written release or interpleader — never simply hand the money to the louder party.
Property Management Trust Funds
Brokers who manage rentals must also run security deposits and collected rents through the trust account, with separate ledgers for each owner and property. Owner draws, repairs, and management fees come out of the account only as authorized by the management agreement. The same Reg. 10.7 principles apply: timely deposit, no commingling, monthly reconciliation, and 3-year retention.
| Property-Management Fund | Trust-Account Treatment |
|---|---|
| Tenant security deposits | Held in trust; returned/applied per lease |
| Collected rent | Held in trust until disbursed to the owner |
| Management fee | Withdrawn only as the agreement authorizes |
Exam Tip: The trust-account rules are not limited to sales. Property-management money is client money subject to the same deposit, recordkeeping, reconciliation, and retention rules — and the same severe penalties for shortages.
Who may maintain the trust account for client funds in Arkansas?
How long must Arkansas brokers retain trust-account records, including monthly reconciliations?
Under AREC Regulation 10.7(d), how much of the broker's OWN money may be in the trust account?
A broker uses earnest money held in trust to pay the office electric bill. What violation is this?