4.1 Trust Account Management
Key Takeaways
- Earnest money must be deposited on or before the next two (2) banking days after final acceptance of the offer (876 IAC 8-2-2)
- Each broker company keeps client funds in a designated escrow/trust account; commingling personal or business funds is prohibited (876 IAC 8-1-1)
- Closing statements and transaction records must be retained for at least five (5) years (876 IAC 8-2-3)
- Disputed earnest money is held until parties agree, a court orders disbursement, or the broker uses the 60-day certified-mail release process
- Conversion of trust funds is theft and is grounds for immediate license revocation under IC 25-34.1-6
Trust Account Management in Indiana
Handling other people's money (OPM) is the highest-risk duty an Indiana real estate broker performs. The Indiana Real Estate Commission (the licensing board, abbreviated IREC) treats escrow mistakes as among the most serious violations because a single conversion can wipe out a buyer's down payment. The governing rules are 876 IAC Article 8 and Indiana Code (IC) 25-34.1. On the state portion of the Pearson VUE-administered Indiana broker exam, expect 4-6 questions drawn directly from these sections.
What a Trust Account Holds
A trust account (also called an escrow account) holds funds belonging to others that come into the broker company's possession. The account must be clearly designated as a trust/escrow account and may be interest-bearing or non-interest-bearing.
| Fund Type | Example |
|---|---|
| Earnest money | Buyer's good-faith deposit on a purchase agreement |
| Security deposits | Tenant deposits when the broker manages a rental |
| Rent collections | Monthly rent held before remittance to the owner |
| Closing proceeds | Sale proceeds not yet disbursed to the seller |
| Option fees | Consideration in a lease-option arrangement |
The Two-Banking-Day Deposit Rule
Indiana does not use a vague "promptly" standard. Under 876 IAC 8-2-2, the listing broker must deposit money received in connection with a transaction into the escrow/trust account (or with the party the purchase agreement designates) on or before the next two (2) banking days after final acceptance of the offer. Banking days exclude Saturdays, Sundays, and bank holidays.
| Event | Day Counted |
|---|---|
| Buyer signs offer | Not yet "final acceptance" |
| Seller signs/accepts (final acceptance) | Day 0 |
| Deposit deadline | End of the 2nd banking day after Day 0 |
Worked example: A seller gives final acceptance Friday afternoon. Saturday and Sunday are not banking days, and Monday is a federal holiday. The two banking days are Tuesday and Wednesday, so the broker must deposit by close of business Wednesday. A common exam trap offers "24 hours" or "3 business days" as distractors — the correct standard is two banking days from final acceptance.
Non-Cash and Promissory Earnest Money
If earnest money is a personal check held until acceptance, a promissory note, or other non-cash consideration, the broker must disclose that fact to the seller before the seller accepts, and note it in the earnest money receipt. Concealing that the "deposit" is an unfunded note is misrepresentation.
Who Holds the Money
In Indiana the listing broker typically holds earnest money in the listing company's trust account, but the purchase agreement controls. The parties may instead designate a title company or attorney as escrow agent. Whoever holds it is bound by the same fiduciary standard: the funds belong to the parties, not the broker, and may never be treated as the firm's asset. A salesperson who personally receives a deposit must turn it over to the managing broker without delay — a salesperson cannot maintain a personal escrow account.
Quick Reference: Core Numbers
| Rule | Indiana Standard |
|---|---|
| Deposit deadline | 2 banking days after final acceptance |
| Reconciliation | Monthly |
| Record retention | 5 years |
| Dispute process | Certified mail, 60-day window, then interpleader |
| Commingling/conversion | Prohibited; grounds for revocation |
Prohibited Practices and Disbursement
Commingling vs. Conversion
Commingling is mixing client trust funds with the broker's personal or operating funds — for example, depositing earnest money into the firm's general operating account, or leaving a closed transaction's funds in trust to "float" payroll. Conversion is the more serious act of using trust funds for the broker's own purposes; it is criminal theft under Indiana law and grounds for immediate revocation.
| Permitted | Prohibited |
|---|---|
| Keeping a small broker deposit to cover bank service fees | Mixing personal or operating funds into the trust account |
| One designated, clearly labeled trust account | Running personal and client funds through one account |
| Detailed ledger identifying each beneficiary's balance | "Borrowing" trust funds, even briefly, intending to repay |
When Funds May Be Disbursed
Money must stay in the trust account until disbursement is properly authorized. A broker may disburse only when:
- The transaction closes (consummation) and proceeds go to the entitled party.
- The transaction terminates and both parties agree in writing on who receives the deposit.
- A court of competent jurisdiction orders disbursement.
Disbursing on the broker's own judgment of who "deserves" the money is premature disbursement — a violation even if the broker guesses correctly.
Earnest Money Disputes
When buyer and seller disagree over a deposit, the broker is a neutral stakeholder and may not take sides. Indiana gives the broker a specific safe harbor: under the escrow rules the broker may send certified mail notice and, if a party indicates it will not perform, may initiate a 60-day dispute-resolution process; if the dispute is still unresolved, the broker may file an interpleader action, deposit the funds with the court, and withdraw.
| Step | Broker Action |
|---|---|
| Dispute arises | Hold all funds; document the disagreement in writing |
| Notice | Send certified-mail notice to the parties |
| 60-day window | Allow parties to resolve or instruct in writing |
| Interpleader | Deposit funds with the court, name both parties |
| Court decides | Judge determines rightful owner; broker is discharged |
Records and Reconciliation
Brokers must keep a ledger identifying funds held for each beneficiary, reconcile the trust account against bank statements monthly, and resolve discrepancies immediately. Per 876 IAC 8-2-3, closing statements and related transaction records must be retained for at least five (5) years. IREC can audit a trust account on a complaint, at random, or at renewal, so the records must be current and reconstructable.
A seller gives final acceptance of an offer on Thursday. By what point must the listing broker deposit the buyer's earnest money under 876 IAC 8-2-2?
Two parties dispute who is entitled to an earnest money deposit and refuse to sign a release. What is the broker's correct course of action?