4.1 Kentucky Trust Account Requirements

Why Trust Accounts Exist

Money a Kentucky licensee receives that belongs to someone else — earnest money, security deposits, rent, escrow balances pending closing — is entrusted funds. Under KRS 324.111 and the escrow rules in the 805 KAR / 201 KAR 11 regulations, those funds must sit in a separate escrow account (also called a trust account) so they can never be reached by the broker's creditors, mixed into operating cash, or lost in a bankruptcy.

Who Controls the Account

This is the single most-tested point: only the principal broker opens, signs on, and is accountable for the escrow account. A sales associate or affiliate broker who personally receives a buyer's check must deliver it to the principal broker for deposit — they may never park it in their own checking account or a desk drawer.

Where and How It Is Titled

The account must be:

• At a federally insured financial institution (FDIC or NCUA);
• Accessible to and examinable by the Kentucky Real Estate Commission (KREC);
• Titled to show its trust character — e.g., "Bluegrass Realty Escrow Account" — never the broker's personal name.

Deposit Timing — The Three-Business-Day Rule

"Promptly" is not vague in Kentucky. Entrusted funds must be deposited no later than the close of the third business day following the broker's receipt of the funds or the latest of the events that makes the deposit due (such as the parties' written acceptance). A buyer's $5,000 earnest-money check handed over on a Friday must be in the escrow account by the close of business the following Wednesday.

Worked example: An affiliate receives a $3,000 deposit Monday at 4 p.m. "Business days" exclude weekends/holidays. Counting Tuesday (1), Wednesday (2), Thursday (3), the deposit must clear into the principal broker's escrow account by Thursday's close — holding it "until closing next month" is a deposit violation even if the money is never touched.

Commingling vs. Conversion — Know the Difference

The exam loves to contrast these two terms.

• Commingling is mixing the broker's own money with client money in one account — even briefly, even with good intentions. It is prohibited because it destroys the audit trail.
• Conversion is using client money for an unauthorized purpose (paying the office rent out of escrow, "borrowing" earnest money). Conversion is far more serious and is treated as theft.

Trap: A modest broker deposit to keep the account open or to absorb bank service charges is the one allowed reason broker money may touch the escrow account. Anything beyond that minimum is commingling.

Handling Disputed Earnest Money

When a deal collapses and buyer and seller both claim the earnest money, the broker is a neutral stakeholder, not a judge. The broker holds the funds until one of these resolves the dispute:

1. Written agreement signed by both parties directing release;
2. A court order;
3. The broker files an interpleader action and deposits the funds with the court; or
4. KREC-recognized procedures permit release.

Releasing the money to whichever party is friendlier — or keeping it — is a disciplinable offense.

Records, Reconciliation, and KREC Audits

The principal broker must keep a complete paper/electronic trail:

Retention and Inspection

Kentucky requires brokerage and escrow records be kept for at least five (5) years. KREC may audit or demand records at any time, including unannounced examinations. The most damaging audit finding is a shortage (the bank balance is less than the sum of client ledgers), which signals conversion and frequently leads to revocation and a claim against the Real Estate Education, Research and Recovery Fund.

Monthly Reconciliation Discipline

A defensible escrow practice means reconciling at least monthly: the broker compares the bank statement balance, the checkbook (running) balance, and the total of all individual client ledger balances. All three must agree. If they do not, the broker must find and correct the difference before the next deposit cycle. Auditors look first at whether reconciliations were performed and dated, because a missing reconciliation often hides a slow-developing shortage.

Common Escrow Mistakes That Trigger Discipline

• Letting an associate hold a deposit "just until the weekend" — a deposit-timing and control violation.
• Disbursing earnest money before the contingency or contract event that authorizes release.
• Picking a side in a disputed deposit instead of holding, getting written agreement, or filing interpleader.
• Failing to keep a per-client ledger, so the broker cannot prove whose money is whose.
• Letting earned commission sit in escrow, which converts a clean trust account into a commingled one.

Mastering these fact patterns — prompt deposit, no commingling, no conversion, neutral handling of disputes, five-year records, and monthly reconciliation — covers the overwhelming majority of escrow questions on the Kentucky exam.