property management webinar series trust accounts instructed by abby lee, associate counsel february...

Property Management Webinar Series

TRUST ACCOUNTSInstructed by

Abby Lee, Associate CounselFebruary 18, 2015

Download the PowerPoint slides now at www.TexasRealEstate.com/for-texas-realtors/property-management

Overview

Trust Accounts, GenerallyAcceptance of Trust MoneyRequirements of the Trust AccountDisbursement of Trust MoneyFrequently Asked Questions

The Texas Real Estate License Act (TRELA), the Texas Real Estate Commission (TREC) Rules, and the National Association of REALTORS® Code of Ethics all contain rules regarding trust money, or money that is held in trust for another. TRELA § 1101.652(b)(9-10, 30-31) TREC Rule 535.146Article 8 of the Code of Ethics

Overview

Overview

Trust Accounts, Generally

At any given time, property managers may have money in their possession that falls into three categories:

1.Property Manager’s Money

2.Owner’s Money

3.Tenant’s Money


In addition to security deposit and rent, oftentimes, property managers will require owners to provide cash to be used for repairs and other issues that may occur during management of property (known as “reserves”).


A trust account is defined as “an account managed by one party for the benefit of another in a banking institution authorized to do business in Texas.”


What do you keep in a trust account? Trust money

“Trust money” includes client’s money, earnest money, rent, unearned fees, security deposits, or any money held on behalf of another person.


Do I have to have a trust account?


Do I have to have a trust account?

If you, as a licensee, hold money that belongs to someone else, then YES.


“Broker” means a person who, in exchange for a commission or other valuable consideration or with the expectation of receiving such, performs for another person one of the following acts:1.Leases or offers to lease real estate; 2.Negotiates or attempts to negotiate a lease; 3.Lists or offers, attempts, or agrees to list real estate for lease; 4.Aids or offers or attempts to aid in locating or obtaining real estate for lease; 5.Procures or assists in procuring a prospect to effect the lease of real estate; or6.Controls the acceptance or deposit of rent from a resident of a single-family residential real property unit.


A person controls the acceptance or deposit of rent from a resident of a single-family residential real property unit and must be licensed if the person has the authority to:

1. Use the rent to pay for services related to management of the property;

2. Determine where to deposit the rent; or3. Sign checks or withdraw money from a

trust account.


Additionally, the TAR Residential Leasing and Property Management Agreement (TAR form 2201) contains the following provisions:

Acceptance of Trust Money

When you accept trust money, what are the rules?


•The broker is responsible for the proper handling of trust money.

•Only a broker may maintain a trust account.

•Any trust money accepted by the broker must be maintained in a trust account (or delivered to an escrow agent authorized in Texas in accordance with the agreement of the principals of the transaction).


•A salesperson shall not maintain a trust account.

•Any trust money received by a salesperson must be immediately delivered to the salesperson’s sponsoring broker.


Any trust money received by the broker must be deposited in a trust account (or delivered to an authorized escrow agent):1)Not later than the close of business of the second working day after the date the broker receives the trust money; OR

Ex. Broker receives trust money on Feb. 18, a Wednesday. The broker must deposit trust money in trust account no later than the close of business Feb. 20, a Friday.

2)A different time period expressly agreed upon in writing by the principals to the transaction.


The broker must not:

1)Commingle trust money with the broker’s personal money or other non-trust money; or

2)Deposit or maintain trust money in a personal account or any kind of business account.


What is commingling?

•Commingling literally means "mixing together".

•Used in a legal context, it is a breach of fiduciary duty when a fiduciary mixes funds that he holds in trust for a client with his own funds, making it difficult to determine which funds belong to the fiduciary and which belong to the client.

Example: Account 1 [ Tenant’s $ + PM $ ] = Commingling


In summary…

•Only a broker may have a trust account and is responsible for proper handling.

•A sales agent must deliver trust money to the broker.

•Any trust money received by the broker must be deposited in a trust account no later than close of business the second working day after the date the broker receives the trust money.

•No commingling.

Overview

Requirements of the Trust Account

So you have a trust account, now…what are the requirements?


• The trust account must be clearly identified as a trust account.

• Make sure your office records reflect this.


The broker may, but is not required to, maintain separate trust accounts for each client or type of trust money maintained by the broker, such as earnest money deposits or security deposits received for the management of rental property.

For example:

•Trust Account 1 (all security deposits) + Trust Account 2 (all rents)

•Trust Account for J. Doe + Trust Account for S. Smith

•Trust Account (all trust money)


Can a trust account be interest-bearing (e.g. a savings account)?

YES!


If trust money held by a broker is deposited in an interest bearing account:

(A) the money must be available for disbursal at the appropriate time; and

(B) unless otherwise provided for by an agreement signed by the party depositing the money with the broker, any interest earned on the money must be distributed to any parties to whom the money is disbursed.


The TAR Residential Leasing and Property Management Agreement (TAR form 2201) paragraph 11 provides that:


•A broker may deposit and maintain a reasonable amount of money in the trust account to cover bank service fees, including fees charged for insufficient funds.

•Detailed records must be kept for any funds deposited under this exception.

•Tip: Think of this as an exception to the commingling rule.


If a broker acquires ownership of trust money held in a trust account, including entitlement to compensation, that money must be removed not later the 30th day after the date the broker acquires ownership.


•The broker must retain a documentary record of each deposit or withdrawal from the trust account.

•A broker must maintain all documentation regarding a trust account for four years from the date the document is received or created by the broker.


A broker may only authorize another license holder to withdraw or transfer money from any trust account but the broker remains responsible and accountable for all trust money received by that broker and all deposits to or disbursements from the trust account.

•A unlicensed assistant, like a bookkeeper, may not withdraw or transfer any trust money from a trust account.


If a broker deposits trust money in the form of a check in a trust account and the check is dishonored by the financial institution on which it was drawn, the broker must immediately notify all parties to the transaction in writing.

Ex. A tenant writes a bad rent check.


In summary…•A broker must clearly identify a trust account as such•A broker may maintain separate trust accounts for each client or type of trust money•A broker may keep interest from interest-bearing trust account only if allowed by written agreement signed by the party depositing the money with the broker•A broker can deposit a reasonable amount of his or her own money in a trust account to cover bank service fees, but this must be detailed carefully.


In summary…continued•If a broker acquires ownership of trust money, the money must be removed not later than the 30th day after such date•Keep trust account records for four years•A broker may only authorize another license holder to withdraw or transfer money from a trust account•If a broker attempts to deposits trust money into a trust account and the check is dishonored, the broker must immediately notify all parties in writing

Overview

Disbursement of Trust Money

What are the requirements when you disburse trust money?


• A broker may only disburse money from the broker's trust account in accordance with the agreement under which the money was received.

• Look to the TAR Residential Leasing and Property Management Agreement (TAR form 2201), paragraph 4 for these instructions:


If any or all of the parties to a real estate transaction make a written demand for trust money, the broker must pay the trust money to the party or parties entitled to the money within not later than the 30th day after the date the demand is made.


• The broker must immediately notify all parties in writing of any disbursement of trust money.

• Paragraph 4 of the TAR Residential Leasing and Property Management Agreement (TAR form 2201), already provides for this:


• If the broker cannot reasonably determine to which party or parties the trust money should be paid, the broker may pay the trust money into the registry of a court and interplead the parties.

• To interplead means to file a suit so that two other parties must determine a matter of claim or right to property held by a third party

Overview

Frequently Asked Questions

I will be holding the security deposit for an owner whose property I am managing. In what type of account should these security deposits be placed?


Security deposits are considered trust money and should be deposited in a trust account where other funds from the managed property or properties are kept. The security deposits can also be deposited in an account separate from other trust money, but this is not a requirement.


I have a salesperson in my office who wants to begin a full-service property-management practice. Can the salesperson have his own trust account to collect and disburse security deposits, rents, and other funds?


No. TREC rules make it clear that a salesperson may not have his own trust account. However, the broker may authorize another license holder to withdraw or transfer money from any trust account. The broker remains responsible and accountable for all trust money received by that broker and all deposits to or disbursements from the trust account.


If a real estate broker has an trust account, can the broker keep any interest that is earned?


Only if the broker depositing the money has signed an agreement authorizing him or her to keep the interest. See the TAR Residential Leasing and Property Management Agreement for this authorization.


Does a trust account have to have a special name?


Yes. If a broker maintains a trust account, it must be identified as such.


Am I required to keep trust account records for a specific period of time?


Yes. A broker must maintain all documentation regarding a trust account for four years from the date the document is received or created by the broker.

In Case You Missed It

• Maintenance of at least one trust account as a property manager is unavoidable, if using the TAR Residential Leasing and Property Management Agreement.

• Commingling of broker money with trust money is strictly forbidden

• Brokers are ultimately responsible for trust money and trust accounts

• Stay up to date and informed about current statute and rules to maintain a compliant operation

Conclusion

• Thanks for your participation in our webinar!

• Future Webinar Dates: • May 20 – Legislative Update• August 19 – TBD• October 21 – TBD• December 16 – TBD

• Questions? Contact the Legal Hotline 512-480-8200

property management webinar series trust accounts instructed by abby lee, associate counsel february...

Documents

trust moneytrust money

generallya trust account

acceptance of trust

proper handling of trust

earnest money

clients money

management of property

deposit of rent