Trust Funds, 2nd Edition
QUIZ
November 23, 2011
This is an optional pen-and-paper quiz (unlike the final
which is automatically graded online). We recommend
you print this document, take the quiz by marking your
answers with a pen, and then read the explanations for
the answers following the quiz.
The questions on this quiz are not representative of the
questions on the final. Most quiz questions are true/false
while 90% of the questions on the final are multiple
choice. The quiz questions tend to be longer and more
difficult than questions on the final.
1.
In addition to the four apartment buildings
James manages for his clients, James
manages his own apartment building. James
should place all security deposits for all the
apartment buildings he manages into his
trust fund. T F
The objective of the quiz is educational while the objective
of the final is to measure your understanding of the
course material.
While the DRE prohibits us from giving you the answers
to the final, we give you the answers to the quiz with
explanations supported by citations from the course’s
textbook.
In all questions referencing James, James is a licensed
real estate broker who specializes in managing apartment
buildings for his clients. (The same James Adams cited
in the course textbook.)
6.
James may move his trust fund from a bank
in California to a bank in Nevada. T F
7.
James may authorize his unlicensed office
manager to make withdrawals from his trust
fund account providing James has insured
her trustworthiness with a sufficiently large
fidelity bond. T F
2.
Trust funds may be “frozen” pending litigation
against the broker. T F
8.
3.
On Friday, James collects $7K in cash for
rents owed to his investor, Steve, and puts
the cash into his golf bag. On the following
Tuesday he meets Steve for a round of golf
and hands over the cash to Steve. James is
in violation of the Real Estate Law. T F
A broker may appropriate the interest earned
from his trust fund but only with the written
approval the fund’s beneficiaries. T F
9.
A broker may draw an advance from his trust
fund but only if the fund has a single
beneficiary who gives his written
authorization to do so. T F
A deposit check may be held uncashed after
the seller accepts the buyer’s offer but only
with the seller’s written approval. T F
10.
If James currently holds in his trust fund
monies owed to five beneficiaries; four with
liabilities of $1,000 each; and one with a
negative trust liability of $1,000; then James’
total trust fund liability is $3,000. T F
11.
This form (see below) is used to journalize
disbursements from and deposits to the trust
account. T F
12.
George is an investor and James’ client. He
gives James a $2,000 check payable to
Armando’s Painting Service with instructions
to give it to Armando. James complies but
does not record this check on his Record of
Undeposited Receipts. James is in violation
of the Commissioner’s trust fund record
keeping regulations. T F
4.
5.
James is Sam’s agent. James places into
his trust fund an earnest money deposit from
Bob for the purchase of Sam’s home. Sam
accepts Bob’s offer. Later Bob and Sam
phone James and tell James that they have
agreed to cancel the deal. Sam tells James
to refund Bob’s earnest money. James may
refund Bob’s deposit. T F
Quiz for the Trust Funds, 2nd Edition
Page 1
13.
Unexplained trust account overages may be
used to offset a shortage for one or more
beneficiaries. T F
14.
Brokers must retain canceled checks for at
least three years for any transaction for
which a real estate license is required.
T F
15.
A DRE auditor who finds that a broker has
converted trust funds is empowered by the
Commissioner to seize that broker’s trust
fund and, if necessary, file bankruptcy on the
broker’s behalf. T F
16.
The following two lines are from a Separate
Beneficiary Record for the Whites; a couple
that submitted a purchase offer to James. ¶
A plausible explanation for these two entries
is that James deposited the White’s $2,000
check into the trust fund but it was returned
from the title company on the 19th after the
deal fell out of escrow. T F
Quiz for the Trust Funds, 2nd Edition
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ANSWERS
We defend each answer with an explanation based on citations from the book. Often we quote more
content than necessary to justify our answers. We do this to put our answers into context and to make the
quizzes a richer learning experience. Citations from the book appear on a yellow background in TimesRoman.
Paragraphs labeled as Notes contain supplemental information we think useful but which is not part of the
course and is therefore not the basis for any question on the course’s final. Paragraphs labeled as
Comments represent the author’s comments which you may disregard.
1.
2.1: Trust Funds and Non-Trust Funds
In addition to the four apartment buildings James manages for his clients, James manages his own
apartment building. James should place all security deposits for all the apartment buildings he manages
into his trust fund.
False James’ trust fund is for “money and other things of value” owed to his clients. The security deposits he
collects from the tenants living in his apartment building are funds which James may refund to his tenants
but his tenants are not his clients. Furthermore, trust funds are for monies collected on behalf of others in
the performance of any acts for which a real estate license is required. Since James does not require a license to
manage his own apartment building, the security deposits he collects on behalf of his own tenants are not
trust funds.
Citation #1: Trust funds are money or other things of value that are received by a broker or salesperson on behalf of
a principal or any other person and which are held for the benefit of others in the performance of any acts for which a
real estate license is required.
Citation #2: (§3.4) A common example of commingling is depositing rents and security deposits on broker owned
properties into the trust account. As these funds relate to the broker’s properties, they are not trust funds and,
therefore, may not be deposited into the trust fund bank account.
2.
2.2: Why a Trust Account
Trust funds may be “frozen” pending litigation against the broker.
False Trust funds held in a true trust fund account cannot be ‘frozen’ pending litigation against the broker or during
probate.
3.
2.3: Trust Fund Handling Requirements
On Friday, James collects $7K in cash for rents owed to his investor, Steve, and puts the cash into his golf
bag. On the following Tuesday he meets Steve for a round of golf and hands over the cash to Steve.
James is in violation of the Real Estate Law.
False The law requires trust funds to be deposited into the trust or handed over to their owner no later
than three business days following their receipt. Since James received the rents on Friday, if one counts
Friday as the first business day, then Monday was the second business day, and Tuesday was the third
business day at which time he complied with the law and handed the trust funds over to Steve.
Citations: According to BPC §10145, trust funds received must be placed into the hands of the owner(s) of the
funds, into a neutral escrow depository, or into a trust account maintained pursuant to DRE Reg. 2832 not later than
three business days following receipt of the funds by the broker or by the broker’s salesperson.
Note: It’s not clear to us if Friday would count as a business day and we can nowhere find clarification in
the California Codes. If business day means a full day from 9 to 5, then James would not have been in
violation of BPC §10145 if he had handed the funds over to Steve by 4:59 on Wednesday.
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4.
2.3: Trust Fund Handling Requirements
A deposit check may be held uncashed after the seller accepts the buyer’s offer but only with the seller’s
written approval.
True If the offer is later accepted, the broker may continue to hold the check undeposited only if the broker receives
written authorization from the offeree [the seller] to do so.
5.
2.4: Identifying Owners of Trust Funds
James is Sam’s agent. James places into his trust fund an earnest money deposit from Bob for the
purchase of Sam’s home. Sam accepts Bob’s offer. Later Bob and Sam phone James and tell James that
they have agreed to cancel the deal. Sam tells James to refund Bob’s earnest money. James may refund
Bob’s deposit.
False After acceptance of the offer, James must have Sam’s written permission to refund Bob’s deposit.
Citation: After acceptance of the offer… all or part of an offeror’s [Bob] purchase money deposit in a real estate
sales transaction shall not be refunded by an agent or subagent of the seller [James] without the express written
permission of the offeree to make the refund.
6.
3.1: General Requirements
James may move his trust fund from a bank in California to a bank in Nevada.
False The law mandates that the trust fund must be in a “recognized depository in California” with one
exception: a trust fund which collects mortgage payments on behalf of a single client.
Citation: BPC §10145 and DRE Reg. 2832 requires that a trust account meet the following criteria: (1) designated
as a trust account in the name of the broker as trustee; (2) maintained with a bank or recognized depository located in
California; and (3) not an interest-bearing account for which prior written notice can, by law or regulation, be
required by the financial institution as a condition to withdrawal. ¶ A broker may have an out-of-state trust account if
the account is insured by the Federal Deposit Insurance Corporation (FDIC) and is used to service first loans for the
types of note owners/investors specified in BPC §10145(a)(2).
7.
3.2: Trust Account Withdrawals
James may authorize his unlicensed office manager to make withdrawals from his trust fund account
providing James has insured her trustworthiness with a sufficiently large fidelity bond.
True The fidelity bond must provide for an insurance benefit equal to or in excess of the maximum amount
of trust funds to which James’ office manager has access.
Citation: According to DRE Reg. 2834, withdrawals from the trust account may be made only upon the signature of
one or more of the following: (1) the broker in whose name the account is maintained; (2) the designated brokerofficer if the account is in the name of a corporate broker; (3) if specifically authorized in writing by the broker, a
salesperson licensed to the broker; or (4) if specifically authorized in writing by the broker who is a signatory of the
trust account, an unlicensed employee of the broker covered by a fidelity bond at least equal to the maximum amount
of trust funds to which the employee has access at any time.
Note: A fidelity bond is a form of insurance protection that covers policyholders for losses should they
incur as a result of fraudulent acts by specified individuals.
8.
3.3: Interest Bearing Accounts
A broker may appropriate the interest earned from his trust fund but only with the written approval the
fund’s beneficiaries.
False in two ways:
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First, the law explicitly prohibits the broker from appropriating any portion of the interest even if his
beneficiary approves: No interest earned on funds in the account shall inure directly or indirectly to the
benefit of the broker … even if the fund’s owners would permit such an arrangement.
Second, the question uses the term “beneficiaries” (plural) but one of the six conditions for
establishing an interest bearing account is that it must be for a single beneficiary: The account is in
the name of the broker as trustee for a specified beneficiary or specified principal of a transaction or series of
transactions.
9.
3.4: Commingling Prohibited
A broker may draw an advance from his trust fund but only if the fund has a single beneficiary who gives
his written authorization to do so.
False A broker may never take an advance from his trust fund. The broker may pay himself from his trust
fund for earned income (with adequate documentation) but he can not take a draw under any
circumstance.
Citation: … under no circumstances may the broker pay personal obligations from the trust fund bank account even
if such payments are a draw against commissions or other income. The broker must issue a trust account check to
himself/herself for the total amount of the income earned, adequately documenting such payment, and then pay
personal obligations from the proceeds of that check.
10.
3.5: Trust Fund Liability
If James currently holds in his trust fund monies owed to five beneficiaries; four with liabilities of $1,000
each; and one with a negative trust liability of $1,000; then James’ total trust fund liability is $3,000.
False The correct answer is $4,000.
Citation: The aggregate trust fund liability at any one time for a trust account with multiple beneficiaries is equal to
the total positive balances due to all beneficiaries of the account at the time. Note that beneficiary accounts with
negative balances are not deducted from other accounts when calculating the aggregate trust fund liability.
11.
4.3: Bank Account Record [#4522]
This form (see below) is used to journalize disbursements from and deposits to the trust account.
True This record [The Bank Account Record shown above] is used to journalize all trust funds deposited to and
disbursed from the trust fund bank account. At a minimum, it must show the following information in columnar
form: date funds were received; name of payee or payor; amount received; date of deposit; amount paid out; check
number and date; and the daily balance of the trust account.
12.
4.5: Record of Undeposited Receipts [#4524]
George is an investor and James’ client. He gives James a $2,000 check payable to Armando’s Painting
Service with instructions to give it to Armando. James complies but does not record this check on his
Record of Undeposited Receipts. James is in violation of the Commissioner’s trust fund record keeping
regulations.
True An exception to this record keeping requirement [the requirement to record an undeposited check on the
Record of Undeposited Checks] is provided in DRE Reg. 2831(e), which states that a broker is not required to
keep records of checks written by a principal [George wrote the check], given to the broker [he gave it to James],
and made payable to service providers [it was payable to Armando’s painting service], including but not limited to
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escrow, credit and appraisal services, when the total amount of such checks for any transaction does not exceed
$1,000 [$2,000 is way over the threshold that permits this exception].
13.
7.4: Overages
Unexplained trust account overages may be used to offset a shortage for one or more beneficiaries.
False Unexplained trust account overages may not be used to offset or cover shortages that may exist otherwise in
the broker’s trust account.
14.
10.0: Audits and Examinations
Brokers must retain canceled checks for at least three years for any transaction for which a real estate
license is required.
True BPC §10148 provides that a real estate broker shall retain for three years copies of all listings, deposit receipts,
canceled checks, trust records, and other documents executed by or obtained by the broker in connection with any
transaction for which a real estate broker license is required.
15.
11.0: Consequences of Conversion
A DRE auditor who finds that a broker has converted trust funds is empowered by the Commissioner to
seize that broker’s trust fund and, if necessary, file bankruptcy on the broker’s behalf.
False! The Commissioner, and certainly not his agent (the DRE auditor) is a tyrant who, on his own
initiative, may seize a business and force it into bankruptcy. To protect the public, he may petition the
Superior Court so that the alleged offender may receive due process; that is, the benefit of legal protections
such as representation, trial by jury, and appeal. The Commissioner’s punitive powers are, for the most
part, restricted to restriction of licenses.
Citation: Should the Commissioner believe a broker is or has converted trust funds, the Commissioner may suspend
the broker’s license and petition the Superior Court for injunctive relief including: 1) an order to desist, 2) a claim for
restitution (BPC §10081), and 3) the appointment of a receiver. Should a receiver be appointed he is empowered as
an officer of the Court to assume the full powers of a trustee. Should the receiver find it necessary to protect trust
funds, he may even file bankruptcy on the broker’s behalf (BPC §10081, §10081.5).
Note: A “court appointed receiver” is an unbiased third party appointed by a court to carry its orders into
effect.
16.
12.0: Sample Transactions
The following two lines are from a Separate Beneficiary Record for the Whites; a couple that submitted a
purchase offer to James. A plausible explanation for these two entries is that James deposited the White’s
$2,000 check into the trust fund but it was returned from the title company on the 19th after the deal fell out
of escrow.
False Of course this isn’t what it means at all. A plausible explanation for these two entries is that James
recorded a purchase deposit from the Whites on May 6 and then transferred the deposit to the title
company on May 19th.
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