Paralegal Advanced Competency Exam (PACE) Practice Exam

What is an escrow?

1. A legal document for transferring property

2. A method of securing a loan

3. A third party holding money until conditions are met

4. The act of executing a will

The correct answer is: A third party holding money until conditions are met

An escrow refers specifically to a financial arrangement in which a third party temporarily holds money, documents, or assets until certain conditions outlined in a transaction are fulfilled. Typically used in real estate transactions, escrow acts as a safeguard for both the buyer and seller, ensuring that funds are only released when all contractual obligations have been met. This helps protect the interests of all parties involved, as it provides assurance that all terms are satisfied before any exchange takes place. In contrast, the other options represent different legal concepts. A legal document for transferring property is more aligned with deeds or contracts, which do not encompass the function of holding funds or documents until conditions have been satisfied. A method of securing a loan generally involves financial agreements or instruments but does not define the specific role of escrow. Lastly, the act of executing a will pertains to the legal process of having a will made effective, which does not relate to the function or purpose of an escrow arrangement.