What are trust accounts?
Trust accounts are separate accounts apart and physically segregated from a broker’s own funds, into which the broker is required by law to deposit all funds received for clients.
Real estate licensees often handle other people’s items which have or evidence monetary value, called funds. Funds belonging to others which a broker and their agents handle when acting as agents in a transaction are called trust funds.
Trust funds generally include:
- rents and security deposits collected under a property management agreement [See RPI Form 590];
- good faith deposits tendered by a buyer with an offer to purchase;
- fees and costs handed to the broker in advance of their performance for agreed-to services [See RPI Form 107];
- loan payments and funds on contract collection and loan brokerage; and
- any other personal property of value.
Trust funds are held by brokers for safekeeping and may not be treated casually. Recordkeeping and accounting requirements are imposed on brokers when they receive, transfer or disburse trust funds.
Identification of trust funds
Brokers, while acting on behalf of others in their capacity as agents in real estate transactions, receive funds which are not theirs and are held in trust for the owner of the funds. These trust funds include:
- deposits on offers to purchase and applications to rent or borrow;
- fees advanced for any brokerage services to be provided in the future, called advance fees;
- funds advanced for future costs, called advance costs;
- funds from sellers, borrowers and landlords as reserves to cover future costs;
- rental income and tenant security deposits;
- funding for a loan or the purchase of real estate; and
- proceeds from a sale or financing.
Trust funds are received by a broker, or by an employee acting on behalf of the broker
Evidence of value
Trust funds include any item or evidence of value handed to the broker or the broker’s employee while acting as an agent in a real estate transaction.
Trust funds come in many forms, including:
- checks;
- precious metals/stones;
- stocks/bonds;
- collectibles;
- promissory notes; and
- any other item or evidence of value. [Calif. Business and Professions Code §1014.5]
Managing the trust funds
Consider a broker who enters in a property management agreement with an owner of income-producing real estate. Management services to be performed by the broker under their license include locating tenants, collecting rent and deposits, and disbursing funds for payment of operating expenses and installments on a trust deed loan encumbering the real estate. [See RPI Form 590]
The broker is further authorized to withdraw their fee and send any funds remaining to the owner.
The broker takes possession of the property under the property management agreement. The broker locates several tenants and collects monthly rent and deposits.
The broker deposits the rent and security deposits they receive into their general account. They then enter the amount of each transaction as trust funds on the client’s subaccount ledger.
Although sufficient funds are held in the client’s subaccount to meet operating expenses and make the loan payment, the broker first withdraws their fee before making the loan payment authorized by the owner. The disbursement of the brokerage fee reduces the balance on the client’s ledger below the amount needed to make the loan payment.
The broker then issues a check from the broker’s general account to the lender for the loan payment. The check bounces due to insufficient funds remaining in the broker’s general account. The owner is notified by the lender and contacts the broker who provides funds to cover the loan payment.
In this instance, the broker illegally commingled
Further, the broker breached their agency duty owed the client by withdrawing the brokerage fee before paying all other obligations the broker agreed to disburse on behalf of the owner, including payment on the loan, known as conversion
Lastly, by writing a check for the loan payment when the broker knew insufficient funds existed in the account to cover the check, the broker misrepresented the availability of immediate funds. This is considered fraud and is grounds for the revocation or suspension of the broker’s license. [Apollo Estates, Inc. v. Department of Real Estate (1985) 174 CA3d 625]
Handling cash and checks
Funds received in the form of cash or checks made payable to the broker while acting as an agent are to be:
- deposited into the broker’s trust account;
- held undeposited as instructed; or
- endorsed and handed to other entitled to the bank.
Trust funds received in the form of checks or cash may only be used for expenditures authorized and incurred for the benefit of the owner of the funds.
Further, the broker is required to regularly account to the owner on the status, expenditure and location of the negotiable trust funds, called an owner’s statement.
Prior to the end of the third business day following the day the broker receives negotiable trust funds, the broker needs to deposit the funds:
- with the person or escrow depository entitled to the funds (as payee or by endorsement); or
- in a trust account maintained by the broker at a bank or other state-recognized depository. [Bus & P C §1014.5; Department of Real Estate Regulation §2832(a)]
Identifying the owner
A broker needs to know who owns and controls the funds held in their trust account at all times. Trust funds can only be disbursed on the authorization of the owner of the funds. Subaccount ledgers are set up to identify the owner of funds and the amount held for the owner.
However, persons other than the owner of the trust funds may have an interest in the funds. If so, their authorization is also required to withdraw the funds.
