The withdrawal of trust funds

Checks or cash are frequently made payable and handed to a real estate broker during a transaction. These items are trust funds since they do not belong to the broker. Rather, checks payable to the broker and cash are received “in trust” by the broker and held on behalf of the client.

These funds will be deposited by the broker into a non-interest bearing trust account

, unless endorsed and handed to others as instructed by the client.

The trust account opened for the deposit of cash and items payable to the broker will be in the name of the broker, as trustee, at a bank or a state-recognized depository, such as a thrift. [Calif. Business and Professions Code §10145]

Once deposited, the trust funds may only be withdrawn or disbursed as authorized and instructed by the owner of the trust funds. A third party who has an interest in the funds may also be necessary to authorize disbursement, such as a seller who acquires an interest in the buyer’s good faith deposit on acceptance of a purchase agreement offer. [Bus & P C §10145(a)(1)]

Withdrawals or disbursements from the trust account in the name of an individual broker will be made under the signature of:

  • the broker named as trustee on the account;
  • a licensed broker or sales agent employed by the named broker under a broker-agent employment agreement [See RPI Form 505]; or
  • an unlicensed employee of the named broker, provided the unlicensed employee is bonded or insured for the total amount of the trust funds the employee can access, and the bond or insurance protects the broker from intentional wrongful acts committed by the employee. [Department of Real Estate Regulation §2834(a); Bus & P C §10145(a)(2)(c)]

A signer

is an employee other than the broker who has written authorization from the broker to withdraw or disburse funds from the trust account. This authority is either included in an addendum to the employment agreement or is provided in the agreement itself.

When the trust account is in the name of a corporate broker as trustee, withdrawals are made by:

  • the designated officer (DO) who qualified the corporation as a licensed broker; or
  • a licensed or unlicensed employee with the written authorization of the designated officer. [DRE Reg. §2834(b)]

The authorization from the corporation is made as part of the employment agreement with each signatory. [See RPI Form 505, 510 or 511]

However, a broker’s written delegation to others who are signers on the trust account does not relieve the individual broker or the designated officer of a corporate broker from liability for any loss or misuse of trust funds. [DRE Reg. §2834(c)]

To help prevent an improper withdrawal by an individual signer, the broker may require two signatures on trust account withdrawals. An insurance policy for the brokerage business needs to include coverage for theft by employees who have direct or indirect access to trust funds.

Interest-bearing accounts

Trust funds may be placed in an interest-bearing account when requested by the owner of the funds and agreed to by the broker. [See RPI Form 535]

However, the broker is under no obligation to comply with the owner’s request when they notify the owner they will not place the trust funds in an interest-bearing account. [Bus & P C §10145(e)]

If the broker agrees to place the owner’s trust funds in an interest-bearing trust account:

  • a separate trust account will be established solely to hold the owner’s trust funds;
  • the trust account will be in the name of the broker as trustee, with the owner named as the specified beneficiary;
  • the trust account will be insured by the Federal Deposit Insurance Corporation (FDIC); and
  • the broker and their agents may not receive any interest earned by the trust account, even when agreed to by the owner of the trust funds. [Bus & P C §10145(d)]

Also, when trust funds are to be placed in an interest-bearing account, the broker is to first disclose:

  • how interest is calculated on the account;
  • who will receive the interest;
  • who will pay bank service charges; and
  • any penalties or notice requirements for withdrawal. [Bus & P C §10145(d)(4); see RPI Form 535]