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Once deposited, the trust funds may only be withdrawn or disbursed as authorized and instructed by the owner of the trust funds.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)]
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.