Trust funds and accountable money handling

A buyer's earnest-money check, a tenant's rent, and a property owner's repair reserve may come into a broker's possession while still belonging to others. These are trust funds. The broker's role is to safeguard, account for, and disburse them only as authorized. The form of value does not change the duty: cash, checks, and other items received for another require appropriate control.

Earned commission is conceptually different. Once the broker is entitled to compensation under the agreement and the transaction's instructions, that money becomes the broker's funds. A deposit does not become commission merely because the broker expects the deal to close. Similarly, a property management reserve is not working capital that the broker may borrow to meet payroll.

Commingling means improperly mixing trust money with personal or operating money. Conversion means using or appropriating another person's property without authority. Depositing a client check into an operating account can create commingling even if it is later returned. Paying the office's electricity bill from client reserves is conversion as well as a potential shortage. Good intentions and an expectation of quick reimbursement do not authorize the transaction.

A salesperson receiving trust funds on behalf of the responsible broker must immediately deliver them to that broker or, if directed by the broker, place them with the principal, a neutral escrow depository, or the broker's trust account. The salesperson does not receive an independent three-day grace period to keep a deposit at home.

The broker ordinarily must place funds in the hands of the owner, in a neutral escrow depository, or in a properly maintained trust account no later than three business days after receipt, subject to applicable written instructions and specific exceptions. The correct answer therefore depends on both the person receiving the money and any valid instructions. An exam question stating only that the recipient is a salesperson points first to immediate delivery.

The broker-escrow exception is faster. Under Regulation 2832(e), when a broker not licensed under the Escrow Law acts as escrow holder in a sale, exchange, or loan transaction in which the broker performs licensed real estate acts, the custody deadline is the next business day after receipt by the broker or the broker's salesperson. Do not apply the ordinary three-business-day rule to that expressly described role.

Neutral escrow can be an appropriate destination without routing money through the broker's account. The broker still needs records showing receipt and disposition. A check made payable to escrow is not an excuse to leave it untracked on a desk.

An important exception concerns a deposit check accompanying an offer to buy or lease. Before acceptance, the broker may hold it uncashed if it is not negotiable by the broker or the offeror provides written instructions not to deposit it before acceptance, and the offeree is told of the holding arrangement before or when the offer is presented.

Once the offer is accepted, continued holding requires written authorization from the offeree. Otherwise the check must be placed in neutral escrow or the trust account within three business days after acceptance, or given to the offeree if both parties expressly authorize that disposition in writing. The initial buyer's instruction alone does not justify indefinite holding after acceptance.

This exception should be read narrowly. An oral request to hold negotiable funds, never disclosed to the seller, does not satisfy the stated conditions. Nor is an uncashed check equivalent to a collected deposit. A seller deciding whether to accept should know whether money has actually been deposited.

A trust bank account must be appropriately designated and maintained in the broker's name as trustee, in the type of depository account permitted by law. It should make the fiduciary capacity clear. Special requirements apply to interest-bearing arrangements, including proper written authorization and allocation of interest; a broker should not silently keep earnings generated by a client's money.

Withdrawals may be made by the broker or authorized persons within the regulatory categories. These can include a licensed salesperson, an appropriately designated broker, or an unlicensed employee covered by the required fidelity protection. Written authorization and applicable insurance requirements matter. Merely being the office bookkeeper does not confer unlimited signing authority, and delegation does not remove the broker's responsibility.

Electronic access deserves the same discipline as paper checks. Separate credentials, verified payee instructions, and limits on initiation and approval reduce both mistakes and unauthorized withdrawals. The accounting must identify the beneficiary affected by each payment. A bank balance can be correct while the allocations among owners are wrong.

Commissioner's Regulation 2835 permits up to $200 of the broker's own money in a trust account to cover bank service charges and related charges or fees. That limited allowance does not permit an unlimited operating cushion. Keep the broker-owned amount separately identifiable so it cannot be mistaken for a client's balance.

Regulation 2835(b) addresses a receipt belonging partly to the principal and partly to the broker when separating it before deposit is not reasonably practicable. The mixed receipt may enter a compliant trust account, but the undisputed broker portion must be paid out no later than 25 days after deposit. The clock does not restart when the broker later posts a fee to the bookkeeping record. If the principal disputes the broker's right to a portion, that disputed portion must remain until the dispute is finally settled. The exception does not authorize taking contested client money.

The control record tracks every receipt and disbursement for the account chronologically. Separate beneficiary or transaction records explain whose money makes up the total. The bank statement confirms what the depository has processed, but timing differences must be reconciled.

A three-way reconciliation compares the adjusted bank balance, the control-record balance, and the total of the separate beneficiary balances. Outstanding checks reduce the bank statement balance; deposits in transit increase it. Correct entries for service charges and other transactions belong in the records. Reconciliation of the separate records with the account record must occur at least monthly when there has been activity, with a record of the reconciliation maintained.

Never net one owner's negative balance against another's positive balance and conclude that everything is fine. Paying Owner A's $1,500 repair when A has only $1,000 uses $500 that belongs elsewhere unless properly funded and authorized. The account's overall positive bank balance does not cure the shortage. Reconcile each beneficiary as well as the total.

Commissioner's Regulation 2832.1 requires prior written consent from every owner of the funds before each disbursement that would reduce the account below the aggregate trust liability. Consent from only the beneficiary receiving the payment is insufficient. Do not assume that consent exists from an available bank balance or a later promise to replenish funds; other legal and fiduciary requirements still apply.

The bank statement shows $18,000. A $2,000 deposit in transit has not posted, and $3,000 in authorized checks are outstanding. The adjusted bank balance is $17,000. The control ledger also shows $17,000. Owner A's ledger is $7,000 and Owner B's ledger is $10,000, so the separate balances total $17,000. All three totals agree, assuming the outstanding items and ownership records are valid.

Now suppose the bookkeeper omitted a $300 bank debit from the control record. Agreement cannot be created by inventing a balancing entry charged to Owner A. Determine the debit's nature, establish whose money it affects, correct the records, and address any resulting shortage. Mathematical agreement is useful only when supported by real transactions.

Release money according to the parties' instructions and applicable law. When a purchase fails and buyer and seller both claim the deposit, the broker should not decide ownership solely because one party is the broker's client. Escalate the dispute and obtain proper authority, such as agreed release instructions or an enforceable legal direction. Keep the money protected while the entitlement question is resolved.

Trust records must document money that never entered the trust bank account as well as funds that did. Delivery receipts, deposit details, canceled checks, authorizations, and beneficiary balances create the necessary trail. The broker's general three-year record-retention obligation is a minimum framework, not permission to discard evidence needed for pending matters.

On Monday, a salesperson receives a buyer's $8,000 check payable to a neutral escrow company. The broker has instructed the salesperson to deliver such checks directly to escrow. The salesperson should carry out that direction immediately and preserve the receipt and delivery evidence. The check's payee does not make the office's custody invisible, and the salesperson cannot begin a personal three-business-day holding period. Record what was received, from whom, for which transaction, and where it went even though the brokerage bank account was never involved.

Change one fact: the check is negotiable by the broker, and the buyer provides written instructions to hold it until acceptance. The seller must be informed of the arrangement before or when the offer is presented. If acceptance occurs Wednesday, the preacceptance instruction no longer supplies unlimited authority to hold it. Continued holding requires the offeree's written authorization; otherwise the postacceptance placement rule applies. This is why the actual acceptance event and both parties' instructions belong in the file.

Now suppose the buyer cancels and demands the check immediately while the seller disputes the cancellation. The broker should not confuse possession of the paper with legal authority to determine the parties' entitlement. Protecting the funds and obtaining appropriate release authority are distinct from advocating the client's contractual position. An agent can explain the client's claim without unilaterally paying it from disputed money.

A trust account has $12,000 in collected funds. Owner A is entitled to $9,000 and Owner B to $3,000. Assume no prior written consent from all fund owners. The broker pays a $4,000 bill for B, leaving $8,000 at the bank. B's ledger becomes negative $1,000; A's remains positive $9,000. The shortage is $1,000 because liability to the positive beneficiary is $9,000, not the net $8,000 produced by subtracting B's deficit. A favorable total on an ordinary cash report therefore can conceal the use of another person's money.

Another error begins with an uncleared deposit. A buyer deposits $5,000; the broker refunds $5,000 before collection is confirmed; the original check is returned unpaid. The bank's temporary credit was not reliable evidence that the buyer supplied collected money. The refund has consumed funds belonging elsewhere unless properly covered. Verify collection and disposition authority independently: a collected check can still be disputed, and an authorized refund can still create a shortage if the original payment failed.

An unexplained overage is also a problem. If the bank has $300 more than the records identify, it is not automatically miscellaneous broker income. Trace deposits, bank adjustments, omitted liabilities, and posting errors. Preserve the original entries and document supported corrections. A balancing entry that merely forces agreement does not establish ownership, and unexplained amounts should not be distributed as profit.

A property manager receives one $2,000 rent check that cannot reasonably be separated before deposit and has earned an undisputed $160 management fee under the agreement. Deposit and record the receipt intact, identify the fee entitlement, and transfer the earned amount to the broker using the appropriate accounting. Paying the broker's personal telephone bill directly from the trust account is not the same as properly disbursing compensation, even if the bill happens to be $160. The trust account is not an operating account with a convenient client subledger.

The $200 bank-charge allowance serves a specific purpose and does not make small personal transactions permissible. Nor does a beneficiary's permission necessarily remove a regulatory restriction. For a qualifying interest-bearing account under section 10145(d), interest cannot benefit the broker or an affiliated licensee directly or indirectly even if an owner offers to let the broker keep it. The account, insurance, separation, disclosures, and allocation requirements must also be satisfied.

For exam reasoning, ask three separate questions before approving a payment: does this beneficiary have sufficient funds, is this payee entitled under the instructions, and is this signer authorized? A yes to one cannot supply either of the others. Reconciliation then confirms that the completed payments and remaining obligations have been recorded consistently.

• Salesperson receipt calls for immediate delivery; the broker's ordinary placement deadline is three business days.
• Holding an offer check requires the specific instructions and disclosures, including additional authority after acceptance.
• The $200 allowance concerns bank charges, not general office expenses.
• Reconcile ownership ledgers, the control record, and the adjusted bank balance.
• No client's surplus authorizes another client's shortage.