General Information Advance Fee Trust Accounts Trust Fund Bank Account General Information Advance Fee Trust Accounts Trust Fund Bank Account General InformationIn the normal course of doing business, real estate brokers and salespersons receive trust funds on behalf of others. Brokers and salespersons must handle, control, and account for these trust funds according to current law. This section discusses the legal requirements for receiving and handling trust funds in real estate transactions as set forth in the Real Estate Law and the Commissioner's Regulations. The discussions in this section will pertain to real estate trust funds received by licensees, and not to non-trust funds such as real estate commissions, or general operating funds. It will cover the requisites for maintaining a trust fund bank account and the precautions a licensee should take to ensure the integrity of such an account. It will also explain and illustrate the trust fund record keeping requirements under the Business and Professions Code.
Current law mandates that trust funds must be handled in a specific manner. For this reason, a licensee must be able to distinguish trust funds from non-trust funds.
Trust Funds: Trust funds are money or other things of value that are received by a broker or salesperson on behalf of a principal or any other person, and which are held for the benefit of others in the performance of any act(s) for which a real estate license is required.
Trust funds may be cash or non-cash items. Some examples are cash, a check used as a deposit (whether made payable to the broker or to an escrow or title company), a personal note made payable to the seller, or even a pink slip to a car that is given as a deposit.
It is a fact that trust funds belong to others and are only entrusted to the care and handling of a real estate licensee for a limited period of time. The licensee, therefore, has a fiduciary responsibility to the owner of the funds. This duty requires that the licensee handle the funds according to the law and use them only for the purpose authorized by the fund's owner(s).
A typical trust fund transaction begins with the broker or salesperson receiving trust funds from a principal in connection with the purchase or lease of real property.
A real estate licensee who accepts funds from others in connection with any transaction for which a license is required must place them in:
If the broker (or broker's salesperson) fails to place the funds into one of these three authorized places within three business days following receipt of the funds by the broker or by the broker's salesperson, he/she is liable for commingling the funds.
Commingling: Mixing deposits or monies belonging to a client (trust funds) with one's personal money.
If the funds are placed into a trust fund account in a bank or recognized depository, they must remain there until he/she makes a disbursement pursuant to instructions from the person(s) entitled to the funds.
An exception to this rule is when a check is received from an offeror in connection with an offer to purchase or lease. In this case, the deposit check may be held uncashed by the broker until acceptance of the offer if the following conditions are met:
If the offer is later accepted, the broker may continue to hold the check undeposited only if the broker receives written authorization from the offeree to do so. Otherwise, the check must be placed, within three business days after acceptance, into a neutral escrow depository or into the trust fund bank account, or into the hands of the offeree if both the offeror and offeree expressly so provide in writing.
If a real estate salesperson accepts trust funds on behalf of the broker under whom he or she is licensed he/she must immediately deliver the funds to the broker or, if directed by the broker, place the funds into the hands of the broker's principal or into a neutral escrow depository, or deposit the funds into the broker's trust fund bank account.
A broker must be able to identify which of the parties in a transaction owns the trust funds and is entitled to receive them, since these funds can be disposed only upon the authorization of that person. The person entitled to the funds may or may not be the person who originally gave the funds to the broker or the salesperson. In some instances the party entitled to the funds will change upon the occurrence of certain events in the transactions. For example, in a transaction involving an offer to buy or lease real property or a business opportunity, the party entitled to the funds received from the offeror (prospective buyer or lessor) will depend upon whether or not the offer has been accepted by the offeree (seller or landlord).
Prior to the acceptance of the offer, the funds received from the offeror belong to that person and must be handled according to his/her instructions. If the funds are deposited in a trust fund bank account, they must be maintained there for the benefit of the offeree until acceptance of the offer. Or, as discussed in the previous section, if the offeror wishes, his/her check may be held uncashed by the broker as long as he/she gives written instructions to the broker to do so and the offeree is informed before or at the time the offer is presented for acceptance that the check is being so held.
SPECIAL NOTE: (Broker Acting As Principal)
A real estate broker who is acting as a principal in the business of buying, selling or exchanging real property sales contracts or promissory notes secured directly or collaterally by liens on real property, must place all funds received by him/her in a neutral escrow depository unless delivery of the note or contract is made simultaneously with receipt of the funds.
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