Trust Funds & Broker Accounting

Trust funds are money and things of value received by a broker that belong to others. They must be kept separate from the broker's personal and business funds. Receiving trust funds does not make them earned brokerage income.

Trust funds are money or other things of value received by a broker or salesperson on behalf of a principal or another person in licensed activity. A buyer's deposit check is trust property even if payable to escrow; a broker's earned commission and ordinary operating funds are not trust funds merely because they pass through the business. Classify the money by ownership and purpose.

The broker must place funds promptly with the owner, a neutral escrow depository, or the broker's trust account, and must account for their receipt and disposition. Holding trust funds creates a fiduciary obligation; it does not give the brokerage a right to use them as working capital. Disburse only under the proper person's authority and governing instructions.

Commingling is the improper mixing of trust funds with the broker's personal or business funds. Conversion is the unauthorized use of another person's funds. Both are serious DRE violations that can result in license revocation.

Commingling is mixing clients' trust property with the broker's own or business funds. Conversion is unauthorized use or diversion of another person's property. A broker may not borrow from one beneficiary's balance to cover another's shortfall or treat funds as available just because the trust account has a positive bank balance.

Regulation 2835(a) permits reasonably sufficient broker funds, up to $200, for bank service charges. That is not the only exception: under subdivision (b), funds belonging partly to a principal and partly to the broker may be deposited into a compliant trust account when separation is not reasonably practicable, but the broker's portion must be disbursed within 25 days and must not be disputed; a disputed portion stays until finally settled. Subdivision (c) separately permits broker-owned funds connected with licensed mortgage-loan activities under B&P Code § 10131(d) or (e), or making, collecting payments on, or servicing a loan subject to § 10240. This is allowed only if the broker meets § 10232 criteria, separately records broker-owned funds at all times, disburses them within 25 days, and maintains the account under subdivision (d). These limited exceptions do not authorize a general operating-fund cushion or inter-client borrowing.

Trust funds received by a broker must generally be placed into the hands of the principal, into a neutral escrow depository, or deposited into the broker's trust account within three business days after receipt.

Under B&P Code § 10145 and Commissioner’s Regulation 2832, funds generally must be placed with the owner, a neutral escrow depository, or the broker's trust account no later than three business days after receipt by the broker or salesperson. A salesperson's receipt therefore matters even if the broker has not yet physically received the item.

A separate, shorter deadline applies when a broker not licensed under the Escrow Law acts as escrow holder in a real-estate purchase-and-sale, exchange, or loan transaction while performing acts requiring a real-estate license: Regulation 2832(e) requires placement with the owner, a neutral escrow depository, or the broker's trust account by the next business day following receipt by the broker or salesperson. Subdivision (e) expressly supersedes the general timing in (a) and the ordinary post-acceptance timing in (d). The preacceptance offeror-check permission in (c) is separately worded: a qualifying check may be held uncashed only if it is nonnegotiable by the broker or the offeror gives written instructions not to cash it, and the offeree is told before or when the offer is presented. Under (d), after acceptance the check ordinarily must be placed within three business days unless the offeree gives written authorization to continue holding it. For a qualifying escrow-holder broker, however, (e)'s next-business-day deadline overrides that ordinary post-acceptance timing; the written-hold option does not extend it.

Brokers must maintain complete, accurate, and up-to-date records for each trust account, including a separate ledger for each principal or beneficiary. A proper three-way reconciliation compares the bank statement, control record, and beneficiary ledgers.

California trust accounting requires records that identify receipts and disbursements and a separate record for each beneficiary or transaction showing that party's running balance. A control record totals activity in the trust bank account; it cannot replace subsidiary ledgers because a total alone does not reveal who owns the money.

Regulation 2831.2 requires reconciliation monthly except in months with no activity. Compare the bank statement with the broker's trust-account record, then reconcile the control balance to the total of beneficiary or transaction records. Investigate timing items and unexplained differences, document the reconciliation, and ensure the adjusted bank balance equals liabilities to beneficiaries, subject only to authorized broker funds.

A trust account shortage must be investigated and corrected immediately. Brokers must not disburse trust funds if doing so would cause a shortage. The cause must be identified and documented.

A shortage exists when trust funds held are less than the amount owed to beneficiaries after properly recognized timing items and authorized broker funds are considered. The broker should promptly determine whether the cause is an erroneous ledger, bank error, unrecorded disbursement, or missing deposit, preserve records, and correct any actual deficiency. Do not make an unauthorized payment merely to force records to agree.

A broker must not knowingly disburse funds if the payment would leave insufficient trust funds for the persons entitled to them. A temporary reconciling difference such as a documented outstanding check is not automatically evidence of conversion, but an unexplained or actual shortage demands immediate attention and may require restoration. Keep each principal's entitlement distinct throughout the investigation.

California brokers must retain specified transaction and trust-fund records for the required period. The high-yield anchor is three years, with the starting point depending on whether the transaction was consummated.

Business and Professions Code § 10148 requires a licensed broker to retain for three years copies of listings, deposit receipts, canceled checks, trust records, and other transaction documents executed by or obtained by the broker in licensed transactions. The period is not a general permission to discard a file immediately after closing; preserve records that establish the transaction and money trail.

For a transaction that is consummated, the three-year period runs from closing; if it is not consummated, § 10148 measures from the date of the listing. The statute's wording does not state a separate cancellation-date alternative for an unlisted transaction, so do not invent one. Keep retrievable records and any longer retention required by another law, contract, litigation hold, or brokerage policy.