California Real Estate Trust Funds
Learn how California brokers receive, safeguard, deposit, account for, reconcile, and disburse money belonging to others under Business and Professions Code §10145 and Commissioner's Regulations §§2830–2835.5.
Educational purposes only: This original study guide summarizes California law for exam preparation; it is not legal advice, does not create a broker-client relationship, and is not a substitute for current statutes, regulations, DRE instructions, or advice from a licensed professional.
A trust fund is money or other items of value received by a broker or salesperson on behalf of another person in connection with licensed real estate activity. The key exam question is not who physically holds the check. It is whether the money belongs to someone else and whether the licensee has received it in the course of the licensed activity.
California places the responsible broker at the center of the system. The broker must establish controls, keep records that can be audited, and supervise the handling of money by affiliated salespersons. A salesperson should promptly deliver trust funds to the broker or the person designated by the transaction instructions; a salesperson is not the person who opens and administers the broker's trust account.
The governing framework
Business and Professions Code §10145
The central statutory rule: a broker who receives money belonging to others in a real estate transaction must handle it through the statutory trust-fund options and keep it separate from the broker’s own money.
Business and Professions Code §10176(e)
Commingling the licensee’s personal or business funds with money received for another is a disciplinary ground. The narrow regulatory allowance for bank charges or a small amount to open or maintain an account does not authorize general operating-fund use.
Regulations §§2830–2830.1
Identify the trust account and address permitted handling, including the broker’s control of the account and the designation that makes the account recognizable as a trust account.
Regulations §§2831–2831.5
Require a complete record system: separate beneficiary or transaction records, a control record, bank reconciliation, and records of trust-fund receipts and disbursements.
Regulations §§2832–2832.3
Address handling and disbursement, including written instructions and limits on withdrawals, and provide rules relevant to branch offices and broker supervision.
Regulations §§2833–2835.5
Cover trust account procedures, separate recordkeeping issues, and restrictions on commingling and conversion. Read the current text when a fact pattern turns on a detailed exception.
First decision: where can the money go?
Section 10145 generally gives the broker three lawful paths for money received for another: deposit it in a properly maintained trust account in a California bank or other authorized financial institution; place it with a neutral escrow depository; or deliver it to the person entitled to it. The transaction documents or the principal's written instructions can affect which path applies. Do not assume that “put it in escrow” is always the answer: identify the instruction and the broker's duty for the particular funds.
Receive and identify
Date-stamp or otherwise document receipt, identify the transaction and the person for whom the funds are held, and follow the responsible broker’s written procedures. A check payable to a party is still a handling question; do not treat possession as permission to deposit it into an operating account.
Deposit or deliver
Under Commissioner’s Regulation §2832, trust funds generally must be placed into one of the authorized destinations by the end of the third business day following receipt by the broker or salesperson. Apply the regulation’s express exceptions when the facts support one.
Record immediately
Make the receipt and eventual disbursement traceable. The records should allow the broker, beneficiary, auditor, or DRE to connect the amount, date, source, purpose, transaction, and recipient.
Disburse only with authority
A broker should release funds only under the agreement, escrow instructions, or other legally sufficient written direction, and should document the basis for the release. A broker may not resolve a disputed entitlement simply by choosing the party who asks first.
Exam tips
“Received” and “deposited” are different events. A broker cannot erase a deposit-duty problem by backdating the receipt, and an associate's receipt is relevant to the broker's handling system.
Records and monthly reconciliation
Regulations §2831 and following require more than a check register. The broker needs an individual record for each beneficiary or transaction and a control record that shows the total trust liability. Regulation §2831.2 requires reconciliation of the balance of all separate beneficiary or transaction records with the control record at least monthly, except when there was no trust-fund activity during the month, and requires a record of each reconciliation.
What a strong trust-fund file can answer
- Whose money is this, and which property or transaction does it concern?
- When and from whom did the broker or associate receive it?
- Where was it deposited or to whom was it delivered?
- What written instruction or agreement authorized each disbursement?
- What is the running balance attributable to each beneficiary?
- Does the bank statement reconcile to the control record and individual records?
Preserve the records for the period required by the current regulations. The exam may give a retention period, reconciliation date, or other number; use the number in the cited provision and do not substitute a general business-record rule. A missing record is not cured by the broker's memory or by a matching bank balance.
Commingling, conversion, and permissible small balances
Commingling
Mixing the broker's money with trust funds. Examples include depositing rent or a buyer's deposit into the brokerage operating account, or leaving earned fees in the trust account without a lawful basis. Commingling can be unlawful even when every beneficiary ultimately receives the correct amount.
Conversion
Using or diverting trust funds for an unauthorized purpose—especially for the broker's expenses or another client's obligation. Conversion concerns the wrongful use of money; it is more than merely placing funds in the wrong account, though commingling can make conversion easier and can itself support discipline.
California regulations recognize limited exceptions to a strict zero-dollar balance of the broker's own money, such as an amount permitted to cover bank service charges or to open and maintain the account. Treat these exceptions narrowly. They do not permit the broker to use a trust account as a reserve, float, or operating account, and the current regulation controls the amount and conditions.
Exam tips
- Commingling is not conversion: distinguish the prohibited mixing of funds from the later unauthorized use of another's money.
- “No loss” is not a defense: a broker can create a commingling violation even if the account never becomes short.
- Do not invent a safe harbor: a small permitted balance is a narrow regulatory exception, not permission to hold arbitrary business funds.
Exam scenarios: apply the sequence
Buyer’s deposit check
An associate receives a deposit check and puts it in a desk drawer until the offer is accepted. The issue starts at receipt: the broker’s trust-fund procedure and §10145 deposit or delivery duties must be followed; acceptance is not a license to delay.
Operating-account shortcut
A broker deposits a tenant’s security deposit into the brokerage operating account and plans to transfer it later. That is commingling, even if the broker keeps a spreadsheet and intends to repay the trust account.
Disputed cancellation
Buyer and seller send conflicting demands for the same deposit. The broker should not pick a side or write a check merely to end the calls. Review the contract, escrow instructions, and applicable dispute procedure; document the basis for any disbursement and obtain appropriate written authority.
Bank reconciliation mismatch
The bank balance looks sufficient, but the control record exceeds the total of the individual beneficiary records. The records do not reconcile. Stop and investigate the unidentified or misposted item; a positive bank balance does not prove compliance.
Earned commission
A broker moves a commission from the trust account before it is earned or without the required authority. The label “commission” does not itself authorize withdrawal; timing, entitlement, and the governing agreement matter.
Common exam traps
- The broker remains responsible. An associate receiving money does not turn the associate into an independent trust-account manager.
- A trust account is not escrow by default. A broker trust account and a neutral escrow depository are distinct handling routes.
- A record is not a deposit. Writing down a check does not satisfy the required handling of funds.
- A reconciliation is not a bank-balance glance. Compare the bank, control record, and beneficiary or transaction records.
- Do not confuse commingling with conversion. Name the conduct precisely, then check for any narrow regulatory exception.
- Trust-fund law is fact-sensitive. When a question supplies written instructions, a disputed demand, a neutral escrow, or a statutory exception, those facts matter.