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Trust Accounts: Definition & Management

Instructor: Shawn Grimsley
Real estate salespersons and brokers routinely receive large sums of money from clients for use in real estate transactions. In this lesson, you'll learn about trust accounts, including what they are, what they are used for, and how to manage them.

Definition

Bethany is a real estate broker that supervises several licensed real estate salespersons. Hardly a day goes buy that Bethany or one of her real estate agents doesn't receive significant sums of money from clients to be used for real estate transactions. For example, her agents routinely receive large earnest money deposits from clients that constitute part of an offer to purchase a parcel of real estate. Both state law and ethics mandates that Bethany deposit such client funds into a trust account. A trust account is a financial account set up to hold funds for the benefit of another, known as a beneficiary.

Purpose

A trust fund is set up to prevent the commingling of client funds with the personal or business funds of the broker or the broker's licensed salespersons. Why use them? While you can't guarantee that money in the control of someone else will not be misappropriated, having a trust account makes it a bit more difficult to do so.

Additionally, since the broker holds funds in the trust account for the benefit of another, none of the property in the account is viewed as owned by the broker. This means no one other than the beneficiary of the funds can lay claim to the money. If the money was held in Bethany's personal or business account, circumstances in Bethany's life could prevent the funds from being accessible for real estate transactions. (Examples of some types of circumstances which might tie up money held in an account include bankruptcy or a court judgment filed against the account holder - and even the account holder's death.)

Finally, the Federal Deposit Insurance Corporation (FDIC) insures the money in a trust account as if each beneficiary has his or her own account. This offers more insurance protection should the bank holding the funds fail. In practical terms, each beneficiary with funds in trust accounts held at a FDIC-insured bank is insured up to $250,000 if certain requirements are met. If the funds were not kept in a trust account, the account would be insured only up to $250,000 in total.

Account Setup

State law regulating real estate licensees like Bethany have specific laws that address trust funds. These laws can vary from state to state. We'll use California's law as an example.

As the licensed broker for her firm, Bethany must set up a trust account in a bank or other depository entity, such as a credit union, located in her state. An out of state financial institution is acceptable if its depository accounts are federally insured by the FDIC and certain other requirements are met. The account must be non-interest-bearing in most cases. The account should be designated as a trust account and the broker should be identified as the trustee of the account.

Deposit of Funds

If Bethany or any of her agents receives client funds, she has a statutorily defined deadline in which to deposit the funds in the trust account. In California, it's three days.

However, there's an exception to this general rule for funds given for purchase or lease of real estate, such as earnest money or a security deposit. You don't have to deposit such funds in a trust account if an offeree (i.e., prospective buyer or tenant) provides a check that cannot be cashed by the broker or you receive written instructions from the offeree not to deposit the funds. In either case, the offeror (i.e., seller or landlord) must be informed that the funds are being held by the broker before or at the time the offer is presented.

If the offer to buy or lease is accepted, the broker must follow the instructions of the offeror and offeree. Generally, the check may be held with the broker if the offeree consents in writing, or it can be distributed to the offeree if both the offeree and offeror agree in writing. A seller's agent cannot refund a deposit for the purchase of real estate to the buyer without the written consent of the seller.

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