GENERAL INFORMATION

GENERAL INFORMATION

Trust Funds and Non-Trust Funds

Since trust funds must be handled in a special manner, a licensee must be able to distinguish trust funds from
non-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
acts 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 purchase deposit (whether made payable to the broker or to an escrow or title company);
a personal note made payable to the seller; or even an automobile’s “pink slip” given as a deposit.

The discussions in this chapter pertain to real estate trust funds received by licensees, and not to non-trust funds
such as real estate commissions, general operating funds, and rents and deposits from broker-owned real estate.
These other types of funds, as long as not commingled with trust funds, are not subject to the Real Estate Law
and Commissioner’s Regulations. It should be noted, however, that under certain circumstances the Department
of Real Estate does have the jurisdiction to look into transactions involving non-trust funds.

Why a Trust Account?

A trust account is set up as a means to separate trust funds from non-trust funds. Although it can certainly be
argued that keeping trust funds in a trust account will not prevent a dishonest broker from misusing the funds,
separating client’s funds from the broker’s own funds provides a better physical and accounting control over the
trust funds.

An important reason for designating a trust fund depository as a trust account is the protection afforded
principals’ funds in situations where legal action is taken against the broker or if the broker becomes
incapacitated or dies. Trust funds held in a true trust account cannot be ‘‘frozen” pending litigation against the
broker or during probate.

Trust funds also have better insurance protection if deposited into a trust account. The general counsel of the
FDIC, in an opinion in 1965, held that funds of various owners which are placed in a custodial deposit (trust
account) in an insured bank will be recognized for insurance purposes to the same extent as if the owners’ names
and interests in the account are individually disclosed on the records of the bank, provided the trust account is
specifically designated as custodial and the name and interest of each owner of funds in the account are
disclosed on the depositor’s records. Each client with funds deposited in a trust account maintained with a
federally insured bank is insured by the FDIC up to $250,000, as opposed to just $250,000 for the entire
account, as long as the regulatory requirements are met.

Trust Fund Handling Requirements

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. According to Business and Professions Code Section
10145, trust funds received must be placed into the hands of the owner(s) of the funds, into a neutral escrow
depository, or into a trust account maintained pursuant to Commissioner’s Regulation 2832 not later than three
business days following receipt of the funds by the broker or by the broker’s salesperson.

An exception to this rule is when a check is received from an offeror in connection with an offer to purchase or
lease real property. As provided under Commissioner’s Regulation 2832, a deposit check may be held uncashed
by the broker until acceptance of the offer if the following conditions are met:

1. the check by its terms is not negotiable by the broker, or the offeror has given written instructions that the
check shall not be deposited or cashed until acceptance of the offer; and

2. the offeree is informed, before or at the time the offer is presented for acceptance, that the check is being
held.

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, not later than 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.

According to Business and Professions Code Section 10145, a real estate salesperson who accepts trust funds on
behalf of the broker under whom he or she is licensed must immediately deliver the funds to the broker or, if
directed to do so 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 neutral escrow depository, as used in Business and Professions Code Section 10145, means an escrow
business conducted by a person licensed under Division 6 (commencing with Section 17000) of the Financial
Code or by any person described in subdivisions (a)(1) and (a)(3) of Section 17006 of the Financial Code.

Identifying the Owner(s) of Trust Funds

A broker must be able to identify who owns the trust funds and who is entitled to receive them, since these funds
can be disposed of 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 transaction. 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 offeror 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.

After acceptance of the offer, the funds shall be handled according to instructions from the offeror and the
offeree as follows:

• An offeror’s check held uncashed by the broker before acceptance of the offer may continue to be held
uncashed after acceptance of the offer, only upon written authorization from the offeree. [Commissioner’s
Regulation 2832(d)]

• The offeror’s check may be given to the offeree only if the offeror and offeree expressly so provide in
writing. [Commissioner’s Regulation 2832(d)]

• All or part of an offeror’s purchase money deposit in a real estate sales transaction shall not be refunded by
an agent or subagent of the seller without the express written permission of the offeree to make the refund.