Broker Duties
Real Estate Trust Accounts Explained
Improper handling of client funds is one of the most common — and most serious — real estate license violations. Understanding trust account rules is critical for both the exam and your career.
What Is a Trust Account?
A trust account (also called an escrow account) is a separate bank account maintained by a licensed broker to hold client funds — earnest money deposits, security deposits, rental income — until they're disbursed according to contractual or legal authority.
Trust accounts must be separate from the broker's operating accounts. Mixing client funds with the broker's own funds is called commingling and is a license violation in every state.
The broker is a fiduciary for the funds in the trust account. The funds belong to the clients — not the broker — until properly disbursed.
Key Trust Account Terms
Commingling
The illegal mixing of client funds with the broker's personal or operating funds. A major license violation even if accidental.
Conversion
Using client trust funds for the broker's own purposes. More serious than commingling — considered theft. Results in immediate license revocation and potential criminal prosecution.
Reconciliation
Regular balancing of trust account records against bank statements to ensure all deposits and disbursements are accounted for. Most states require monthly reconciliation.
Ledger
A record keeping track of each client's funds separately within the trust account. The total of all client ledger balances must equal the trust account bank balance at all times.
Disbursement
The release of trust funds to the appropriate party — seller at closing, buyer if deal falls through, landlord after tenant move-out. Must have proper authorization.
Trust Account FAQ
Who is responsible for the trust account?
The designated/managing broker is ultimately responsible for trust account compliance, even if day-to-day management is delegated. This is why broker supervision of trust account activity is a legal requirement.
What happens if there's a dispute over earnest money?
When buyers and sellers both claim earnest money (e.g., after a failed transaction), the broker cannot release funds without written agreement from both parties or a court order. Many brokers file an interpleader action to let the court decide.
Can a broker earn interest on the trust account?
This depends on state law. Some states allow or require interest to be paid to clients; others allow it to go to a state housing fund (IOLTA - Interest on Lawyers' Trust Accounts equivalent for real estate). The broker generally cannot personally benefit from trust account interest.
Must salespersons maintain a trust account?
No. Only licensed brokers are authorized to maintain trust accounts. All client funds received by salespersons must be promptly turned over to their supervising broker.