Trust Fund Handling and Accounting for California Real Estate Professionals

Otherwise, it will create a cloud on the title, and although certain minor discrepancies will not invalidate the deed, possible litigation can be avoided by exercising care. The grantor, if a natural person, should be of legal age and sound mind. Otherwise, the grantor can, at a later date, have the deed set aside and recover the property. A grantee must be named or indicated with reasonable certainty or the deed is void.

The matter of consideration is a technical requirement. As a contract, a consideration must be stated in a deed. However, a person may make a gift of a parcel of real estate and lack of consideration does not render the conveyance void. While most contracts must be supported by a valuable consideration, a good consideration love and affection is sufficient to support a gift deed. If no consideration is given, the grantee cannot enforce covenants of warrant against the grantor. A gift deed given to defraud creditors may be set aside by the grantor's creditors.

So that the information will remain private and not be made a matter of public record, most deeds do not show the full purchase price paid. The use of a nominal sum in the recital of consideration satisfies the technical requirement of contract law that there be some consideration.

Without some clearly expressed intention to transfer ownership of real estate, a deed may be ineffective in accomplishing its purpose or may at best create ambiguity as to its purpose. This portion of the deed should clearly state any limitations or reservations that are intended. The standard form deeds in common use utilize terms such as "convey and warrant" in general warranty deeds, "convey and specially warrant" when a deed of limited warranty is intended, or "release and quitclaim" when no warranties of any kind are intended. The habendum clause following the granting clause defines or limits the extent of ownership to be enjoyed by the grantee, such as fee simple, life estate or easement.

The words "to have and to hold" introduce the clause. The description of the estate in the habendum clause should agree with the description in the granting clause. To correctly identify the property being conveyed, the property must be described with a reasonable degree of accuracy. No doubt should be left as to its identification. Although several ways are acceptable for describing property, to avoid discrepancies in the records, the legal, technical description should be the same as used in previous conveyances. All improvements to the land go with the land as appurtenances. In transferring a house and lot, it is necessary only to describe the land upon which the house is situated.

It is common, however, to add, following the description, words indicating that all the appurtenances go with the land. The grantor is assumed to be conveying the property free and clear of all encumbrances and restrictions, except for those specifically mentioned in the deed. Therefore, the deed usually contains a provision that the grantor conveys the property free and clear of all encumbrances. Then follows a specific enumeration of the exceptions, such as: Warranties and covenants are not essential requirements of a valid deed.

The grantor may convey an interest in land by a quitclaim deed wherein no warranty of any kind is given, or the grantor may convey by a general warranty deed wherein numerous warranties are made to the grantee. To transfer title effectively by a deed, it must be signed by the grantor with the intent that ownership of some interest in land be transferred to a designated grantee. In the event there are co-owners, and the agreement is to transfer the interest of each of the owners, each must sign the deed.

If the property is homestead property, the owner's spouse must join in the conveyance. The rules in practice require the signatures of both husband and wife on any deed to property owned by only one of them. The execution of a deed to property owned by a partnership can be accomplished by the signature of any general partner on the deed. For corporations, a resolution of the board of directors will give authority to certain officers to execute deeds on behalf of the company.

A deed is not effective until it is delivered by the grantor and accepted by the grantee. For there to be an effective delivery, the grantor must intend to pass title to the grantee. A deed given to the grantee, affording an opportunity to examine, does not constitute delivery. For delivery of a deed to be effective, it must be made during the lifetime of the grantor. If the grantor executes a deed, retains it and directs that upon death, it is to be delivered to the grantee, the deed does not pass title.

Effective delivery may be made to some third person for the benefit of the grantee, but the grantor must surrender all right and control or recovery of the deed. When a deed is recorded the law presumes effective delivery. An acknowledgment is a formal declaration made by a person in the case of a deed, by the grantor to a notary public or another public official authorized to take acknowledgments, and to affirm that the execution of the instrument was an act of free will, voluntarily given.

The notary public, or other authorized officer, fills out the certificate of acknowledgment customarily printed on the instrument. The statutory form of acknowledgment also provides that the declarer is known by the notary or other authorized officer to be the identical person who executed the instrument.

A deed is valid between the parties without being acknowledged, but the deed cannot be recorded unless it has been acknowledged. Since an unrecorded title can lead to serious difficulties, it is advisable to have the deed acknowledged so that it can be recorded. If, by chance, the deed should be recorded without an acknowledgment and remain so recorded for a period of ten years, the recording shall be valid as though it had been acknowledged.

A deed need not be recorded to be valid between the parties. However, the prudent purchaser will immediately record the deed. Recording protects an innocent purchaser or encumbrancer who acts without knowledge of an unrecorded instrument and also provides a conclusive presumption that all persons have knowledge of the recorded instrument. Occasionally, privately owned land is transferred to the public without consideration, with the intent that the land will be accepted and used for public purposes. This is most common in real estate developments where the streets, water system and sewer lines have been constructed and paid for by the developer and subsequently dedicated to the public and given to the city for future maintenance.

If one dies with a valid will testate , the estate, consisting of all real and personal property hereditaments , will be distributed to heirs and assigns according to the express intent of the decedent. A will handwritten by the testator is a holographic will. The gift of property by the last will and testament of the donor is a devise.

The recipient of such property is the devisee. If one dies without a will intestate , the estate will be distributed by succession, according to the descent and distribution statutes of the state. In either case, the judicial process for disposition of the estate of the decedent will be the responsibility of the probate court acting through an executor or executrix named in the will or an administrator or administratrix who is appointed by the court in the event one dies without a will. In any case, the sale of real property after death cannot normally be consummated until the state tax authorities and the Federal Internal Revenue Service have given clearance.

A contract for deed, also known as an installment sales contract or as a land contract, is a conditional sales contract to purchase real property in which the buyer makes a down payment and where further payments are made in installments. In such contracts, the seller does not deliver the deed to the buyer until all, or a specified amount, has been paid on the price. In the event of default by the buyer, the seller is required to initiate a foreclosure action, even though the buyer does not have legal title to the real property.

In a contract for deed, it may be months or years before the buyer receives a deed. It is common, therefore, to arrange for a third and neutral party to collect the buyer's payments and to assure that the contract terms are completed. This is referred to as a deed in escrow. For deeds delivered in escrow, the deed must be delivered during the lifetime of the grantor and if he dies, title relates back to the date the deed was delivered to the escrow agent if all conditions of the escrow are met.

Contracts for deed are deceptive in their apparent simplicity. Significant legal and moral problems can arise from their use. A full and comprehensive understanding of the nature of the instrument, its uses and its inherent dangers, is important to real estate professionals. Defining a Contract for Deed. A standard definition of a contract for deed is: Sometimes it is useful in defining something to include what it is not. In the case of a contract for deed, it is not a sales contract as such, but it is technically a contract and must meet all the basic contract rules.

It is not a mortgage, but it serves as a financial security device and should contain the covenants of a mortgage. It is not a deed, but it serves to create equitable interest in behalf of the grantee buyer. All essential elements of a contract must be present for a contract for deed to be valid and enforceable. The parties must be competent to enter into a contract. There must be an offer and an acceptance which manifest the mutual assent to be bound to the terms of the offer. There must be consideration supporting the contract. A contract for deed to be valid must have for its purpose a legal objective and to be enforceable, any agreement for the sale of real estate or the sale of an interest therein must be in writing and signed by the party against whom enforcement would be sought in the event of breach.

There must be a legally adequate description clearly identifying the subject property. It is not necessary for a contract for deed to be notarized or recorded to be binding between the parties. However, if it is intended that the contract be recorded, it must be executed in compliance with the recording statutes of the state.

Assuming the buyer took possession, the interest of the buyer would be protected without recording the contract for deed inasmuch as anyone buying from the seller, the owner of record, would take notice of the rights of the parties in possession. In the case of undeveloped land, however, occupancy is not so obvious and a good faith purchaser might have no notice or knowledge of the existence of the contract and would be able to take the property free of the interest of the contract buyer.

As a Financial Security Device. The best security available is title to property rights. Under the typical contract for deed, the seller retains legal title until the last payment has been made. Only then arc they obligated to transfer full legal ownership to the buyers. Legal authorities generally agree that in most cases, the buyers do not acquire legal title until they have fully performed on the contract.

Most courts will recognize, however, that the buyers who have made payments under a contract for deed do have an equitable interest in the property, and will protect buyers accordingly. As a Promissory Note. Because the contract for deed does not have an accompanying note, all the conditions of the sale are described in the contract forms, including the full purchase price and the terms of the loan.

Although the buyers cannot sell their fee interest they have none , they may assign their rights to third parties provided there is an absence of any prohibition to the agreement. Should an assignment of interest take place, whether the original buyer still has the obligations assumed in the initial agreement, or whether the buyer is released, will depend on the wording of the contract.

In the usual contract for deed, the sellers look to the property for their security; in such a case, should a buyer default, the sellers cannot pursue the buyer for any unpaid payments or for a "deficiency" in event the property cannot be resold at the same or a better price. As a practical matter, many buyers under contracts for deed are in such marginal economic circumstances that pursuing them for collection of such debt would be futile.

In many sales by buyers of their rights under a contract for deed, the sellers may not know that the contract has been transferred. If, however, the original buyers take their successor to the sellers for approval, a novation may result. This is, in effect, a new contract between the sellers and the successor buyers. Under these circumstances, the first buyer would normally be released from further obligation.

Common covenants in a contract for deed. Ad Valorem Taxes and Assessment Clause. The tax burden for property is usually imposed upon the holder of record title. In a contract for deed, the seller remains the hold of title but logically the payment of real estate taxes should be the responsibility of the purchaser who is occupying and using the property.

The clause is necessary to effect the shifting of the burden of payment to the purchaser. Sellers commonly reserve the right to pay the taxes in order to protect their security, the legal title, and to add the cost back into the unpaid balance. It is also appropriate for the contract buyer to bear the burden of the payment of assessments for municipal improvements such as trees, sewers, water and the like. These improvements increase the value of the property and should be paid for by the ultimate owner. Both parties have an insurable interest, but there is no clear duty to insure on the part of either.

The typical resolution of the question of who should pay the insurance is covered by the contract provision that the purchaser obtain and keep in force adequate insurance for the benefit of both parties, with the policy to be held by Seller during the payment period. Note the provision which requires notice to Seller before Purchaser's policy may be cancelled. Maintenance and Inspection Clause. It is usually in the best interest of the purchaser to keep the property in good repair. However, in order to protect the seller's security, it is common to impose a positive requirement upon the buyer to maintain the property.

Failure of the buyer to do so will constitute a breach of the contract so that it can be terminated by the seller and the property taken back. Because of the difficulty that may be encountered in monitoring good repair, a good contract will reserve the right to enter and inspect periodically to verify that necessary maintenance is in fact being performed. Against removal; Mechanics' and Materialman's Lien. The seller will usually seek assurance against removal or demolition of any building on the property without consent. This is necessary because the amount of money involved is generally based on value that includes both land and buildings.

Some improvements may be of no value and actually a hindrance to the proposed use of the property. The seller may be pleased to approve removal of certain dilapidated structures, but the contract should clearly spell out the authority to approve or deny such action. Numerous lawsuits have arisen where a materialman has tried to assert a claim of lien against both the buyer and the seller. The legal theory underlying this assertion is that the seller had actual notice that the buyer was placing improvements on the property. The clause used in the sample will assist in freeing the seller from this problem.

The use clause requires the buyer to refrain from breaching any existing private or restrictive covenant as well as prohibits illegal use of the property. Such protection is necessary to protect the value of any property interest retained by the seller, whether he intends to keep it or sell it to others. It is also protection for the innocent seller against asset seizure should the property be subject to confiscation for illegal substance distribution. Assignment and Lease Clause. Many contracts for deed contain an absolute prohibition against assignment. In the absence of any provision at all, the contract for deed would be freely assignable by the buyer just as almost all other contracts may be assigned.

This particular covenant contemplates the possibility of assignment, but permits the seller to retain a strong element of control by requiring approval prior to assignment. Interest calculations may be figured on a monthly, semiannual, or other time bases and can be computed on the balance due at the beginning or at the end of the period. In order to avoid misunderstanding, the manner of calculation should be stated clearly. If there is already an existing mortgage against the property at the time of the execution of the contract for deed, whether or not. Even where there is no such pre-existing secured debt upon the property, however, the seller may find it necessary or desirable to create it even after entering into the contract for deed.

Because this action has a negative impact upon the seller's ability to perform his side of the bargain, the contract buyer is entitled to be notified of such intended actions by the seller. The lender, if aware of the contract for deed, will insist upon the contract buyer's acquiescence and recognition of the superiority of the lien of the mortgage. When a neutral third party is engaged to handle the details of the transaction, instructions should be set out in detail stating the conditions on which the deed is to be delivered to the grantee, the disposition of the deed on default, and other details pertinent to the escrow agreement.

Acceleration and Additional Expenses Clauses. Like a mortgage, a contract for deed should include a clause providing that in case of default on the part of the buyer, the seller can declare the remaining amount due and payable immediately. Known as the acceleration clause, it can also indicate the grace period, the notification to the buyer of what action will be undertaken, and the allowance of additional expenses involved in the foreclosure process to be charged to the buyer. This clause gives the buyer the privilege of paying off the contract ahead of schedule.

It will usually state that the buyer may pay the entire or stated amounts on the principal at any time he chooses prior to the due date. Some such clauses, however, call for a pre-determined penalty for early payment. The risk of loss is on the seller until either title or possession of the property has passed to the buyer. Since title may not be transferred for years, the date of possession becomes significant. Also, the purchaser needs to know when he can occupy premises. The purpose of a real estate contract is to bind the buyer and seller to do something at a future time.

In case of death or incapacity of one or the other of the parties, a valid contract is binding upon the heirs and assigns. This covenant alerts both parties to the permanent effect of the contract which may extend the provisions beyond the life of the parties. All owners of record should sign. The agent has a responsibility to make a reasonable effort to determine who the owners actually are and ascertain that they sign their names exactly as they received title.

Buyers names should be signed exactly as they wish to accept title. All parties should sign for themselves and the agent should not sign for any of the parties unless there is a valid power of attorney for same that has been recorded or that can be recorded. Although a contract for deed is binding between the parties if not notarized, it cannot be recorded without acknowledgment, a declaration by the grantor to a notary public or other public official authorized to take acknowledgments.

The acknowledgment certifies that the instrument was executed by the grantor, known by the notary or other authorized officer to be the identical person who executed the instrument, and that it was his free and voluntary act. The general use of contracts for deeds has been discouraged by real estate practitioners because of the dangers and uncertainties over a long haul.

A contract for deed can develop into a nightmare for both buyers and sellers if not carefully drawn with the guidance of a competent attorney. On the other hand, a well designed contract for deed can be a useful and effective tool in long term financing. Rights to real property may be transferred through no voluntary act of the current owner. The most typical examples of involuntary alienation of rights include escheat, eminent domain, confiscation, accretion, and adverse possession.

The state is the potential heir of all owners of real estate. It takes their property unless someone else succeeds to its ownership either by virtue of disposition by a valid will or by the state rules of inheritance. The legal process of reversion of the ownership of property to the state is escheat. The most typical occasion giving rise to escheat is when the property owner dies intestate no will and without heirs capable of inheriting no legal heirs.

The power of eminent domain is an inherent right reserved by the government. It is the power of governmental units literally to take private property when it is concluded that such action is in the best interest of the general public. The method by which this power is exercised is called condemnation. Privately owned property may be taken for public use by condemning it.

The taking or condemning of private property must be done in accordance with specific legislative authority and within the limitations of the owner's constitutional rights, both federal and state. Generally, payment must be made to the landowner based upon the fair value of the property taken and the landowner may also collect payments for damages in terms of loss of value to the property remaining. Certain essential utilities, such as gas companies, electric companies and railroads, are frequently conferred the right of eminent domain. Once there has been a legitimate determination that private property is needed for a public purpose that is, the taking is not arbitrary nor capricious , the landowner can only dispute the value of the property taken, not the right to take.

The government has the power to take property in time of emergency or war, without compensation. Such confiscation generally applies only to property of enemies of the government. Section of the Federal Drug Enforcement Act of allows real property to be seized and forfeited if it is used to facilitate illegal drug traffic. Those who can prove that they were "innocent owners," either by having no knowledge of the illegal activity or by making all reasonable effort to alleviate the activity, have some protection from "asset seizure.

Accretion is the acquisition of land due to the gradual accumulation of soil alluvion by natural causes resulting in stream or river shoreline changes. Although usually beneficial for those landowners whose holdings are increased by the process, accretion may be detrimental to others who lose a portion of their holdings through erosion. The process of gradual recession of water from the usual watermark, thereby increasing land volume, is known as reliction or dereliction. Avulsion is the loss of land due to the sudden removal of a considerable quantity of soil by an act of nature, such as a flash flood tearing away a sizeable portion of land.

A riparian owner generally does not lose title to land by avulsion. The boundary lines stay the same no matter how much soil is lost. Adverse possession is a possession of private property which is inconsistent with and detrimental to the rights of the true owner. The title to private property may pass by prescription, against the will and desire of the owner, if the adverse claimant takes physical possession of the property for the statutory term of fifteen years. The justification for this "legalized stealing" of real estate is that if the true owners choose not to take action for such a long period of time, the law will not help them regain lost ownership.

The public purpose of adverse possession is to prevent the abandonment of private property and to keep land productive for society. To acquire legal title by adverse possession, the potential owner has to have been in actual possession that was open and notorious obvious , exclusive unshared , and continuous and uninterrupted, and with the claim of right of ownership for fifteen years.

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A second or follow-up adverse claimant may "tack on" another period of continuous occupancy to that of the first adverse claimant who has sold or otherwise conveyed an interest in the property to the second claimant. By tacking, the successive occupancies may total the necessary period of time. Whenever title to real estate depends on a claim by virtue of adverse possession, it may be necessary to obtain a judicial determination that acquisition of the title has in fact occurred. The common name for such a proceeding is a quiet title suit.

Those who claim title bring legal action in a local court against anyone and everyone who may have or may ever have had a any claim against the property, no matter how remote, to prove the validity of their title. Such suits typically name everyone ever remotely connected with the property and "the rest of the world" as defendants. Title may also be acquired through adverse possession by a claimant who has only a color of title wherein the title may appear to be good, but, because of a certain defect, is in fact not valid.

This commonly occurs in situations such as a forged deed where the occupant does not have title, but by fulfilling the requirements of adverse possession, good title may be acquired. Adverse possession should not be confused with squatter's rights where in the claimant may not be seeking title. Although squatters may develop a "prescriptive claim" or title that can eventually ripen into good title, the process is much less certain than gaining title by adverse possession.

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• California Course: California Trust Fund Handling (Trust Funds).

Potential licensees are advised to study carefully the subject of trust fund handling as it could well appear among the questions at the state licensing examination. What are trust funds? Real estate brokers and salespersons receive trust funds in the normal course of doing business. They receive these funds on behalf of others, thereby, creating a fiduciary responsibility to the funds' owners. Brokers and salespersons must control, and account for these trust funds according to established legal standards.

While compliance with these standards may not necessarily have a direct bearing on the financial success of a real estate business, non-compliance can result in unfavorable business consequences. Improper handling of trust funds is cause for revocation or suspension of a real estate license, not to mention the possibility of being held financially liable for damages incurred by clients.

Trust Funds vs 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. According to Business and Professions Code Section , 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 not later than the next business day 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.

CA broker compliance and 10145 trust fund accounting law

As provided under Commissioner's regulation , a deposit check may be held uncashed by the broker until acceptance of the offer if the following conditions are met: The check by its terms is not negotiable by the broker, or if the offeror has given written instructions that the check shall not be deposited or cashed until acceptance of the offer; and. The offeree is informed, before or at the time the offer is presented for acceptance that the check is being so 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 the next business day 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.

A neutral escrow depository, as used in Business and Professions Code Section , means an escrow business conducted by a person licensed under Division 6 commencing with Section of the Financial Code or by any person described in subdivisions a and c of Section of the Code. Identifying the Owner s of the Trust Funds. A broker must be able to identify which of the parties in a transaction owns the trust funds and 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. After acceptance of the offer, however, 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 the acceptance of the offer, only upon written authorization from the offeree. The offeror's check may be given to the offeree only if the offeror and offeree expressly so provide in writing.

Commissioner's Regulation 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. Commissioner's Regulation a Trust fund bank accounts. Trust funds received by a licensee that are not forwarded directly to the broker's principal or to a neutral escrow depository or for which the broker does not have authorization to hold uncashed must be deposited to the broker's trust fund bank account.

Business and Professions Code Section Business and Professions Code Section and Commissioner's Regulation require that a trust account meet the following criteria: Designated as a trust account in the name of the broker as trustee;. Maintained with a bank or recognized depository located in California; and. Not an interest-bearing account for which prior written notice can by law or regulation be required by the financial institution as a condition to withdraw the funds, except as noted in the following discussion of "Interest Bearing Accounts".

According to Commissioner's Regulation , withdrawals from the trust account may be made only upon the signature of one or more of the following: The broker in whose name the account is maintained; or. The designated broker-officer if the account is in the name of a corporate broker; or. If specifically authorized in writing by the broker, a salesperson licensed to the broker; or.

If specifically authorized in writing by the broker, an unlicensed employee of the broker covered by a fidelity bond at least equal to the maximum amount of the trust fund to which the employee has access at any time. Any arrangement under which a person named in items 3 or 4 is authorized to make withdrawals from a broker's trust fund account does not relieve an individual broker or the broker-officer of a corporate broker licensee from responsibility or liability as provided by law in handling trust funds in the broker's custody.

The fact of an employee's irresponsibility or negligence also does not relieve the broker of compliance with the law. Why a trust Account? An important reason for designating a trust fund depository as a trust account is the protection afforded principals' trust 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 Federal Deposit Insurance Corporation FDIC , in an opinion in , 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.

A trust fund bank account normally may not be interest bearing. A broker may, however, at the request of the owner of trust funds, when certain requirements pursuant to Business and Professions Code Section are met. Funds belonging to the licensee may not be commingled with trust funds. Commingling is strictly prohibited by the Real Estate Law. It is grounds for the revocation or suspension of a real estate license pursuant to Business and Professions Code Section e.

Personal or company funds are deposited into the trust fund bank account. This is a violation of the law even if separate records are kept. Trust funds are deposited into the licensee's general or personal bank account rather than into the trust fund account.

In this case the violation is not only commingling, but also handling trust funds contrary to Business and Professions Code Section It is also grounds for suspension or revocation of a license under Business and Professions Code Section d. Commissions, fees, or other income earned by the broker and collectible from the trust account are left in the trust account for more than 30 days from the date they were earned.

A common example of commingling is depositing rents and security deposits on broker-owned properties into the trust account. As these funds relate to the broker's properties, they are not trust funds and, therefore, may not be deposited into the trust fund bank account. Likewise, mortgage payments and other payments on broker-owned properties may not be made from the trust account even if the broker reimburses the account for such payments.

Conducting personal business through the trust account is strictly prohibited and is a violation of the Real Estate Law. For practical reasons, a real estate broker's personal funds may be commingled in the trust account in the following two specific instances: Trust funds may not be used to pay for these expenses. Commissions, fees, and other incomes earned by a broker, collectible from trust funds deposited into the broker's trust account may remain there for a period not to exceed 30 days.

While leaving this income in the trust account is technically commingling of funds, sometimes it may just not be practical to disburse the earned income immediately upon receipt. For instance, a property management company may find it too burdensome to collect its management fee every time a rent check is received and deposited to the trust account.

Therefore, as long as the broker disburses the fee from the trust account within 30 days after it is earned there is no commingling violation. Note, however, that income earned shall not be taken from trust funds received before depositing such funds into the trust bank account.

A licensed salesperson and an unlicensed employee of the broker may withdraw funds if either is authorized in writing by the broker to make withdrawals and certain regulatory requirements are met. However, brokers like Bethany must be very cautious in giving others authority to withdraw funds from a trust account because she remains legally liable for wrongful or negligent withdrawals made by authorized parties. State regulations also impose recordkeeping requirements on Bethany. Generally speaking, Bethany should make sure to record all trust fund transactions on a daily basis, making sure to record each transaction to a specific client or other beneficiary.

She also needs to maintain the source documents used to support her accounting entries, such as bank deposit slips, receipts, invoices, copies of checks or canceled checks drawn on the account. Bethany should always maintain a current balance when she enters transactions into her records and should reconcile her account with her monthly bank statement. A separate set of records should be maintained for each trust account held.

Bethany's trust account balance must always equal the aggregate amount held for the trust account beneficiaries.

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If her account is out of balance because of a shortage or an overage, Bethany is in violation of real estate law. Consequences for a broker with an out of balance trust account can range from regulator sanctions to loss of license - or even criminal convictions if theft, fraud or another crime is involved. Real estate brokers are required by state law to maintain trust accounts to keep client funds separate from the business and personal funds of the broker and their licensed salespersons.

Trust accounts help prevent theft, insure the funds are readily accessible to its beneficiaries and enables better insurance coverage of the funds. State law generally regulates the creation and management of broker trust accounts. A broker's trust account liability is equal to the outstanding balance deposited for the account beneficiaries.

A shortage or an overage in a trust account is a violation of law and can have very serious consequences for the broker in charge of the account as trustee. To unlock this lesson you must be a Study. Login here for access. Did you know… We have over college courses that prepare you to earn credit by exam that is accepted by over 1, colleges and universities. You can test out of the first two years of college and save thousands off your degree.

Anyone can earn credit-by-exam regardless of age or education level. To learn more, visit our Earning Credit Page. Not sure what college you want to attend yet? The videos on Study. Students in online learning conditions performed better than those receiving face-to-face instruction. Explore over 4, video courses. Find a degree that fits your goals. Try it risk-free for 30 days. Add to Add to Add to. Want to watch this again later? 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. 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. Account Setup State law regulating real estate licensees like Bethany have specific laws that address trust funds.

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. Try it risk-free No obligation, cancel anytime. Want to learn more? Select a subject to preview related courses: Withdrawals Bethany must insure that there are restrictions on who can withdraw funds from the trust account. Recordkeeping State regulations also impose recordkeeping requirements on Bethany. Trust Fund Liability Bethany's trust account balance must always equal the aggregate amount held for the trust account beneficiaries.

Lesson Summary Real estate brokers are required by state law to maintain trust accounts to keep client funds separate from the business and personal funds of the broker and their licensed salespersons. Register to view this lesson Are you a student or a teacher?

Definition

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ABCs of BRE Broker Audits

You are viewing lesson Lesson 1 in chapter 15 of the course:. Contracts In Real Estate Role of Agencies in Real Principles of Practicing Real Estate. Real Estate Exam Prep Information Systems and Computer Applications Business