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An account set up by a broker to keep a client’s monies segregated from the broker’s general funds; also called an earnest money account. In general, each broker is required by state law to deposit funds, which are not to be immediately released to escrow, into a trust fund account with a bank or recognized depository within a certain time after receipt. The broker is the trustee of the client trust account, and all funds deposited in the account must be available for withdrawal upon demand. A single client trust account can usually serve all of the broker’s clients, provided that detailed records are maintained and made subject to inspection by the proper state licensing agency. The principal broker in an agency is responsible for all trust monies and, although the broker will usually authorize a salesperson in writing to deposit client monies, the broker is ultimately responsible for the account. These accounts may or may not earn interest, according to state regulations, and if interest is earned, the state will specify who may benefit from interest earned. The broker may suggest the use of an interest-bearing account when substantial funds are involved—there should be a clear understanding of who will benefit from the interest (usually the buyer, not the seller or the broker).

A main reason for requiring a broker to maintain a client trust account separate from his or her general account is to protect these monies from possibly being “frozen” during legal actions against the broker, such as creditor attachments or probate of a deceased broker’s estate. In addition, because the account is custodial in nature, the Federal Deposit Insurance Corporation personally insures each client’s funds up to $100,000 if each account is specifically designated as custodial and the name and interest of each owner in the deposit is disclosed on the depositor’s records. This insurance will not apply if the broker allows any personal or business funds to commingle with clients’ funds.

In addition to a client trust account for use with earnest money deposits, it is good practice for a broker to set up a management trust account when acting as property manager for several income rental properties. It is not necessary to open a separate trust account for each transaction; rather, a simple ledger system is sufficient.
Dearborn Real Estate Education
This "Word of the day" is excerpted from The Language of Real Estate, 6th Edition by John Reilly (published by Dearborn Real Estate Education, 2006 copyright). To purchase the complete book, with over 2800 key terms and definitions, or to browse through Dearborn's hundreds of other professional real estate titles, including Real Estate Technology Guide by Klein, Barnett, Reilly, click here.