RE-CA-CE-Trust_Funds

Trust Funds
California
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VERSION 2023-01-24
CONTENTS
Segment 1: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Definition of Trust Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Fiduciary Duty - Trust Fund Handling General Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Identifying the Owner(s) of the Trust Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Segment 2: Trust Fund Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
General Trust Account Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Interest Bearing Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Withdrawals of Trust Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Commingling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Trust Fund Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Trust Fund Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Attempt to Use Trust Funds as an Offset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Advance Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Segment 3: Trust Fund Accounting Records and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Accounting Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Columnar Record System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Columnar Record of All Trust Funds Received and Paid Out - Trust Fund Bank Account . . . . 19
Separate Record for Each Beneficiary or Transaction For Clients Funds Placed in Trust
Fund Bank Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Record of All Trust Funds Received - Not Placed in Brokers Trust Account . . . . . . . . . . . . . . . . 21
Separate Record for Each Property Managed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Non-Columnar Record System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Developing Good Recordkeeping Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Segment 4: Reconciling Accounting Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Reconciliation Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Reconciliation Procedural Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Segment 5: California Department of Real Estate Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Documentation and Document Handling Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Accounting Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Non-Accounting Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Additional Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
The Ten Most Common Violations Found in DRE Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Record Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
I
Use of False or Fictitious Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Trust Fund Records To Be Maintained . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Separate Record for Each Beneficiary or Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Trust Account Reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Trust Fund Handling for Multiple Beneficiaries (Trust Fund Shortage) . . . . . . . . . . . . . . . . . . . . 34
Trust Fund Handling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Trust Account Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Commingling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Written Disclosure Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
The DRE Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Segment 6: Sample Record Keeping Transactions Case Study . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Example Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Sample Situation Transaction Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
FORM RE 4522 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
FORM RE 4523 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
FORM RE 4524 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
FORM RE 4525 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Appendix I: California Business and Professional Code 10145 and 10146 . . . . . . . . . . . . . . . . 56
Appendix II: Commissioners Regulations - Article 15. Trust Fund Accounts . . . . . . . . . . . . 60
II
Segment 1: Introduction
During the normal course of business, real estate licensees routinely receive trust funds. These funds may
be in the form of cash, personal checks, or other items of value. All of these funds are received from the
public in the course of performing services for which a real estate license is required. The two most common
reasons for receiving trust funds are:
• A buyer making an offer to purchase a property and tendering a good faith offer
• A broker/licensee managing real property for an owner.
These funds do not belong to the brokerage or the licensee. Because these funds belong to another person
and are held for the benefit of others, these funds are called trust funds.
Since trust fund handling violations are a major reason for disciplinary action, a thorough understanding of
and complying with the laws and regulations regarding trust funds are important. This course will focus
on the laws and regulations governing the handling of California trust funds and the maintenance of a trust
fund bank account.
In your first reading assignment, you will be introduced to the concept of trust funds and the licensee's
obligations with regard to trust funds.
After you have completed this reading assignment, you will be able to:
• Explain what is a trust fund
• Explain a licensee's basic duty relating to trust funds
• Identify the owner of a trust fund

Definition of Trust Funds

Trust funds are money or things of value that are received
by a broker or salesperson on behalf of a principal or other
person. Trust funds are held for the benefit of others in the
performance of any acts for which a California real estate
license is required. Trust funds are not limited to cash. They
can include the following items:
• Cash
• Deposit checks made payable to the broker, the seller, a

title company, or an attorney
• A promissory note held as part of a property purchase

price
• Rent money received from a tenant
• Security deposits received from a tenant
• A "pink" slip to an automobile given in lieu of a deposit
• Other items of value that are given to a broker or salesperson to be held for the benefit of another in a
transaction
• Fees for brokerage services to be conducted in the future
Not all funds or things of value received by a broker or salesperson are trust funds. The following are
examples of funds that a brokerage may receive which are not regarded as trust funds:
• Rents and deposits derived from rental property owned by the broker, whether owned by the brokerage
itself or the broker as an individual
• Real estate commissions
• Brokerage general operating funds
• The broker's personal funds
In general, the California Department of Real Estate (DRE) does not have jurisdiction over non-trust funds
accounts. However, if there is any confusion as to whether a specific account is a trust funds account subject
to DRE regulation, the DRE may find it necessary to investigate a specific account to determine the source
of funds and ownership of funds
Broker John renews his real estate license on an account called "Trust Account for John Family."
The DRE would most likely investigate this account since it would be difficult to determine if the
account only contained funds for the John Family or it is used to hold funds for the benefit of oth
ers.
2 Definition of Trust Funds

Fiduciary Duty - Trust Fund Handling General

Procedures
The licensee has a fiduciary responsibility to the owner of the trust funds. Trust funds are entrusted to
the care and handling of the real estate licensee for a limited period and are to be handled and managed
according to the fiduciary duty of accounting. This duty of accounting requires licensees to put the interest
of the funds' owner ahead of the personal or business interests of the licensee. The rules and regulations
governing the handling and management of trust funds are designed to make sure this fiduciary standard is
achieved.
Business and Professional Code Section 10145 is the statutory authority governing trust funds.
The California Department of Real Estate Commissioner's Regulations Sections 2830 to 2835 pre
scribe in more detail the procedures to be followed in accounting for trust funds.
When a licensee accepts trust funds on behalf of the licensee's broker, the licensee must take one of the
following actions, within three business days (Commissioner's Regulations 2832(a)):
1. The funds can be given to their owner. (Note: written instructions are required from all principals to do
so);
2. the funds can be deposited into a neutral escrow depository; or
3. the funds can be deposited into the broker's trust fund account.
There is one exception to the three-day check deposit rule. Licensee can hold a check uncashed that has been
received in connection with an offer to purchase or lease real property when both of the following conditions
are met:
Fiduciary Duty - Trust Fund Handling General Procedures 3

1. The check by its terms must not be negotiable by the broker (that is, not made payable to the broker),
or if the offeror (buyer) gives written instructions that the check shall not be deposited or cashed until
acceptance of the offer; and
2. The offeree (seller) is informed that the check is being held uncashed, either before or at the time the
offer is presented for acceptance.
If the offer is later accepted, the broker can continue to hold the check undeposited only if the broker receives
written authorization from the seller. Otherwise, the check must be placed into a trust account or depository
within three business days.
A neutral depository can be a title or escrow company, an attorney, or a financial institution. All of these
neutral depositories must be conducted by a person licensed under Division 6 of the Financial Code or by
any person described in Section 17006(a) and (c) of the Financial Code.
After receiving trust funds, a licensee, within three business days, must put them into a neutral
depository, the broker's trust fund account, or give them to the owner of the funds upon receipt of
written instructions. The only exception to this rule is when the funds are received as part of an
offer to purchase or lease property and are to be held uncashed until acceptance of the offer.
Identifying the Owner(s) of the Trust Funds

Since trust funds can be disposed only upon the authorization of the person entitled to receive them or who
owns them, a broker must be able to identify which of the parties in a transaction owns the funds or is
entitled to receive them. In a transaction yet to be completed, the person entitled to the funds can change as
the transaction progresses. The person who tendered the funds is not necessarily the person entitled to the
funds. In some instances, the party entitled to the funds will change upon the occurrence of certain events
in the transaction, depending on the terms stated in the purchase contract.
An initial good faith deposit given by a buyer will be considered the buyer's funds. However, if
the buyer defaults, ownership of the funds, depending on the agreement between the buyer and
seller, may transfer to the seller.
4 Fiduciary Duty - Trust Fund Handling General Procedures

Generally, the following principles will determine the ownership of trust

funds:
• Prior to acceptance of the offer. A good faith deposit received

from a buyer prior to the acceptance of the offer belongs to the buyer
and is to be handled according to the buyer's instructions. If the
check is deposited in the broker's trust fund bank account, the money
should be maintained in the account for the benefit of the buyer until
the offer is accepted. The deposit check can be held undeposited if the
buyer gives written instructions to hold it uncashed and if the seller is
informed it is to be held uncashed at the time of the offer is presented.
• After acceptance of the offer. After acceptance of the offer by the

seller, the deposit should be handled according to the instructions of
the buyer and seller as follows:
• The money must be placed into a neutral escrow depository or into the trust fund bank account of
the broker no later than three business days after acceptance.
• A buyer's check held uncashed by the broker before acceptance of the offer can be held uncashed after
the acceptance of the offer only upon written authorization from the seller.
• The buyer's check can be given to the seller only if the buyer and seller give written instructions.
• The buyer's deposit cannot be refunded to the buyer without the express written consent of the
seller. The reason for this rule relates to ownership of the money. Depending on the terms of the
underlying offer to purchase, the ownership of the funds can move from the buyer to the seller upon
the occurrence or non-occurrence of specified events.
Identifying the Owner(s) of the Trust Funds 5

Segment 2: Trust Fund Bank Accounts
Whether a broker maintains a trust fund account or elects not to maintain a trust fund account, a broker
in either case is required to maintain trust fund records as soon as the broker has any contact with trust
funds. Your next reading assignment will discuss the non-accounting issues associated with the handling of
trust funds. This discussion will include the characteristic of a trust account along with the benefits and
protections it affords the client. Once a trust account is established, there are certain actions relating to
that account that are prohibited. These activities will be discussed.
At the conclusion of your next reading assignment you will be able to:
• Describe the purpose of a trust account and what benefits a trust account provides
• Identify prohibited activities relating to trust fund accounts
Introduction
Due to the liability that arises when funds are received from or for the benefit of a principal, along with the
numerous obligations and requirements for maintaining a trust account, many brokers do not maintain a
trust account. These brokers simply require all funds to be deposited directly into a neutral escrow depository
by having good faith deposit checks made payable directly to a title or escrow company.
A broker is not required to maintain a trust fund account, but is required to maintain trust fund
records.
If a broker does maintain a trust account, the broker and their salespersons
must carefully follow the rules and procedures required by the Business
and Professions Code, as well as the Commissioner's Regulations, relating
to the establishment and maintenance of trust accounts.
The trust account must be kept in good order at all times. To a large de
gree, this is a recordkeeping function. Supporting records must show that
all accounts balance to the trust funds bank account. Supporting records
should also reinforce the fact that no violations of law have occurred in
the custodial management of the funds.
The broker should ensure that personal and company operating funds are
not commingled with trust funds and that at all times the trust fund
account balance equals the broker's trust fund liability, without shortages
or overages. To perform this task efficiently and in accordance with the real
estate law, the broker must keep the trust fund records current, complete,
and accurate.
A trust account does not protect a client from dishonest acts of a broker. However, the reasons for having a
trust account and for maintaining trust account records are much more practical. Some of the reasons are:
• Trust account funds cannot be frozen pending litigation against the broker or if the broker becomes
incapacitated or dies. Funds maintained as trust funds are not subject to claims against the broker that
are personal in nature.
• Each client receives up to $250,000 FDIC insurance protection if the account is a FDIC account meeting
appropriate regulatory requirements. This means that each client with funds deposited in a trust account
in a federally insured bank is insured up to $250,000, as opposed to just $250,000 for the entire account.
It should also be noted that an individual's trust funds would be added together with any other single-
ownership funds the client may have on deposit at the institution, up to a total aggregate coverage of
$250,000 per person per institution.
• A trust account provides the DRE with easy audit access to client trust fund records.
• Trust fund segregation from other funds of the broker ensures the integrity of the funds and prevents
accidental commingling.
• Interest earned on any trust account, where permitted, may NOT be for the benefit of the broker.
Introduction 7
General Trust Account Requirements

The Business and Professions Code Section 10145 (a)(1) and the Commissioner's Regulations 2832 require
trust accounts to meet the following criteria:
• The account must be designated as a trust account in the name of the broker, as trustee;
• The account must be maintained with a bank or recognized depository located in the State of California;
and
• The account must not be an interest bearing account requiring prior written notice as a condition of the
withdrawal of funds. (Commissioner's Regulation 2832 (b).
Interest Bearing Accounts

A broker has no obligation to place trust funds into an interest bearing
account. In fact, normally, trust fund bank accounts are not interest
bearing. The only exception to this rule is permitted under Business and
Professions Code Section 10145(d). Under this section, a real estate broker
MAY place the trust funds in an interest bearing account at the request of
the owner of the trust funds or the principals involved in a series of related
transactions. The broker may open an interest bearing account only if all
of the following requirements are met:
• The account is in the name of the broker as trustee for a specified ben
eficiary or specified principal of a transaction or series of transactions.
• All of the funds in the account must be covered by insurance provided

by an agency of the federal government.
• The funds in the account must be kept separate, distinct, and apart from funds belonging to the broker
or to any other person for whom the broker holds funds in trust.
• The broker must discloses the following information to the person from whom the trust funds are received
and to any beneficiary whose identity is known to the broker at the time of establishing the account:
• How the interest will be calculated and paid under various circumstances;
• Whether service charges will be paid to the depository and by whom; and
• Possible notice requirements or penalties for withdrawal of funds from the account.
• In an executory sale, lease, or loan transaction, the person who shall receive earned interest needs to be
specified in writing.
• No interest earned on funds in the account shall go directly or indirectly to the benefit of the broker or
to any person licensed to the broker.
8 General Trust Account Requirements

Even authorization by the funds' owners will not legally permit the broker to collect the earned
interest on trust funds!
Commissioner's Regulations 2830.1 provide the only other situation that allows a real estate broker to deposit
funds into an interest bearing account. This situation is when the broker is acting as an agent for a financial
institution that is the beneficiary of a loan. When this is the case, the broker can deposit and maintain
funds received from or for the account of an obligor into an interest bearing account to pay interest on an
impound account to the obligor as long as the following conditions are met:
• The account is in the name of the broker, as trustee;
• All of the funds in the account are covered by insurance provided by an agency of the federal government;
• All of the funds in the account are funds held in trust by the broker for others;
• The broker discloses to the obligor how interest will be calculated and paid; and
• No interest earned on the funds shall go directly or indirectly to the benefit of the broker, or to any
person licensed to the broker.
Most trust fund bank accounts are not interest bearing. The broker has no obligation to place
trust funds into an interest bearing account.
Withdrawals of Trust Funds

Once trust funds have been deposited into a trust account, the funds can only be withdrawn upon the
signature of one or more of the following (Commissioner's Regulation 2834):
• The broker in whose name the account is maintained;
• The designated broker-officer, if the account is in the name of a corporate broker; or
• If specifically authorized in writing by the broker (individual or corporate broker), any one of the following
persons:
• A salesperson licensed to the broker;
• An associate broker licensed to the broker; or
• An unlicensed employee of the broker covered by a fidelity bond in an amount at least equal to the
maximum amount of the trust funds to which the employee has access.
Interest Bearing Accounts 9

If the broker or broker-officer elects to have a salesperson, associate broker, or unlicensed employee
handle the trust account, the broker or broker-officer remains responsible and liable for the funds
and handling of the account. The fact that an employee might be negligent or intentionally mis
handle the account does not relieve the broker or broker-officer of compliance with the trust fund
law.
Commingling
Commingling means combining the funds of the client with
the funds of the broker or licensee in the same account. Real
Estate Law strictly prohibits commingling. It can be grounds for sus
pension or revocation of a real estate license under the Business and
Professions Code Section 10176(e).
Commingling occurs when:
• Personal or company funds are deposited into the trust fund bank
account.
• Trust funds are deposited into the licensee's general or personal bank account rather than into the trust
fund account.
• Commissions owed to the broker are left in the trust account for more than 25 days from the date they
were earned.
• Rents and security deposits on broker-owned properties are deposited into the trust account. Since these
funds relate to the broker's property, they are not trust funds and may not be deposited into the trust
account. Conducting personal business through the trust account, even if it relates to real estate, is
strictly prohibited and is a violation of the Real Estate Law.
The following two cases are not "commingling" for purposes of Business and Professions Code Section
10176(e) as provided for by Commissioner's Regulation 2835:
• The broker may maintain up to $200 of personal funds in a trust account to cover service
fees and other bank charges. These fees may include charges made against the account for check
printing, monthly account service charges, or fees on returned deposit items. However, the trust ac
count is specifically prohibited from paying these charges out of trust funds. Most banks will debit the
broker's personal or operational account for any trust account charges or fees, as is the preferred practice.
(Commissioner's Regulations 2835(a).)
• Commissions and other fees owed the broker out of trust fund money may remain in the
account for no more than 25 days. This is not considered commingling under the Commissioner's
Regulations. This exception is for practical reasons. It would be burdensome for a broker to be forced to
withdraw funds each time a commission or property management fee is earned or upon receipt of a rent
check out of which a fee may be due to the broker.
10 Withdrawals of Trust Funds

• Under no circumstances may a broker withdraw an earned fee before depositing the funds which
triggered the fee.
• Under no circumstances may a broker pay personal or company expenses from the trust fund bank
account. This includes payments that are a draw against commissions or other earned income.
The proper procedure is for the broker to issue a check on the trust fund bank account to themself
or their company for the total amount of income earned, then pay personal or company expenses
from that check.
It should also be noted that if there is a dispute as to the broker's right to receive any portion of
trust funds, the disputed portion of the funds should not be withdrawn until the dispute is settled.
Trust Fund Liability

Once trust funds are placed into a trust account, the broker-
trustee becomes liable for those funds. The broker remains liable for
those trust funds until the funds are disbursed according to instructions
from the principals who own the funds. The amount of total liability that
the broker has at any given moment is the total trust fund positive balances
due to all the beneficiaries of the account at that time. If a beneficiary
account has a negative balance, it is not deducted from the total liability.
That would allow the broker to be liable for less than what is due the
other beneficiaries of the account!
Some of the reasons for a possible negative balance in a trust fund are:
• The broker overdraws a particular beneficiary's account balance by mistake.
For Example: Broker Bob transfers $2,500 to Escrow Company on behalf of Beneficiary B. The balance
in Beneficiary B's account prior to the transfer is only $2,000. Beneficiary B, after the transfer, has a
negative balance of $500 in his trust fund account.
• The broker overdraws a particular beneficiary's account balance due to a bounced check by one of the
trust fund beneficiaries.
For Example: Broker Bob transfers $2,500 to Escrow Company on behalf of Beneficiary B. The balance
in Beneficiary B's account prior to the transfer is only $2,500. Immediately after the transfer, Beneficiary
B's trust fund account balance is $0.00. The next day Broker Bob receives notice that Beneficiary B's
check that was deposited into the trust fund account is being returned marked Non-Sufficient Funds
(NSF). The balance in Beneficiary B's trust fund account is now negative $2,500.
Commingling 11
• A beneficiary's check bounces.
For Example: The bank charges the trust fund account a $20 returned item fee. Even after the
beneficiary's check is made good, the beneficiary would still have a negative balance in his trust fund
account, until such time as $20 is deposited to cover the returned item fee.
The trust account balance might also be greater than the total trust fund liability. If this is the case, there
is a trust fund overage. An overage may be a violation of the Business and Professions Code Section
10176(e) relating to commingling.
EXAMPLE OF TRUST FUND OVERAGE/UNDERAGE: Broker Bob maintains a trust

account that currently has 4 account beneficiaries on May 1. The trust account owes Beneficiary
A $5,000, Beneficiary B $2,000, Beneficiary C $10,000 and Beneficiary D $8,000. The broker-
trustee owes the Beneficiaries a total of $25,000, regardless of how much money is actually in the
account. Broker Bob transfers Beneficiary B's $2,000 to Escrow Company X upon proper written
instructions. However, one day after the transfer, Beneficiary B's check is returned for "non-suffi
cient funds" (NSF). The broker owes Beneficiaries A, C and D a total of $23,000. Because of the
transfer of B's funds to escrow and B's NSF check there is only $21,000 in the trust fund account.
Broker Bob is liable for the shortage. On May 5, Beneficiary's D transaction closes. On that day,
Broker Bob is entitled to a commission in the amount of the $8,000 in Beneficiary D's trust fund
account. On June 10, the total trust account balance is still $21,000. The total account aggregate
liability is now $15,000. This balance includes an overage of $8,000 in Beneficiary D's trust fund
account and a shortage of $2,000 in Beneficiary B's trust fund account balance.
Both trust fund account shortages and overages are a violation of the Real Estate
Law. Whether the trust fund account has a shortage or an overage, any discrepancy of any kind
is a serious violation. Many brokers and salespersons can testify to the fact that the California
Department of Real Estate takes these account discrepancies seriously, as license suspension or re
vocation are the result even if the account discrepancies have been corrected prior to a DRE audit.
Each broker must at all times ensure that the trust account balance equals the trust fund liabilities. The
following measures should be taken to ensure account integrity:
• Deposit all trust funds intact and in a timely manner that are not forwarded to escrow,
forwarded to the fund's owner(s), and are not held uncashed as authorized. Following this
simple rule will lessen the risk of funds being lost or misplaced. The licensee and broker are responsible
for all funds received, whether or not they are deposited. DRE auditors frequently identify cases where
the trust funds received were properly recorded on the books but were never deposited into the bank.
• Maintain adequate supporting papers and documentation for any disbursements. This docu
mentation may include copies of invoices, purchase and sale agreements, commission agreements and the
like.
• Care should be taken to accurately record disbursements both in the Bank Account Record
and in the Separate Beneficiary Record. Since the total liability of beneficiary records must equal at
12 Trust Fund Liability

all times the balance in the bank account record, accurate recording of disbursements in both records is
a necessity.
• Disburse funds against a beneficiary's account only when the disbursement will not result
in a negative balance. This type of shortage usually occurs when a broker makes a disbursement for
a beneficiary that is in excess of funds received from that beneficiary.
• Ensure that a check deposited into a trust account has cleared before disbursing funds
against that check. This may require that a broker verify with the trust fund account bank that
the funds deposited by a particular beneficiary are cleared funds, prior to disbursing those beneficiary
funds to an escrow company. This situation frequently arises when a broker deposits a buyer's earnest
money check for a purchase transaction that is rejected by the seller. Before the broker returns the
earnest money to the buyer for the rejected offer, the broker should verify that the buyer's funds are were
actually collected!
• Keep accurate, complete, and timely records of the trust account. This would include records
relating to the trust bank account and the records representing the corresponding beneficiary accounts.
• On a monthly basis, reconcile the trust account bank statement with the separate record for each bene
ficiary account.
Trust Fund Conversion

Conversion of trust funds is a theft of the funds. Conversion is not the same thing as commingling.
The act of conversion, as defined by Black's Law Dictionary, is the "unauthorized assumption and exercise
of the right of ownership over the goods or personal chattels belonging to another. . . to the exclusion of the
owner's rights." The California Penal Code Section 503 defines embezzlement, which is a form of conversion,
as "...the fraudulent appropriation of property by a person to whom it has been entrusted." In the case of
trust fund conversion, it means the misappropriation of the trust funds by one not entitled to them. In
other words, it is stealing from the funds.
The act of commingling trust funds is regarded as a serious matter by

the DRE that may subject the licensee to a range of possible DRE-
imposed penalties. However, if the broker/licensee is involved in trust
fund conversion, a violation of the California Penal Code 506 may have
occurred. Not only will the DRE be involved in disciplinary action
against a licensee involved in trust fund conversion, but the criminal
embezzlement felony law and resulting penalties may also be imposed.
Any licensee or broker who is guilty of conversion will lose

their real estate license. If a complaint for conversion is filed with
the DRE, or if a DRE audit should uncover conversion of client funds,
the DRE will file a formal accusation of conversion under the Admin
istrative Procedures Act. The Real Estate Commissioner will be the
complainant and the licensee will be the respondent. The case will be heard before an administrative law
judge from the Office of Administrative Hearings. The Commissioner's legal counsel presents the case for
the Commissioner. Respondent's independent counsel will make the respondent's case. The judge makes a
proposed decision based upon the evidence presented. The Commissioner issues an official decision, accepting
Trust Fund Liability 13

or rejecting the judge's proposed decision. If the charges are upheld, the Commissioner will almost certainly
call for the revocation of the respondent's license.
If the respondent disagrees with the decision based upon the evidence, they may petition for reconsideration.
If the petition for reconsideration is denied, then the respondent has the right to appeal to the courts.
If a licensee has been convicted of trust fund conversion, a receivership may be imposed upon
the licensee's assets in order to find and recover the stolen trust funds. Assets of the licensee
may have to be sold or otherwise recovered in order to reclaim the embezzled trust funds. If the licensee
has converted funds and then becomes insolvent (not able to pay), the situation becomes very complicated.
In the resulting bankruptcy action, creditors of the licensee will make claims against the licensee's assets.
Since the trust funds that were converted are stolen funds, the licensee never had a right to the funds and
consequently the creditors will have no valid claim to those funds either. The problem for the bankruptcy
court is to identify the stolen funds or the assets derived from the stolen funds and to separate those assets
from the general bankrupt estate. Once the stolen funds or the assets derived from the stolen funds have
been identified, the bankruptcy court will distribute them to the rightful owner.
If funds are converted, the broker or licensee can both be civilly and criminally liable. When
a broker or licensee receives trust funds, they are liable for them until they are disbursed to the rightful
parties. If conversion has been committed, the rightful owner of the funds may sue to recover the funds. If
necessary, all assets of the broker/licensee may be sold in order to satisfy the civil judgment.
Depending on the nature of the conversion, the district attorney in the county in which the conversion took
place may seek a grand jury indictment. If indicted, the licensee will be tried in criminal court. The DRE will
act as a witness for the prosecution if the Commissioner believes that the licensee committed the conversion.
If convicted, imprisonment and fines are potential penalties.
A more detailed discussion of the DRE disciplinary procedures is presented in Segment 5 of this
course.
Attempt to Use Trust Funds as an Offset

Situations may arise where a client, who has funds in a broker's trust account, owes the broker or a licensee
of the broker a debt. Although the debt may be valid, funds of the client in the broker's trust account
may not be used to offset debt.
EXAMPLE: Broker Bob loaned Seller Sam $10,000 so that Sam could purchase a boat. Sam
signed a promissory note that was due on June 1, 2000. Sam, on September 1, 2000, listed his per
sonal residence with Broker Bob. Bob obtained a buyer for Sam's property and deposited Buyer
Betty's real estate purchase contract deposit for $5,000 into his Brokerage trust account. At the
time of closing, Sam still owed Bob the entire $10,000 plus accrued interest. Bob may not offset
Sam's trust account funds for $5,000 against the debt Sam personally owes Bob. Bob's remedy
is to bring a civil action against Sam. Bob may not use trust money to offset any debt Sam owes
him under any circumstances.
14 Trust Fund Conversion

Advance Fees
An advance fee is any fee received by a licensee in advance of providing the actual services for
which the fee is paid. Section 10026 of the Business and Professions Code defines an advance fee as:
... a fee, regardless of the form, claimed, demanded, charged, received, or collected by a licensee from a
principal before fully completing each and every service the licensee contracted to perform, or represented
would be performed. Neither an advance fee nor the services to be performed shall be separated or divided
into components for the purpose of avoiding the application of this section. The term applies to a fee for
a listing, advertisement or offer to sell or lease property, other than in a newspaper of general circulation,
issued primarily for the purpose of promoting the sale or lease of business opportunities or real estate or
for referral to real estate brokers or salesmen, or soliciting borrowers or lenders for, or to negotiate loans
on, business opportunities or real estate...
Some brokers will collect advance fees from a client for services to be
rendered in the future, perhaps marketing or renting a property. Some
fee-for-service brokers may collect an advance fee retainer which they can
draw against as services are performed.
All advance fees received by a broker must be deposited into the

broker's trust fund account. They are not the funds of the broker.
They are the funds of the client. If the funds are deposited directly into
the account of the broker, such a deposit is deemed embezzlement, and
the principal can recover treble damages (triple the normal amount) and
attorney's fees. Once the fees have been deposited into the trust fund account, they cannot be withdrawn
except for the benefit of the principal whose funds they are. They may be withdrawn for the benefit of the
broker when the agent's services are completed, and then only upon following required DRE procedures.
Prior to collecting an advance fee, the broker/licensee must comply with the provisions of the Business
and Professions Code Section 10085 and DRE approval requirements. These requirements are found in
Commissioner's Regulation 2970. Any violation of these rules can also lead to DRE disciplinary action. The
law requires that:
• Advance fee agreements, letters, advertisements, and other solicitation materials should be submitted for
DRE approval at least ten days prior to their use or prior to the actual collection of any advance fee.
• All advance fee agreements and materials must be printed in at least 10-point type.
• The DRE will disapprove any materials found to be misleading.
• All materials are deemed approved if not disapproved within 15 days after DRE submission.
• Soliciting or charging an advance without prior approval of all material used in the solicitation is a
misdemeanor. The potential penalty is a fine up to $1,000 and six months in jail.
• Use of material that has been disapproved is also a misdemeanor.
Advance fees that are deposited into a trust fund account are the funds of the principal. They
must be accounted for in a manner consistent with other kinds of trust funds. Section 10146 of the California
Business and Professional Code is the statutory authority allowing the DRE to establish rules regulating the
accounting for advance fees.
Advance Fees 15
The DRE's rules regarding advance fees is found in Commissioner's Regulations Section 2972. This section
requires the following:
• Principals of advance fee trust funds are to receive verified copies of the accounting for
their funds from the broker at the end of each quarter and/or at completion of their contract with the
broker.
• Accounting procedures for receiving advance fees includes the following:
• Proper recording of the names of the agent and the principal
• The amount collected
• Identification of the trust account into which the fees are deposited
• A description of the services rendered or to be rendered for the advance fee.
• Accounting procedures for disbursements require an itemization of the purpose of each withdrawal as
per the following:
• Disbursements for each service listed in the description of services rendered or to be rendered
• Disbursements to pay commissions to agents and representatives
• Disbursements to pay for costs and profit
• Disbursements for advertising must include a copy of the advertisement, the name of the publication,
the number of advertisements published and the dates published.
• Disbursements for an advance fee for the arrangement of a loan secured by a real property or a business
opportunity must include a list of the names and addresses of the persons to whom information
pertaining to the principal's loan requirements were submitted and the dates of the submittal.
16 Advance Fees
Segment 3: Trust Fund Accounting
Records and Procedures
https://r.onlineed.com/pub/992.mp4
Brokers are obligated to maintain records relating to trust funds. If a broker maintains a trust account,
adequate accounting records that meet regulatory requirements must be followed. In your next reading
assignment you will be introduced to basic record keeping accounting systems and good record keeping
practices that must be followed in order to be in compliance with real estate law. At the conclusion of your
next reading assignment you will be able to:
• Identify the two basic accounting systems and describe their basic characteristics
• Identify and explain good record keeping procedures and practices
Introduction
The broker has the fiduciary responsibility of accounting for the trust
funds entrusted to them. The maintenance of adequate records to
account for the trust funds received and disbursed is a major part of
the fiduciary duty of accounting. The records that must be maintained
by the broker do not just relate to funds which are deposited into the
broker's trust fund account. Records must be kept for all trust
funds handled by the broker. These might include trust funds
sent directly to escrow, released to the owner(s) of the funds, or held
uncashed as permitted under the Commissioner's Regulation 2832.
The fiduciary duty of accounting requires the maintenance of accurate

and adequate accounting records and procedures for a number of reasons:
• It helps the broker prepare adequate monthly or other periodic reports for the client. These
reports apply particularly to property management accounts that require the broker to report account
activity to the client on a regular basis.
• It ensures that the beneficiary's funds being held in the trust fund account will be insured
up to the maximum FDIC insurance coverage limits. If the beneficiary's deposited funds should
Segment 3: Trust Fund Accounting Records and Procedures
exceed the FDIC insured limits, steps should be taken by the broker to set up additional account(s) at
other banking institutions so that the funds are adequately protected by FDIC insurance.
• It ensures that trust funds of the clients are kept separate from the personal funds or company
operational funds of the broker/brokerage.
• It helps ensure that there is not a shortage or overage in the trust fund account and the individual
beneficiary accounts.
• It is the basis for determining the amount of money owed the account beneficiaries at any
given moment. This total amount will be the trust fund liability of the broker as of that specific
moment.
Accounting Systems
Regardless of the specific accounting system and procedures used by the
broker, the accounting system must meet certain basic characteristics as
prescribed by Commissioner's Regulations 2831 and 2831.1(a). These reg
ulations require that an acceptable accounting system must show the fol
lowing:
• All trust receipts and disbursements and applicable account details

must be detailed in chronological order.
• The balance of each trust fund account must be calculated based on

recorded transactions. The audit trail tracing the recorded steps taken by the broker in handling each
account must lead to an accurate, up to date balance of the account.
• The system must present in chronological sequence all receipts and disbursements that affect each
beneficiary.
• The system must show the balance owing to each beneficiary or on each transaction. These
balances must be based on recorded transactions.
There are two acceptable types of trust accounting systems acceptable to the California Department of Real
Estate. These two systems are the columnar record system and the non-columnar record system. Either
system may be manually produced or be based upon a computer software program. The actual system used
by each broker or brokerage will be a function of the volume of transactions requiring processing, the cost
to maintain each system, the nature of the broker's business (large property management operation v. small
real estate brokerage), and the types of reports required.
18 Introduction
Columnar Record System

The columnar record system requires the keeping of the records in a columnar format. This
system is specifically authorized by the Commissioner's Regulations 2831 and 2831.1. The system will present
in columnar form the following information:
Columnar Record of All Trust Funds Received and Paid

Out - Trust Fund Bank Account
(Hereinafter referred to as "Trust Fund Bank Account Record" - Form RE 4522). This form is required
whenever trust funds are received and deposited to or withdrawn from the trust fund bank account. It
shows the activity in the bank account. If there is more than one trust fund bank account, a separate record
must be maintained for each trust fund bank account. This form is used in conjunction with form RE 4523,
Separate Record For Each Beneficiary or Transaction.
Columnar Record System 19

Separate Record for Each Beneficiary or Transaction For

Clients Funds Placed in Trust Fund Bank Account
(Hereinafter referred to as "Separate Beneficiary Record" - Form RE 4523). This form is required whenever
trust funds are received and deposited to or withdrawn from the Beneficiary's Account. It shows the
activity in a specific beneficiary's account. A separate Form RE 4523 must be maintained for each
beneficiary or transaction from which the broker received funds that were deposited to the trust fund bank
account. If the broker has more than one trust fund account, each account must have its own set of separate
beneficiary records so that they can be reconciled with the trust fund bank account. If the broker has more
than one trust fund account, each account must have its own set of separate beneficiary records so that they
can be reconciled with the trust fund bank account. This form is used in conjunction with form RE 4522,
Trust Fund Bank Account Record.
20 Columnar Record System

Record of All Trust Funds Received - Not Placed in

Brokers Trust Account
(Hereinafter referred to as "Record of All Funds Received But Not Deposited" - Form RE 4524). This form
is required when trust funds are received but are not deposited into the trust fund bank account, but rather
are forwarded to escrow or to the owner(s) of the funds. Trust fund receipts are recorded on the form in
chronological order. Their disposition is recorded on the same line where the corresponding receipt was
recorded.
The DRE does not consider individual transaction folders maintained for each real estate sales
transaction showing the receipt and disposition of undeposited checks as an acceptable alternative
to the Record of All Trust Funds Received But Not Deposited.
Columnar Record System 21

Separate Record for Each Property Managed

(Hereinafter referred to as "Separate Property Managed Record" - Form RE 4525). This form may be used
by the broker in lieu of Form RE 4523, the Separate Beneficiary Record. This form is simply geared towards
property management and therefore provides information that is more detailed for the broker and property
owner applicable to a rental property account. Each property must have its own separate ledger, even if the
properties are owned by the same property owner.
Non-Columnar Record System
22 Columnar Record System

A broker may elect to use trust fund records that are not in the columnar
form as set forth by Commissioner's Regulation 2831 and 2831.1. How
ever, if a non-columnar record keeping system is used, it must
be a system in compliance with generally accepted accounting
principles. At a minimum, such a system requires the following:
• A journal to record in chronological sequence the details of all trust

fund transactions. An accounting journal is a daily chronological record
of trust fund account receipt and disbursement activity. Usually a sin
gle journal will be used to record both the receipts and disbursements.
However, it is permissible to have a separate receipts journal and dis
bursements journal. Whichever journal format is used, it must contain
sufficient information to identify the transaction, such as the date,
amount received or disbursed, name or reference to a payee or payor,
check number or reference to another primary source document of the transaction, and identification of
the beneficiary account affected by the transaction. The journal must also correlate with the cash ledger
and individual beneficiary ledgers. This simply means that the entries in the journal must be the basis
for posting to the ledger.
• A cash ledger that shows the bank balance as affected by the transactions recorded in the journal. The
ledger is posted by the proper recording of debits and credits based upon the journal entries. Debits
represent additions to the trust fund account and credits represent withdrawals. The net result of the
debit and credit postings will represent the cash balance at any given moment. The cash ledger may be
incorporated in the journal or may be a separate record.
• A beneficiary ledger for each of the beneficiary accounts to show in chronological sequence the trans
actions affecting each beneficiary's account as well as the balance of the account. The entries in the
individual beneficiary ledgers must be based upon the entries recorded in the journals.
Developing Good Recordkeeping Procedures

The goal of the record keeping process is accurate and complete records.
The only way to ensure good record keeping is to consistently follow
good record keeping procedures. The following are some suggestions
for developing and maintaining a good record keeping routine:
• Record transactions daily in the Trust Fund Bank Account

Record and in the Separate Beneficiary Records. Remember that
entries are to be recorded in chronological sequence. The best way
to ensure this happens is to perform the routine each day.
• Use the same source documents consistently as the basis for

recording trust fund receipts and disbursements. (For example:
Receipts will always be based upon the Real Estate Contract and Receipt for Deposit form as the source
document. Disbursements will always be recorded based on a check being written on the trust account.)
• Calculate the account balances at the time the entries are made to keep all account balances
up to date.
Non-Columnar Record System 23

• Show the total receipts and disbursements regularly, at least once a month.
• Reconcile the records monthly to determine that transactions are properly recorded in both the trust
fund bank account record and the applicable subsidiary records.
• If more than one trust fund bank account is used, keep a separate set of records for each bank
account (both bank account records and beneficiary records).
24 Developing Good Recordkeeping Procedures

Segment 4: Reconciling
Accounting Records
Trust account reconciliation is required to be performed on a regular basis after the monthly bank statement
has been produced. Your next reading assignment explains how trust account records are reconciled and
what procedures should be followed to accomplish this task. At the conclusion of this reading assignment,
you will be able to explain the trust account reconciliation process.
Introduction
In order to ensure the accuracy of the trust fund account and the individual beneficiary records, periodic
reconciliation is required. Reconciliation is the process of comparing two or more sets of records
to determine whether their balances agree. Since the Trust Fund Bank Account Record, the Separate
Beneficiary Record, and the bank statement are all interrelated, all three documents are necessarily involved
in the reconciliation process. Any entry made on the Trust Fund Bank Account Record must have a corre
sponding entry on the Separate Beneficiary Record. Similarly, any entry shown on the bank statement must
be reflected on the Trust Fund Bank Account Record.
Bank statements are routinely produced by all banking institutions on a monthly basis. Therefore, the
reconciliation process should occur immediately after receiving the monthly trust fund account(s) bank
statement(s). All records should be reconciled to the bank statement cutoff date.
Reconciliation Procedures
Segment 4: Reconciling Accounting Records
Two reconciliations should be made at the end of each bank statement

period:
• Reconciliation of the Bank Account Record with the Sepa

rate Beneficiary Records - This reconciliation is required by Com
missioner's Regulation 2831.2. It will verify that the transactions
entered on the bank account record were posted to the separate
beneficiary or transaction records. The balance of the trust fund
bank account record should equal the total of all beneficiary record
balances for that account. If any differences are discovered, the
discrepancy should be located and the records corrected to reflect the correct bank and beneficiary li
ability account balances. The Commissioner's Regulations require this process to be performed on a
monthly basis except in those months in which there is no activity in the trust fund bank account. The
Commissioner's Regulations also require a record of each reconciliation. The reconciliation record should
identify the bank account name and number, the date of the reconciliation, the account number or name
of the principals, beneficiaries or transactions, and the trust fund liabilities of the broker to each of the
principals, beneficiaries, or transactions.
• Reconcile the Trust Fund Bank Account Record with the Bank Statement - Reconciling the bank
account with the bank statement is essential to determine if there have been any errors by the broker
or the bank relating to the trust fund account. If the bank statement agrees with the trust fund bank
account record, the trust fund bank account record is correct. Any bank statement reconciliation with
the trust fund bank account record will necessarily be adjusted for outstanding checks not yet clearing
the bank, deposits in transit not yet reflected on the bank statement, and other transactions not yet
included upon the bank statement.
Reconciliation Procedural Guidelines

The following general procedural guidelines are suggested to ensure accurate and timely reconciliation of
trust account records:
• Effective Date. Prior to beginning the actual reconciliation process, make sure that all records are
current and all transactions are recorded up to the date of the bank statement cutoff date. Use the
balances reflected on the Separate Beneficiary Records, the Trust Fund Bank Account Record, or the
Separate Property Managed Records as of the last day of the bank statement.
• Adjusted Bank Balance. For the bank account reconciliation, calculate the adjusted bank balance
from the bank statement and the Trust Fund Bank Account Record. This is achieved by adding to or
subtracting from the bank statement the entries on the Trust Fund Bank Account Record that have not
yet shown up on the bank statement. This involves accounting for deposits in the Trust Fund Bank
Account Record not yet showing on the bank statement. It also involves accounting for withdrawals on
the Trust Fund Bank Account Record not yet clearing the bank as of the statement cutoff date.
• Discrepancies. Any discrepancies between the various accounting records should be identified and
immediately corrected. Discrepancies may be due to not recording a transaction in one of the records,
26 Reconciliation Procedures
Segment 4: Reconciling Accounting Records
by posting an incorrect figure, erroneous calculation of a balance, bank errors, or missing beneficiary or
transaction records.
• Record Retention. Records of reconciliation (with supporting documentation) that are performed at
the end of each month's statement period must be kept for a minimum of three years.
Reconciliation Procedural Guidelines 27

Segment 5: California
Department of Real Estate Audits
The real estate regulatory agency maintains a program of auditing broker trust fund records and transaction
records. An audit may be triggered by a complaint filed initiated by a member of the public or as result of
the Department's ongoing audit program.
Your next reading assignment will introduce you to real estate document handling and related record keeping
requirements. You will also learn about the most common violations found in audits along with the actions
that may be taken against a licensee as a result of the audit.
At the conclusion of this reading assignment you will be able to:
• Identify the types of records required to be maintain with respect to real estate activity
• Identify the most common violations of real estate law resulting from an audit
• List the various actions that may be taken against a licensee resulting from the violation of real estate
law
Introduction
The California Department of Real Estate maintains a continuous program of auditing broker trust fund
records and transaction records on a statewide basis. The audits may be triggered by a complaint filed with
the DRE or may be a routine audit conducted under the department's ongoing audit program.
The DRE will give a broker notice that an audit will take place at a specific date and time. The broker
must make all books, accounts, records, and transaction files available for examination by the commissioner
or their designated representative.
In fiscal year 2019-20, DRE's Audit Section completed 533 audits, of which 69% found recordkeep
ing violations and 31% found trust fund shortages. DRE Summer 2021 Real Estate Bulletin.
Segment 5: California Department of Real Estate Audits
Documentation and Document Handling Requirements

The DRE requires that the broker maintain the following records con
cerning all real estate transactions:
Accounting Records
• Columnar Records
• Columnar Record of All Trust Funds Received and Paid Out -

Trust Fund Bank Account
• Separate Record for Each Beneficiary or Transaction For Clients

Funds Placed in Trust Fund Bank Account
• Record of All Trust Funds Received - Not Placed in Brokers Trust Account
• Separate Record for Each Property Managed
• Trust Fund Bank Account Statements, deposit slips, cancelled checks, check register
• Non-Columnar Records
• Journals
• Cash Ledger
• Beneficiary Ledger of each account
• Trust Fund Bank Account Statements, deposit slips, canceled checks, check register
Since a licensee normally handles the following types of transactions, the licensee as well as the broker should
retain copies of the following:
• Records regarding the Receipt of Trust Funds:
• Purchase deposits from buyers - retain real estate purchase contract and receipt for deposit form
• Rents and security deposits from tenants - retain collection receipts (receipt book stubs)
• Other Receipts - retain collection receipts
• Records regarding the deposit of trust funds - retain duplicate bank deposit receipts indicating file
numbers and/or individual depositing funds
• Records forwarding buyer's checks to escrow - retain copy of check signed and dated by buyer showing
receipt of check
• Records regarding the disbursement of trust funds - retain canceled checks and, where applicable, all
paperwork supporting disbursement of funds
Documentation and Document Handling Requirements 29

• Records regarding the receipt of offers and counter-offers from buyers and sellers - retain real estate
purchase contract and receipt for deposit, agency and transfer disclosure statements
• Records regarding the collection of management fees from the trust fund bank account - retain property
management agreements between the broker and property owners; canceled checks
• Records reconciling bank account records with the separate beneficiary records - retain reconciliation
record
Non-Accounting Records
Additional records required to be made available to DRE, if requested:
• Real estate licenses - to confirm that licensees had a valid license during the performance of licensed acts
• Broker-salesperson contracts - statutory requirement
• Written authorizations from broker delegating authority to review documents or maintain trust fund
accounts - documents that proper authority has been granted to delegations acts
• Listing Contracts
• Unaccepted Offer File - Copies of all real estate purchase contracts and receipt for deposit, signed by the
offeror but NOT signed by the offeree
• Receipt from Title Company - for forwarding buyers' check to escrow
• Property Management Agreements
Additional Requirements
The following are some additional requirements of the Real Estate Law and Commissioner's Regulations
relating to the preparation and management of real estate transaction documents:
Business and Professional Code Section 10142 - Copies of Signed

Documents
Copies of real estate agreements need to be given to signers of those agreements at the time
of signing.
10142. When a licensee prepares or has prepared an agreement authorizing or employing such licensee
to perform any of the acts for which he is required to hold a license, or when such licensee secures the
signature of any person to any contract pertaining to such services or transaction, he shall deliver a copy
of the agreement to the person signing it at the time the signature is obtained.
Examples:
30 Documentation and Document Handling Requirements

• Listing agreements
• Receipt for deposit forms
• Real estate purchase contracts
• Addenda to contracts
• Property management agreement
Commissioner's Regulation 2725 - Broker Supervision

Commissioner's Regulation 2725 requires that the responsible broker must exercise reasonable supervision
over the activities of their salespersons, including establishing policies to review a salesperson's transactions,
documents, and the handling of trust funds. As long as the broker does not relinquish the overall responsi
bility for supervision of salespersons licensed to the broker, responsibility or authority may be delegated:
• To any licensed real estate broker who has entered into a written agreement with the broker relating to
the delegation
• To a real estate salesperson licensed to the broker if the salesperson has at least two years full-time
experience as a salesperson licensee in the preceding five years and has a written agreement with the
broker regarding the delegation of responsibility.
Broker Escrows: If an escrow is conducted by a broker (under the exemption of Section 17006
of the Financial Code), the broker's responsibility to review and initial instruments ex
tends to escrow instructions and closing statements. These must be given to the parties in
a transaction prior to close of escrow and must have been prepared or signed by the broker's sales
person, associate, or employee.
The Ten Most Common Violations Found in DRE Audits

The California Department of Real Estate has identified the ten most common violations found during the
conduct of DRE broker audits. Of the ten most common violations, seven relate to trust fund records and
procedures. The following is a summary of the DRE's ten most common violations list:
Documentation and Document Handling Requirements 31

Record Retention
Business and Professional Code Section 10148(a) states that "a real estate broker shall retain for three years
copies of all listings, deposit slips, canceled checks, trust records, and other documents executed by him or
her or licensees operating under the license of the broker, in connection with any transaction for which a real
estate license is required." These records must be made available for examination upon request by the DRE.
Keep all real estate records for three years!
Use of False or Fictitious Name

Commissioner's Regulation 2731 states that a licensee shall not use a "fictitious" or "assumed business" name
in the conduct of any activity for which a license is required under the Real Estate Law unless the licensee
is the holder of a license bearing the fictitious name. The violation raised by this regulation usually relates
to a broker who is using a DBA that is not registered with the DRE. To register with the county is not
sufficient. The DRE license must also bear the name.
Always use DRE-licensed names and business names when doing real estate business.
Trust Fund Records To Be Maintained

Commissioner's Regulation 2831 requires the broker to maintain, in columnar form, a record of all trust funds
received and deposited by the broker. If the columnar system is not used and automated data processing
system is used in its place, the system must meet the standards of generally accepted accounting principles
and meet the data information requirements of Regulation 2831.
The majority of DRE audit citations for violation of Regulation 2831 relate to the following:
• The broker did not maintain any trust fund records.
• Trust fund record were not maintained in columnar form or a required column of information was missing.
• The broker used a standard checkbook as the sole trust fund record.
• The broker's trust fund records reflected inaccurate postings of dates or amounts.
• The broker did not maintain a daily running balance of the Bank Account Record.
• The broker did not maintain a record of trust funds received but not deposited.
The problems raised by noncompliance with Regulation 2831 can be corrected by accurate usage of Form
4522 (Columnar Record of All Trust Funds Received and Paid Out - Trust Fund Bank Account) and form
4524 (Record of All Trust Funds Received - Not Placed In Brokers Trust Account).
32 The Ten Most Common Violations Found in DRE Audits

Keep trust account records up to date and in the proper DRE-approved format at all times.
Separate Record for Each Beneficiary or Transaction

Commissioner's Regulation 2831.1 requires the broker to maintain, in columnar form, a separate record of
trust funds for each beneficiary or transaction accounting for all funds which have been deposited into a
trust account. Separate records for each beneficiary may be maintained under an automated data processing
system as long as the system meets generally accepted accounting system standards and includes all of the
information required by Regulation 2831.1.
The majority of DRE audit citations for violation of Regulation 2831.1 relate to the following:
• The broker did not maintain separate records for each beneficiary.
• Required information was missing.
• Posted items were inaccurate.
• The required daily balance for each record was either not calculated or was inaccurate.
Keep a separate record for each trust account beneficiary or transaction and keep it up to date.
Trust Account Reconciliation

Commissioner's Regulation 2831.2 requires that the total of all Separate Beneficiary Records be reconciled
with the balance of the Trust Fund Bank Account Record at least once a month. This process involves rec
onciling the bank statement with the Trust Fund Bank Account Record and then comparing and reconciling
the Trust Fund Bank Account Records with the Separate Beneficiary Records. The purpose of this routine
monthly procedure is to ensure the accuracy of account records and ascertain that there is no trust account
overage or underage.
Compare the Trust Fund Bank Account Record with the Separate Beneficiary Records and Bank
Statementsonce each month to ensure accuracy.
The Ten Most Common Violations Found in DRE Audits 33

Trust Fund Handling for Multiple Beneficiaries (Trust

Fund Shortage)
Commissioner's Regulation 2832.1 requires the real estate broker to obtain written consent from every owner
of the trust funds in the bank account, prior to each disbursement, if the disbursement will reduce the
balance of the funds in the bank account to an amount less than the existing trust fund liability of the
broker to all owners of the funds. This procedure must be followed if there is a trust fund shortage. Trust
fund shortages are due to intentional conversion by the broker or Separate Beneficiary Record
posting errors which show a balance that is larger than the true amount owed the individual beneficiary.
If the incorrect inflated beneficiary balance is paid to the beneficiary, a trust fund shortage will result.
If the required periodic trust account reconciliation required by Regulation 2831.2 is performed, shortages,
if any, should be detected in a timely manner.
If there will be an account shortage, obtain written consent from every owner of the trust funds in
the bank account prior to each disbursement.
Trust Fund Handling

Commissioner's Regulation 2832(a) requires that a broker place funds accepted on behalf of another into the
hands of the owner of the funds, a neutral escrow depository, or into a trust fund account maintained in the
name of the broker no later than three business days following the receipt of the funds by the broker or the
broker's salesperson.
• The broker fails to designate accounts receiving trust funds as trust fund accounts in the name of the
broker.
• The broker fails to deposit trust funds into the trust fund account within the three business days of
receipt.
• The broker's improper use of an interest bearing account as prohibited by Regulation 2832(b)
• The broker's failure to place checks received from an offeror into a neutral escrow depository or into the
trust fund bank account in a timely manner as required by Regulation 2832(c) and (d).
Trust funds must be properly placed within three days of receipt. They must either go into es
crow, a trust fund account, or back to the owner.

Trust Account Withdrawals

Commissioner's Regulation 2834(a) requires that trust fund account withdrawals be made only upon the
signature of the broker or those properly authorized to do so, such as a salesperson or associate broker
licensed to the broker, an unlicensed employee with proper fidelity bond coverage, or an officer of a corporate
broker.
• The failure of the broker or designated corporate broker to be a signatory on the trust account, which
may indicate account supervision and monitoring problems.
• The presence of an unlicensed signatory on the trust account who does not have fidelity bond coverage.
• Fidelity bond coverage in an inadequate amount and/or with a deductible.
• The failure of the broker or designated corporate broker officer to give specific written authorization
permitting a salesperson, broker, or unlicensed person to sign on the trust account.
Withdrawals may only be made by the broker, authorized licensees, and unlicensed bonded em
ployees.
Commingling
Business and Professional Code Section 10145 and Commissioner's Regulation 2835 prohibit trust fund
commingling.
The majority of DRE audit citations for violation of Commissioner's Regulation 2835 and Business and
Professional Code Section 10145 relate to the following:
• Depositing trust funds received into the broker's general operation account and not into the trust account.
This is especially the case where brokers do not maintain trust accounts and then receive
funds from clients for credit reports, appraisals, or inspection fees. The broker will deposit
these fees into his operations account. This is commingling because these funds are trust funds.
• Maintaining over $200 in broker funds in a trust account.
• Not disbursing broker funds out of the trust account within 25 days after the funds become that of the
broker. (Regulation 2835(b)).
Commingling funds is strictly illegal. Funds which become the broker's must be withdrawn from a
trust fund account within 25 days.
The Ten Most Common Violations Found in DRE Audits 35

Written Disclosure Statement

Business and Professional Code Section 10240 requires brokers to provide a borrower with a mortgage loan
disclosure statement within three business days after receipt of a completed loan application or before the
borrower becomes obligated on the note, whichever is earlier. The violation of this section occurs when this
required disclosure is not delivered to the borrower as required.
The DRE Audit

A major concern of the California Department of Real Estate
relates to trust fund handling. Whenever funds of clients or
third parties are being handled, there is concern that this
fiduciary duty is carried out properly and according to the
Real Estate Law. The potential for economic harm to a
client in the mishandling of funds is the basis for the DRE's
concern.
The ongoing statewide DRE audit program has as its goals

the identification of trust fund handling violations and to
assist brokers and licensees in the proper handling of trust
funds. Additional goals of the program are to improve the
performance of brokers and licensees in all matters relating
to real estate transactions and real estate property management. Audits will assist in weeding out frequent,
flagrant violators of the law through appropriate disciplinary action. Audits will also correct minor real estate
law and procedure infractions and educate brokers and licensees whose activities are otherwise acceptable.
Audits also substantiate that the performance of brokers and licensees is in conformance with the law. All
of this helps assure the public of competent and safe handling of their funds and their real
estate transactions. With these purposes in mind, it is not the intention of the DRE to conduct
audits that are harassing in nature.
An audit may result from the DRE's ongoing statewide random audit program. The audit may also be
initiated by a written complaint. The complaint, if viewed by the DRE as bona fide, will be investigated.
If in the investigation process the DRE determines that an audit of the broker's records will be necessary to
resolve the issue raised in the complaint, the broker will be notified of the DRE's intent to audit.
Once the DRE has given notice of intent to audit, the broker must make all books, accounts, and
records discussed above available for examination during regular business hours. The California
Right to Financial Privacy Act may limit the access of public agencies to private financial records. However,
a broker or licensee must give the Commissioner authorization to examine trust fund records upon request. If
the authorization is not given voluntarily, the records may be obtained from the financial institution holding
the trust funds under a subpoena after an opportunity is given the customer to quash the subpoena. After
obtaining and examining the broker's records any one of a number of possible actions may be taken:
• No Action Necessary. Most audits conducted by the DRE result in no action necessary. Suggestions
may be made by the DRE as to how to better maintain records and documents, but nothing serious
enough regarding compliance with the law warrants further action.

• Citation - Warning Letter. A citation - warning letter may be given to a broker or licensee for minor
or "technical" violations, such as clerical errors or a slight unintentional error in a record form. The
purpose of the letter is to formally prompt more meticulous efforts in the future and to prevent letting
small errors, if continued to go unchecked, to rise to the level of more serious law or regulation violation.
• Informal Conference. DRE audits may result in an informal conference. The conference follows the
audit and involves the broker sitting down with the DRE auditor to review corrections that should take
place in the licensee's brokerage to avoid minor errors in record keeping and in procedural matters.
• Accusation - Administrative Hearing Procedures - Penalties. Violations that are more serious
will result in an accusation being filed by the DRE against the broker or licensee. An accusation is the
first step in the administrative disciplinary procedure adopted by licensing agencies within the State of
California. An accusation is a written statement by the DRE of charges, setting forth the acts that
constitute violation of the law. The accusation must be served upon the licensee by registered mail or
by other means provided for under the administrative rules. No adverse action may be taken against a
licensee without proper service.
Once served with the accusation, the licensee would be well ad
vised to consult with legal counsel prior to responding. The
accusation will be sent along with a form entitled Notice of Defense,
which the licensee, at their option, may file with the DRE. The Notice
of Defense permits the licensee to request a hearing, admit to the accu
sation in whole or in part, present a defense, object to the accusation
on the grounds that it is indefinite or uncertain, challenge the DRE
on the basis of jurisdiction, or object to the accusation on the grounds
that compliance with the cited regulation would have resulted in the
violation of another regulation.
If a licensee files a Notice of Defense within 15 days after service of the accusation, the licensee is entitled
to a hearing on the matter. If the licensee fails to file a Notice of Defense within 15 days after
service, the licensee's right to a hearing is waived. In the written Notice of Defense, all accusations
not specifically admitted to by the licensee are deemed as a specific denial of the accusations made.
Within 30 days after being served with the accusation, the licensee is entitled to request and obtain names
and address of all witnesses and is entitled to inspect and to make copies of any of the following:
• Statement of complaining parties
• Statements of parties to the proceeding or witnesses
• Writings that are relevant and admissible as evidence
• Investigative reports
If the above information cannot be obtained voluntarily, the licensee may subpoena the in
formation. It should be noted that the administrative hearing rules of evidence are much less formal than
traditional court rules and procedures.
A hearing before an Administrative Law Judge will usually occur in the county in which the transaction
giving rise to the alleged violation of law occurred. Within 30 days after the case has been submitted to the
Administrative Law Judge, a proposed decision will be released to the DRE. The DRE must serve a copy
of the proposed decision on the licensee no later than 30 days after received by the DRE. The proposed
The DRE Audit 37

decision becomes effective 30 days after delivered or mailed to the licensee. In serious cases, the DRE has
the authority to make the effective date of the proposed decision earlier.
Depending on the nature and severity of the violation, the proposed decision and final DRE order will usually
involve one of the following:
• License suspension for a stated period
• A fine imposed instead of suspension
• License revocation and issuance of a "restricted" license for the remaining term of the original license.
The terms of the restricted license will be that which the DRE deems necessary, taking into consideration
the violations of the particular case that gave rise to the accusation
• Revocation
If the licensee disagrees with the proposed decision, the licensee has the option of filing a
petition for reconsideration, which takes the case back through the administrative hearing process. The
licensee also has the option of filing a petition for judicial review that will move the case to the state's court
system.
One year after the effective date of the decision, the licensee may apply to the DRE for
reinstatement or reduction in penalty. Any decision regarding reinstatement or reduction of penalty
is up to the DRE. The DRE may, as a condition of reinstatement, require the applicant (licensee) to fulfill
certain education requirements such as retaking the broker's or salesperson's examination, or completing
continuing education requirements and passing the professional responsibility examination.
The DRE's disciplinary authority is based upon violations of the Real

Estate Law and the Commissioner's Regulations. These violations
statutorily have their basis in the Business and Professions Code and
the Code of Regulations. The DRE has no authority to bring
criminal charges. It does have the authority to make a referral of a
potential criminal matter to the appropriate district attorney.
• Criminal Action - Certain broker or licensee conduct may be a

violation of the Business and Professional Code and the California
Penal Code. In these cases, in addition to DRE disciplinary ac
tion, the DRE may turn over evidence it has collected relating to
potential penal code violations to the district attorney for possible criminal prosecution. If indicted and
brought to trial, the Real Estate Commissioner becomes a witness for the prosecution. Depending on the
nature of the penal code violation, the offense may be either a misdemeanor or a felony.
• Civil Liability - In addition to any action taken by the DRE against a licensee for violations of the Real
Estate Law or Penal Code, a licensee may also be subject to civil liability. If a client or third party suffers
economic or other damages because of licensee conduct, such wronged party may recover monetary losses
and penalties from the licensee through civil litigation.
• Income Tax Liability - In the event a licensee converted funds of a client to their own use, the Internal
Revenue Service and the California Department of Revenue may also have an interest in the conduct of
the licensee. If the converted funds were not reported as income, then the appropriate taxing authority
may assess tax liability and penalties.
38 The DRE Audit

Segment 6: Sample Record
Keeping Transactions Case Study
In order to demonstrate trust fund record keeping requirements, your next assignment will present a sample
record keeping transaction case study. The example will outline the transactions for a small real estate
brokerage office for the period of one month. The example will use the columnar record keeping system. You
should note how each transaction is recorded in the accounting records. After you have completed reading
this segment, you will be able to properly record a transaction in a columnar accounting record keeping
system.
Example Situation
Broker Scott Simple recently opened a small brokerage office. Broker Simple has opened his office with
two other salespersons, Betty Sharp and John Moore. The office primarily specializes in residential sales.
However, in order to accommodate a few of its investor clients, it does offer property management services.
Broker Simple has elected to use one trust fund bank account that is maintained at the Left Coast Bank.
In addition, since Broker Simple does not have much experience with computerized accounting systems, he
has elected to use the DRE's columnar record keeping system. The transactions for the month of June are
as follows:
Date Transaction
June 1 Opened trust account in Left Coast Bank. Deposited $200 of personal funds
to open account.
June 2 Agent Betty Sharp received $5,000 check from Andrew and Ferrgie Royal,
made payable to Trust Account, as deposit on an offer to purchase 10 Buck
ingham Drive owned by Sarah Kingman. The Royals asked the broker to
hold the check uncashed until the seller accepted their offer.
June 3 Entered into agreements to manage the following rental properties:
Address Owner's Name Number Units Mgmt Fee

Segment 6: Sample Record Keeping Transactions Case Study
136 Oregon Ave Straub 4 $35/unit
50 Kerr Parkway Vance 2 $35/unit
101 Rockingham Tyson 4 $35/unit
43 Kingsgate Rockwell 1 $55/unit
June 4 Deposited rents received from tenants of the properties under property man
agement contract:
Address Tenant's Name Rent Amount
136 Oregon Santoro $ 825
136 Oregon McKee $ 850
136 Oregon Hammond $ 800
50 Kerr Parkway Elliott $ 700
50 Kerr Parkway Herrick $ 750
101 Rockingham Starr $1200
101 Rockingham Clinton $1500
June 5 Received check for $2,100 from Monet Painter for rent of $900 for period
June 5 - June 30 and $1,200 for security deposit on 10101 Rockingham.
June 6 Agent Betty Sharp delivered to Broker Simple fully executed purchase and
sale agreement, fully executed by all parties on June 5 regarding the Royals
offer to purchase Kingman's house. Broker Simple deposited $5,000 from
Royals into trust bank account.
June 7 Received the following rents:
Address Tenant's Name Rent Amount
136 Oregon Yoast $ 800
101 Rockingham Dole $1400
43 Kingsgate Baker $3000
June 8 Agent John Moore took a listing on 4 Massachusetts Avenue.
40 Example Situation
June 9 Broker Simple received a $3000 check payable to Reliable Escrow from Su
san Ford. Susan Ford made an offer on 100 SW Washington Ct.
June 10 Broker Simple received Jason Frost's acceptance of Susan Ford's offer to
purchase 100 SW Washington Court.
June 11 Broker Simple opened escrow for Susan Ford transaction at Reliable Es
crow. Delivered Susan Ford's $3000 check to Reliable Escrow.
June 12 Received $4500 check from Rockwell for anticipated repairs and painting
on the Kingsgate Circle property and for upcoming property taxes. Check
deposited to trust account the same day.
June 13 Broker Simple issued trust account check number 1001 to Last Chance Es
crow company for account of Andrew and Ferrgie Royal, buyers of the 10
Buckingham property.
June 14 Agent Betty Sharp received an offer and a $4,000 check from Olive Pitt
to purchase a house at 45 Produce Lane. John and Nancy Green own the
house.
June 15 Broker Simple issued the following checks for various expenses relating to
the managed properties:
Check Payee Purpose Amount
1002 Sunset Mtg. Mtg. Pmt./Rockingham $2,200
1003 PGE Utilities/ Kerr Parkway $ 175
1004 Sam Painting Painting/Kingsgate $3,600
1005 Able Maids Cleaning/ Oregon Ave $ 200
1006 Kern County Property Tax/Kingsgate $1,600
1007 Sunrise Mtg. Mtg. Pmt/Kingsgate $1,200
June 16 Olive Pitt's offer was rejected by John and Nancy Green. Agent Betty
Sharp returned deposit check to Olive Pitt.
June 17 Left Coast Bank set Broker Simple notice of check printing charges of
$75.00 charged to trust fund account.
June 30 Broker Simple charged property management fees to the following accounts
and issued check number 1008 to Scott Simple Real Estate Company for
$405.
Property Owner Management Fee
Example Situation 41
Straub $140
Vance $ 70
Tyson $140
Rockwell $ 55
June 30 Sent statements of account to the owners of rental properties.
Sample Situation Transaction Entries

All of the information in the above fact situation relating to activity of the Scott Simple Real Estate Company
must be recorded using the following columnar record keeping journals and/or ledgers:
• Columnar Record of All Trust Funds Received and Paid Out - Trust Fund Bank Account
(Form RE 4522). This is the ledger used to record all trust funds received and deposited into the trust
fund bank account and the disbursements from the account. The balance shown in the right-hand column
of this form must agree with the balance shown on the trust account's bank statement as adjusted for
deposits in transit, outstanding checks, and any other reconciling items. Any difference between the two
records must be reconciled.
• Separate Record for Each Beneficiary or Transaction for Client's Funds Place in Trust Bank
Account (Form RE 4523). This ledger is maintained for each transaction or beneficiary of trust funds
deposited to and disbursed from the trust bank account including any interest earned, if applicable. The
total of all RE 4523 and RE 4525 balances (right-hand column of the forms) must equal the trust bank
balance shown on RE 4522 on any given date. Any difference must be reconciled.
• Record of All Trust Funds Received - Not Placed in Broker's Trust Account (Form RE 4524).
This form is used to record all trust funds received and not deposited into the trust bank account,
including uncashed checks, notes, or anything of value used as a deposit, and the disposition of such
funds.
• Separate Record for Each Property Managed (Form RE 4525). This form is used to record trust
fund account deposits and disbursements pertaining to each property managed for others. When this
form is used, RE 4523 will not be maintained for the same transactions. The total of all RE 4525 and
RE 4523 balances must equal the daily balance shown on RE 4522 on any given date. Any difference
must be reconciled.
The following is a description of the steps that must be taken to properly record the daily transactions listed
in the above example:
Date Documentation Entries
42 Example Situation
June 1 Broker to prepare deposit slip and execute Record deposit on:
required bank account documentation
1. RE Form 4522 Account balance $200
2. RE Form 4523 Beneficiary record for

Scott Simple. Account balance $200
June 2 Real Estate Contract and Receipt for De Enter transaction on RE Form 4524.
posit signed by Andrew and Ferrgie Royal.
Collection Receipt #1 issued to Royal
June 3 Property management contracts executed by Set up Separate Record for Each Property
property owners and Broker Managed. Show property address, owner
name, and other general information.
June 4 Collection receipts issued to: Record the $6,625 received from tenants on:
#2: Santoro - $825
#3: McKee - $850 1. Bank Account Record new balance
#4: Hammond - $800 $6,825.
#5: Elliott - $700
2. Separate Beneficiary Records for property
#6: Herrick - $750
owners:
#7: Starr - $1,200
Straub: $2,475 balance
#8: Clinton - $1,500
Vance: $1,450 balance
Broker to prepare bank deposit slip in
Tyson: $2,700 balance
amount of $6,625
June 5 Collection Receipt #9 issued to Monet Record the $2,100 received from tenant on:
Painter for $2,100 with notation on receipt
that $1,200 for security deposit and $900 for 1. Bank Account Record new balance
rent. $8,925.
2. Separate Property Managed Record for
amount of $2,100.
Tyson (Security Deposits) Balance $1,200
for Painter Security Deposit.
3. Separate Property Managed Record for

Tyson. Balance $3,600.
NOTE: Two Separete Record for Each Prop

erty Managed forms must be maintained.
One record is for security deposits, which are
owed to the tenant, and the other is for op
erational receipts and disbursements. The
total liability owed to Tyson at any time is
the sum of these two Separate Beneficiary
Records.
Sample Situation Transaction Entries 43

June 6 Real Estate Purchase Contract signed by Record $5,000 deposit on:
seller, Sarah Kingman.
Broker to prepare deposit slip 1. Bank Account Record: Balance $13,925.
2. Prepare Separate Beneficiary Record

Royal/Kingman. Balance $5,000.
3. Show disposition of Royals check on

Record of Undeposited Receipts.
June 7 Collection Receipts issued to: Record $5,200 received from tenants on:
#10: Yoast - $800
#11: Dole - $1,400 1. Bank Account Record: Balance $19,125.
#12: Baker - $3,000
2. Separate Beneficiary Records for property
owners:
amount of $5,200.
Straub: $3,275 balance
Tyson: $5,000 balance
Rockwell: $3,000 balance
June 8 Listing Agreement signed by seller and No entries needed. No trust account funds
Agent Moore. involved.
June 9 Real Estate Purchase Contract and Receipt Record receipt on Record of Undeposited
for Deposit signed by Susan Ford. Receipts
June 10 Real Estate Purchase Contract and Receipt No entries needed.

for Deposit signed by Jason Frost, seller.
June 11 Receipt in amount of $3,000 from Reliable Record of Undeposited Receipts. Show
Escrow transfer to Reliable Escrow of Susan Fords
check previously entered on record.
June 12 Collection Receipt #13: Issued to Rockwell Record $4,500 received from Rockwell on:
in amount of $4,500.
Broker to prepare deposit slip in amount of 1. Bank Account Record. Balance $23,625.
$4,500.
2. Separate Beneficiary Record for Rockwell.
Balance $7,500.
June 13 Check #1001 issued by broker to Last Record Disbursement of Check #1 on:
Chance Escrow in amount of $5,000.
Receipt issued by Last Chance Escrow in 1. Bank Account Record. $18,625.
amount of $5,000.
2. Separate Beneficiary Record Royal /
Kingman. Balance is $0
June 14 Real Estate Purchase Contract and Receipt Record receipt of Pitts $4,000 check on
for Deposit signed by Olive Pitt. Record of Undeposited Receipts.
44 Sample Situation Transaction Entries

June 15 Checks #1002-1007 issued by Broker. Sup Record disbursements on:

porting documentation for each check payee.
1. Bank Account Record. Balance is $9,650.
2. Separate Beneficiary Records for:

Straub: Balance $3,075
Vance: Balance $1,275
Tyson: Balance $2,800
Rockwell: Balance $1,100
June 16 Real Estate Contract and Receipt for De Record return of check to Olive Pitt on
posit rejected by John and Nancy Green, Record of Undeposited Receipts.
sellers.
June 17 Notice of advice of charge to account issued Record notice of charge to account on:
by bank
1. Bank Account Record. Balance $9,575
2. Separate Beneficiary Record for Scott

Simple. Balance $125.
June 30 Property Management Contracts showing Record disbursement on:

monthly property management fees.
Check #1008 in amount of $405. 1. Bank Account Record. Balance is $9,170.
List showing breakdown of check amount,
2. Record charges to each property owner
showing charge to each property owner.
on Separate Beneficiary Records for:
NOTE: For audit trail purposes the list is
Straub: Balance $2,935
necessary to document the breakdown of
Vance: Balance $1,205
charges to each property owner. Posting the
Tyson: Balance $2,660
entries to the separate beneficiary records
Rockwell: Balance $1,045
without the backup list is not deemed ade
quate audit trail documentation.
FORM RE 4522
COLUMNAR RECORD OF ALL TRUST FUNDS RECEIVED AND PAID OUT - TRUST FUND BANK
ACCOUNT
(Form RE 4522)
Sample Situation Transaction Entries 45

Click here1 to see a larger image of the Form 4522 example.
1 https://www.onlineed.com/system/content/images/coursespecific/ca_trust_funds06_form4522.gif
46 FORM RE 4522
FORM RE 4523
SEPARATE RECORD FOR EACH BENEFICIARY OR TRANSACTION

FOR CLIENT'S FUNDS PLACED IN TRUST FUND BANK ACCOUNT
(Form RE 4523)
IDENTIFICATION OF TRANSACTION (names, addresses, account numbers, etc.)

Scott Simple - personal funds (Broker)
Description Discharge of Trust Accountability For Trust Accountability For Account Bal
Funds Paid Out Funds Received ance
Date of Check Check Number Amount Date of De Amount

posit
To open trust 06.01 200.00 200.00

account
Check Print 06.17 Bank Memo 75.00 125.00

ing Charges
FORM RE 4523 47
SEPARATE RECORD FOR EACH BENEFICIARY OR TRANSACTION

FOR CLIENT'S FUNDS PLACED IN TRUST FUND BANK ACCOUNT
(Form RE 4523)
IDENTIFICATION OF TRANSACTION (names, addresses, account numbers, etc.)

Andrew and Ferrgie Royal
Purchase of: 10 Buckingham
Seller: Sarah Kingman
Description Discharge of Trust Accountability For Trust Accountability For Account Bal
Funds Paid Out Funds Received ance
Date of Check Check Number Amount Date of De Amount

posit
Deposit on 06.06 5000.00 5000.00

Purchase and
Sale Agree
ment
Transfer to 06.13 #1001 5000.00 -0.00-

Last Chance
Escrow Com
pany
FORM RE 4524
The following demonstrates all of the entries required in the above case study as they should be entered
on the respective Bank Account Record, Separate Beneficiary Records, Record of Undeposited Funds, and
Separate Record for Each Property Managed.
48 FORM RE 4523
RECORD OF ALL TRUST FUNDS RECEIVED NOT PLACED IN BROKERS TRUST

ACCOUNT
(Form RE 4524)
Date Re Form of Amount Received Property Disposition Date of

ceived Receipt From Descrip of Funds Disposition
tion (to escrow,
principal
etc.)
06.02 Check 5000.00 Andrew 10 Bucking To Broker 06.06

& Ferrgie ham Trust Ac
Royal count
06.09 Check 3000.00 Susan Ford 100 SW Reliable Es 06.11

Washington crow
Court
06.14 Check 4000.00 Olive Pitt 45 Produce Return to 06.16

Lane Buyer
FORM RE 4525
SEPARATE RECORD FOR EACH PROPERTY MANAGED

(Form RE 4525)
Owner Deposit $
Straub
Address Monthly $3,275.00

Rent
Property Commis $
136 Oregon sion
Tenant Name Leases $

Santoro/McKee/Hammond/Yoast
Unit Collection $
A, B, C, D
FORM RE 4524 49
Remarks Manage $140/mo

ment
DATE RE DE RE AMOUNT DATE AMOUNT BALANCE

CEIVED SCRIP CEIPT/ RE DEPOSITED DIS
FROM TION CHECK CEIVED BURSED
OR PAID NO.
TO
06.04 Santoro Rent - Collect 825.00 06.04 825.00

June Rec. #2
06.04 McKee Rent - Collect 850.00 06.04 1675.00

June Rec. #3
06.04 Hammond Rent - Collect 800.00 06.04 2475.00

June Rec. #4
06.07 Yoast Rent - Collect 800.00 06.04 3275.00

June Rec. #10
06.15 Able Cleaning #1005 06.15 200.00 3075.00

Maids
06.30 Simple June #1008 06.30 140.00 2935.00

Real Es Mgmt
tate Co. Fees
50 FORM RE 4525

(Form RE 4525)
Owner Deposit $
Vance
Address Monthly $1450.00

Rent
Property Commis $
50 Kerr Parkway sion

Elliott, Herrick
Unit Collection $
1, 2
Remarks Manage $70.00/mo.

ment

OR PAID NO.
TO
06.04 Elliott Rent - Collect 700.00 06.04 700.00

June Rec. #5
06.04 Herrick Rent - Collect 750.00 06.04 1450.00

June Rec. #6
06.15 PG&E Utilities - #1003 06.15 175.00 1275.00

Electricity
06.30 Simple Mgmt #1008 06.30 70.00 1205.00

Real Es Fees -
tate Co. June

(Form RE 4525)
Owner Deposit $
Tyson
Address Monthly $5240

Rent
FORM RE 4525 51
Property Commis $
101 Rockingham sion

Starr, Clinton, Painter, Dole
Unit Collection $
A, B, C, D
Remarks Manage $140/mo

ment

OR PAID NO.
TO
06.04 Starr Rent - Collect 1200.00 06.04 1200.00

June Rec. #7
06.04 Clinton Rent - Collect 1500.00 06.04 2700.00

June Rec. #8
06.05 Painter Rent - Collect 900.00 06.05 3600.00

June Rec. #9
06.07 Dole Rent - Collect 1400.00 06.07 5000.00

June Rec. #11
06.15 Sunset June #1002 2200.00 2800.00

Mortgage Mortgage
Payment
06.30 Simple Manage #1008 140.00 2660.00

Real Es ment Fees
tate Co. - June
52 FORM RE 4525

(Form RE 4525)
Owner Deposit $
Tyson
Address Monthly $
Rent
Property Commis $
101 Rockingham sion
Unit Collection $
Remarks Manage $
Security Deposits Held for Benefit of Tenants ment

OR PAID NO.
TO
06.05 Painter Security Collect 1200.00 06.05 1200.00

Deposit Rec. #9

(Form RE 4525)
Owner Deposit $
Rockwell
Address Monthly $3000.00

Rent
Property Commis $
43 Kingsgate sion
Unit Collection $
Remarks Manage $55.00/mo

ment
FORM RE 4525 53

OR PAID NO.
TO
06.07 Baker Rent June Collect 3000.00 06.07 3000.00

Rec.#12
06.12 Rockwell Owner Collect 4500.00 06.12 7500.00

funds Rec.#13
06.15 Sam Exterior Check 3600.00 5400.00

Painting Repaint #1004
06.15 Kern Property Check 1600.00 3800.00

County Taxes #1006
06.15 Sunrise June Check 1200.00 2600.00

Mortgage Mortgage #1007
Payment
06.30 Simple Manage Check 55.00 1045.00

Real Es ment Fees #1008
tate Co. - June
54 FORM RE 4525
Conclusion
The receiving of trust funds by a broker or salespersons licensed to a broker occurs in the daily practice of
real estate. Since these trust funds are the property of clients or others, these funds must be dealt with the
utmost exercise of fiduciary responsibility. The State of California, through its Business and Professional
Code, Penal Code, and through the Department of Real Estate Commissioner's Regulations has set forth
policies and procedures that must be followed in the receipt, handling, and maintenance of trust funds and
trust fund accounts. These prescribed procedures must be followed carefully by all those possessing California
Real Estate Salespersons or Broker licenses.
In its ongoing efforts to protect the public and to ensure compliance with Real Estate Law and DRE
regulations, the Department of Real Estate conducts an ongoing audit program and responds to complaints
from the public about practices of brokers and salespersons operating in the state. Of particular concern to
the DRE are violations of the trust fund handling rules, trust fund account maintenance, and record keeping.
All brokers and licensees are well advised to understand all of the rules and procedures of handling trust
funds and trust fund accounts. The majority of violations found in DRE audits relate to these issues.
Noncompliance with the Real Estate Law and DRE regulations on trust funds is a serious matter, whether
the conduct is unintentional, negligent, or willful. Depending on the nature of trust fund violations, DRE
disciplinary action may occur. Certain violations may be so serious that it may lead to criminal prosecution
and penalties.
A thorough knowledge of the law and regulations relating to trust fund handling will assist the licensee in
complying with this most important area of real estate practice.
Appendix I: California Business and
Professional Code 10145 and 10146
BPC 10145
(a) (1) A real estate broker who accepts funds belonging to others in connection with a transaction subject
to this part shall deposit all those funds that are not immediately placed into a neutral escrow depository
or into the hands of the broker's principal, into a trust fund account maintained by the broker in a bank
or recognized depository in this state. All funds deposited by the broker in a trust fund account shall be
maintained there until disbursed by the broker in accordance with instructions from the person entitled to
the funds.
(2) Withdrawals may be made from a trust fund account of an individual broker only upon the signature
of that broker, or in the case of a corporate broker, only upon the signature of an officer through whom
the corporation is licensed pursuant to Section 10158 or 10211, or one, or more, of the following persons if
specifically authorized in writing by the individual broker or officer:
(A) A real estate salesperson licensed to the broker.
(B) Another broker acting pursuant to a written agreement with the individual broker that conforms to the
requirements of this part and any regulations promulgated pursuant to this part.
(C) An unlicensed employee of the individual broker, if the broker has fidelity bond or insurance coverage
equal to at least the maximum amount of the trust funds to which the unlicensed employee has access at
any time. For purposes of this section, bonds or insurance providing coverage shall protect the broker from
intentional wrongful acts committed by an employee of that business, including theft, dishonest acts, or
forgery. Bonds and insurance providing coverage may be written with a deductible of up to 5 percent of
the coverage amount. For bonds and insurance with a deductible, the employing broker shall have evidence
of financial responsibility that is sufficient to protect members of the public against a loss subject to the
deductible amount.
Evidence of financial responsibility shall include one or more of the following:
(i) Separate bond or insurance coverage adequate to cover the amount of the deductible.
(ii) A cash deposit held in a separate account, apart from other funds of the broker, the broker's employees,
or the broker's principals, in a bank or recognized depository in this state adequate to cover the amount
of the fidelity bond deductible and held exclusively and solely for the purpose of paying the fidelity bond
deductible amount.
(iii) Any other evidence of financial responsibility approved by the commissioner.

Appendix I: California Business and Professional Code 10145 and 10146
(3) An arrangement under which a person enumerated in subparagraph (A), (B), or (C) of paragraph (2) is
authorized to make withdrawals from a trust fund account of a broker shall not relieve an individual broker,
nor 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.
(4) Notwithstanding the provisions of paragraphs (1), (2), and (3), a real estate broker collecting payments
or performing services for investors or note owners in connection with loans secured by a first lien on real
property may deposit funds received in trust in an out-of-state depository institution insured by the Federal
Deposit Insurance Corporation, if the investor or note owner is any one of the following:
(A) The Federal National Mortgage Association, the Government National Mortgage Association, the Federal
Home Loan Mortgage Corporation, the Federal Housing Administration, or the United States Department
of Veterans Affairs.
(B) A bank or subsidiary thereof, bank holding company or subsidiary thereof, trust company, savings bank
or savings and loan association or subsidiary thereof, savings bank or savings association holding company
or subsidiary thereof, credit union, industrial bank or industrial loan company, or insurance company doing
business under the authority of, and in accordance with, the laws of this state, another state, or the United
States relating to banks, trust companies, savings banks or savings associations, credit unions, industrial
banks or industrial loan companies, or insurance companies, as evidenced by a license, certificate, or charter
issued by the United States or a state, district, territory, or commonwealth of the United States.
(C) Trustees of a pension, profit-sharing, or welfare fund, if the pension, profit-sharing, or welfare fund has
a net worth of not less than fifteen million dollars ($15,000,000).
(D) A corporation with outstanding securities registered under Section 12 of the Securities Exchange Act of
1934 or a wholly owned subsidiary of that corporation.
(E) A syndication or other combination of any of the entities specified in subparagraph (A), (B), (C), or (D)
that is organized to purchase the promissory note.
(F) The California Housing Finance Agency or a local housing finance agency organized under the Health
and Safety Code.
(G) A licensed residential mortgage lender or servicer acting under the authority of that license.
(H) A licensed real estate broker selling all or part of the loan, note, or contract to a lender or purchaser
specified in subparagraphs (A) to (G), inclusive.
(5) A real estate broker who deposits funds held in trust in an out-of-state depository institution in accordance
with paragraph (3) shall make available, in this state, the books, records, and files pertaining to the trust
accounts to the commissioner or the commissioner's representatives or pay the reasonable expenses for travel
and lodging incurred by the commissioner or the commissioner's representatives in order to conduct an
examination at an out-of-state location.
(b) A real estate broker acting as a principal pursuant to Section 10131.1 shall place all funds received from
others for the purchase of real property sales contracts or promissory notes secured directly or collaterally
by liens on real property in a neutral escrow depository unless delivery of the contract or note is made
simultaneously with the receipt of the purchase funds.
(c) A real estate salesperson who accepts trust funds from others on behalf of the broker under whom he or
she is licensed shall immediately deliver the funds to the broker or, if so directed by the broker, shall deliver
FORM RE 4525 57
the funds into the custody of the broker's principal or a neutral escrow depository or shall deposit the funds
into the broker's trust fund account.
(d) If not otherwise expressly prohibited by this part, a real estate broker may, at the request of the owner of
trust funds or of the principals to a transaction or series of transactions from whom the broker has received
trust funds, deposit the funds into an interest-bearing account in a bank, savings and loan association,
credit union, or industrial loan company, the accounts of which are insured by the Federal Deposit Insurance
Corporation, if all of the following requirements are met:
(1) The account is in the name of the broker as trustee for the designated beneficiary or principal of a
transaction or series of transactions.
(2) All of the funds in the account are covered by insurance provided by an agency of the United States.
(3) The funds in the account are kept separate, distinct, and apart from funds belonging to the broker or to
any other person for whom the broker holds funds in trust.
(4) The broker discloses to the person from whom the trust funds are received, and to a beneficiary whose
identity is known to the broker at the time of establishing the account, the nature of the account, how
interest will be calculated and paid under various circumstances, whether service charges will be paid to the
depository and by whom, and possible notice requirements or penalties for withdrawal of funds from the
account.
(5) Interest earned on funds in the account shall not inure directly or indirectly to the benefit of the broker
or a person licensed to the broker.
(6) In an executory sale, lease, or loan transaction in which the broker accepts funds in trust to be applied
to the purchase, lease, or loan, the parties to the contract shall have specified in the contract or by collateral
written agreement the person to whom interest earned on the funds is to be paid or credited.
(e) The broker shall have no obligation to place trust funds into an interest-bearing account unless requested
to do so and unless all of the conditions in subdivision (d) are met, nor, in any event, if he or she advises
the party making the request that the funds will not be placed in an interest-bearing account.
(f) Subdivision (d) does not preclude the commissioner from prescribing, by regulation, circumstances in
which, and conditions under which, a real estate broker is authorized to deposit funds received in trust into
an interest-bearing trust fund account.
(g) The broker shall maintain a separate record of the receipt and disposition of all funds described in
subdivisions (a) and (b), including any interest earned on the funds.
(h) Upon request of the commissioner, a broker shall furnish to the commissioner an authorization for exam
ination of financial records of those trust fund accounts maintained in a financial institution, in accordance
with the procedures set forth in Section 7473 of the Government Code.
(i) As used in this section, "neutral escrow" means an escrow business conducted by a person licensed under
Division 6 (commencing with Section 17000) of the Financial Code or by a person described in paragraph
(1) or (3) of subdivision (a) of Section 17006 of that code.
(Amended by Stats. 2018, Ch. 92, Sec. 12. (SB 1289) Effective January 1, 2019.)
BPC 10146.
58 FORM RE 4525
Any real estate broker who contracts for or collects an advance fee from any other person, hereinafter referred
to as the "principal," shall deposit any such amount or amounts, when collected in a trust account with a bank
or other recognized depository. Such funds are trust funds and not the funds of the agent. Amounts may be
withdrawn therefrom for the benefit of the agent only when actually expended for the benefit of the principal
or five days after the verified accounts mentioned hereinafter have been mailed to the principal. Upon request
of the commissioner, a broker shall furnish to the commissioner an authorization for examination of financial
records of the trust account in accordance with the procedures set forth in Section 7473 of the Government
Code.
The commissioner may issue such rules and regulations as he or she deems necessary to regulate the method
of accounting, and to accomplish the purpose of the provisions of this code relating to advance fees including,
but not limited to, establishing forms for and determining information to be included in such accountings.
Each principal shall be furnished a verified copy of such accountings at the end of each calendar quarter and
when the contract has been completely performed by the licensee. The commissioner shall be furnished a
verified copy of any account or all accounts on his or her demand therefor.
Where advance fees actually paid by or on behalf of any principal are not handled in accordance with
the preceding paragraph, it shall be presumed that the agent has violated Sections 506 and 506a of the
Penal Code. The principal may recover treble damages for amounts so misapplied and shall be entitled to
reasonable attorney's fees in any action brought to recover the same.
(Amended by Stats. 2009, Ch. 307, Sec. 99. Effective January 1, 2010.)
FORM RE 4525 59
Appendix II: Commissioners Regulations -
Article 15. Trust Fund Accounts
California Code of Regulations, Title 10 (Investments), Chapter 6 (Real Estate Commissioner), Article 15
(Trust Fund Accounts)
2830. Broker Placement of Trust Funds with Financial Institutions.
The relationship between a real estate broker and a client for whom the broker holds funds in trust is an
agency relationship. As an agent, the broker owes a fiduciary duty to the client regarding the handling of the
trust. Any benefit received by the broker relating to the broker's handling of client funds in trust belongs
to the client by law, and the broker must pass that benefit along to the client.
1. Unless in possession of written permission from the client, it is unlawful for any real estate broker,
including any corporate broker, to receive, directly or indirectly, any commission, compensation, or other
consideration, whether personal or professional, from any person or institution other than the client as an
inducement for the placement of a trust fund account in accordance with Section 10145 of the Business
and Professions Code. Actual placement of a trust fund account is not a precondition to a violation of
this section, whether the violation is or is not a per se violation pursuant to subsection (c), below.
2. For purposes of this section, a "compensating balance" is a balance maintained in a checking account or
other account in a bank or other recognized depository in the name of a real estate broker for the purpose
of paying bank fees on a separate trust fund account.
3. Unless in possession of written permission from the client as described in subsection (a), the following
activities, whether performed directly or indirectly, are deemed per se receipt of inducements for the
placement of trust account business by any person and are unlawful:
1. Receiving or requesting payment for, accepting or requesting provision of, or accepting or requesting
assistance with business expenses, including, but not limited to, rent, employee salaries, furniture,
copiers, facsimile machines, automobiles, telephone services or equipment, or computers.
2. Receiving or requesting receipt of any form of consideration intended for the benefit of the broker,
rather than the trust account itself, including cash, below market rate loans, automobile charges, or
merchandise or merchandise credits.
3. Receiving or requesting to receive on behalf of the broker or corporation, compensating balances or

benefits in the pricing or fees for the maintenance of a compensating balance account.
4. Receiving or requesting provision of all, or any part, of the time or productive effort of any employee
of the bank or other recognized depository for any service unrelated to the trust account.
Appendix II: Commissioners Regulations - Article 15. Trust Fund Accounts
5. Receiving or requesting expenditures for food, beverages, and entertainment.
4. Receipt or request of receipt of the following are not deemed to be unlawful or in violation of this section:
1. Promotional items with a permanently affixed company logo of the bank or other recognized depository
with a value of not more than ten dollars ($10) each. "Promotional item" does not include a gift
certificate, gift card, or other item that has a specific monetary value on its face, or that may be
exchanged for any other item having a specific monetary value.
2. Receipt or requested receipt of education or educational materials exclusively related to the business
of trust fund management if continuing education credits are not provided.
5. The receipt or requested receipt of any form of consideration as an inducement for the placement of a
trust account not specifically set forth in this section shall not be presumed lawful merely because it is
not specifically prohibited.
2830.1. Interest-Bearing Trust Account.
A real estate broker, when acting as agent for a financial institution as beneficiary of a loan, may deposit and
maintain funds from or for the account of an obligor for the future payment of property taxes, assessments
or insurance relating to real property containing only a one-to-four family residence, in an interest-bearing
trust account in a bank or savings and loan association in order to pay interest to the obligor in accordance
with Section 2954.8 of the Civil Code if the following requirements are met:
1. The account is in the name of the broker as trustee.
2. All of the funds in the account are covered by insurance provided by an agency of the federal government.
3. All of the funds in the account are funds held in trust by the broker for others.
4. The broker discloses to the obligor how interest will be calculated and paid.
5. No interest earned on the funds shall inure directly or indirectly to the benefit of the broker nor to any
person licensed to the broker.
2831. Trust Fund Records To Be Maintained.
1. Every broker shall keep a record of all trust funds received, including uncashed checks held pursuant to
instructions of his or her principal. This record, including records maintained under an automated data
processing system, shall set forth in chronological sequence the following information in columnar form:
1. Date trust funds received.
2. From whom trust funds received.
3. Amount received.
4. With respect to funds deposited in an account, date of said deposit.
5. With respect to trust funds previously deposited to an account, check number and date of related
disbursement.
FORM RE 4525 61
6. With respect to trust funds not deposited in an account, identity of other depository and date funds
were forwarded.
7. Daily balance of said account.
2. For each bank account which contains trust funds, a record of all trust funds received and disbursed shall
be maintained in accordance with subdivision (a) or (c).
3. Maintenance of journals of account cash receipts and disbursements, or similar records, or automated data
processing systems, including computer systems and electronic storage and manipulation of information
and documents, in accordance with generally accepted accounting principles, shall constitute compliance
with subdivision (a) provided that such journals, records, or systems contain the elements required by
subdivision (a) and that such elements are maintained in a format that will readily enable tracing and
reconciliation in accordance with Section 2831.2.
4. Nothing in this section shall be construed to permit a violation of Section 10145 of the Code.
5. A broker is not required to keep records pursuant to this section of checks which are written by a principal,
given to the broker and made payable to third parties for the provision of services, including but not
limited to escrow, credit and appraisal services, when the total amount of such checks for any transaction
from that principal does not exceed $1,000. Upon request of the Department or the maker of such checks,
a broker shall account for the receipt and distribution of such checks. A broker shall retain for three
years copies of receipts issued or obtained in connection with the receipt and distribution of such checks.
2831.1. Separate Record for Each Beneficiary or Transaction.
1. A broker shall keep a separate record for each beneficiary or transaction, accounting for all funds which
have been deposited to the broker's trust bank account and interest, if any, earned on the funds on
deposit. This record shall include information sufficient to identify the transaction and the parties to the
transaction. Each record shall set forth in chronological sequence the following information in columnar
form:
1. Date of deposit.
2. Amount of deposit.
3. Date of each related disbursement.
4. Check number of each related disbursement.
5. Amount of each related disbursement.
6. If applicable, dates and amounts of interest earned and credited to the account.
7. Balance after posting transactions on any date.
2. Maintenance of trust ledgers of separate beneficiaries or transactions, or similar records, or automated

data processing systems, including computer systems and electronic storage and manipulation of in
formation and documents, in accordance with generally accepted accounting principles will constitute
compliance with subdivision (a), provided that such ledgers, records, or systems contain the elements
required by subdivision (a) and that such elements are maintained in a format that will readily enable
tracing and reconciliation in accordance with Section 2831.2.
62 FORM RE 4525
2831.2. Trust Account Reconciliation.

The balance of all separate beneficiary or transaction records maintained pursuant to the provisions of Section
2831.1 must be reconciled with the record of all trust funds received and disbursed required by Section 2831,
at least once a month, except in those months when the bank account did not have any activities. A record
of the reconciliation must be maintained, and it must identify the bank account name and number, the date
of the reconciliation, the account number or name of the principals or beneficiaries or transactions, and the
trust fund liabilities of the broker to each of the principals, beneficiaries or transactions.
2832. Trust Fund Handling.
1. Compliance with Section 10145 of the Code requires that the broker place funds accepted on behalf of
another into the hands of the owner of the funds, into a neutral escrow depository or into a trust fund
account in the name of the broker, or in a fictitious name if the broker is the holder of a license bearing
such fictitious name, as trustee at a bank or other financial institution not later than three business days
following receipt of the funds by the broker or by the broker's salesperson.
2. Except as expressly provided by subdivision (d) of Section 10145 of the Code or by a regulation in this
article, the account into which the trust funds are deposited shall not be an interest-bearing account for
which prior written notice can by law or regulation be required by the financial institution as a condition
to the withdrawal of funds.
3. A check received from the offeror may be held uncashed by the broker until acceptance of the offer if
1. 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 nor cashed until acceptance of the offer and
2. the offeree is informed that the check is being so held before or at the time the offer is presented for
acceptance.
4. In these circumstances if the offeror's check was held by the broker in accordance with subdivision (c)
until acceptance of the offer, the check shall be placed into a neutral escrow depository or the trust fund
account, or into the hands of the offeree if offeror and offeree expressly so provide in writing, not later
than three business days following acceptance of the offer unless the broker receives written authorization
from the offeree to continue to hold the check.
5. Notwithstanding the provisions of subdivisions (a) and (d), a real estate broker who is not licensed under
the Escrow Law (Section 17000, et seq., of the Financial Code) when acting in the capacity of an escrow
holder in a real estate purchase and sale, exchange or loan transaction in which the broker is performing
acts for which a real estate license is required shall place all funds accepted on behalf of another into
the hands of the owner of the funds, into a neutral escrow depository or into a trust fund account in the
name of the broker, or in a fictitious name if the broker is the holder of a license bearing such fictitious
name, as trustee at a bank or other financial institution not later than the next business day following
receipt of the funds by the broker or by the broker's salesperson.
2832.1. Trust Fund Handling for Multiple Beneficiaries.

The written consent of every principal who is an owner of the funds in the account shall be obtained by a
real estate broker prior to each disbursement if such a disbursement will reduce the balance of funds in the
account to an amount less than the existing aggregate trust fund liability of the broker to all owners of the
funds.
2834. Trust Account Withdrawals.
FORM RE 4525 63
1. Withdrawals may be made from a trust fund account of an individual broker only upon the signature of
the broker or one or more of the following persons if specifically authorized in writing by the broker:
1. a salesperson licensed to the broker.
2. a person licensed as a broker who has entered into a written agreement pursuant to Section 2726 with
the broker.
3. an unlicensed employee of the broker with fidelity bond coverage at least equal to the maximum
amount of the trust funds to which the employee has access at any time.
2. Withdrawals may be made from the trust fund account of a corporate broker only upon the signature of:
1. an officer through whom the corporation is licensed pursuant to Section 10158 or 10211 of the Code;
or
2. one of the persons enumerated in paragraph (1), (2) or (3) of subdivision (a) above, provided that
specific authorization in writing is given by the officer through whom the corporation is licensed and
that the officer is an authorized signatory of the trust fund account.
3. An arrangement under which a person enumerated in paragraph (1), (2) or (3) of subdivision (a) above
is authorized to make withdrawals from a trust fund account of a broker shall not relieve an individual
broker, nor 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.
2835. Commingling.
"Commingling" as used in Section 10176(e) of the Code is prohibited except as specified in this section. For
purposes of Section 10176(e), the following shall not constitute "commingling":
1. The deposit into a trust account of reasonably sufficient funds, not to exceed $200, to pay service charges
or fees levied or assessed against the account by the bank or financial institution where the account is
maintained.
2. The deposit into a trust account maintained in compliance with subdivision (d) of funds belonging in
part to the broker's principal and in part to the broker when it is not reasonably practicable to separate
such funds, provided the part of the funds belonging to the broker is disbursed not later than twenty-five
days after their deposit and there is no dispute between the broker and the broker's principal as to the
broker's portion of the funds. When the right of a broker to receive a portion of trust funds is disputed
by the broker's principal, the disputed portion shall not be withdrawn until the dispute is finally settled.
3. The deposit into a trust account of broker owned funds in connection with activities pursuant to either
subdivision (d) or (e) of Section 10131 of the Code or when making, collecting payments or servicing a
loan which is subject to the provisions of Section 10240 of the Code provided:
1. The broker meets the criteria of Section 10232 of the Code.
2. All funds in the account which are owned by the broker are identified at all times in a separate record
which is distinct from any separate record maintained for a beneficiary.
3. All broker owned funds deposited into the account are disbursed from the account not later than 25
days after their deposit.
64 FORM RE 4525
4. The funds are deposited and maintained in compliance with subdivision (d).
5. For the purpose of this section, a broker shall be deemed to be subject to the provisions of Section
10240 of the Code if the broker delivers the statement to the borrower required by Section 10240.
4. The trust fund account into which the funds are deposited is maintained in accordance with the provisions
of Section 10145 and the regulations of this article.
2836. Subdivider and Broker Records.
1. 1. A subdivider shall maintain or cause to be maintained, in accordance with accepted accounting

practices, records of all funds received from prospective purchasers or lessees of subdivisions interests.
2. A subdivider shall maintain or cause to be maintained, in accordance with accepted accounting

practices, records of receipt, deposit and disbursement of all funds collected or obtained in connection
with the operation of a homeowners association
3. The records shall reflect dates of receipt and disbursement of funds and the names of persons from
whom received and to whom disbursed. The records shall be retained by the subdivider for a period
of three years after the date of receipt or disbursement.
2. A broker shall maintain or cause to be maintained, in accordance with accepted accounting practices, all
trust fund records described in Section 10148 of the Code.
3. Such records shall be made available for examination and inspection in California during regular business
hours upon request by the commissioner or his or her designated representative.
FORM RE 4525 65

RE-CA-CE-Trust_Funds

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Trust Funds

• A broker/licensee managing real property for an owner.

• Explain what is a trust fund

• Explain a licensee's basic duty relating to trust funds

• Identify the owner of a trust fund

Definition of Trust Funds

• Deposit checks made payable to the broker, the seller, a

• A promissory note held as part of a property purchase

• Rent money received from a tenant

• Security deposits received from a tenant

• A "pink" slip to an automobile given in lieu of a deposit

• Fees for brokerage services to be conducted in the future

• Real estate commissions

• Brokerage general operating funds

• The broker's personal funds

2 Definition of Trust Funds

Fiduciary Duty - Trust Fund Handling General

2. the funds can be deposited into a neutral escrow depository; or

Fiduciary Duty - Trust Fund Handling General Procedures 3

Identifying the Owner(s) of the Trust Funds

4 Fiduciary Duty - Trust Fund Handling General Procedures

Generally, the following principles will determine the ownership of trust

• Prior to acceptance of the offer. A good faith deposit received

• After acceptance of the offer. After acceptance of the offer by the

Identifying the Owner(s) of the Trust Funds 5

• Identify prohibited activities relating to trust fund accounts

General Trust Account Requirements

Interest Bearing Accounts

• All of the funds in the account must be covered by insurance provided

8 General Trust Account Requirements

• The account is in the name of the broker, as trustee;

Withdrawals of Trust Funds

• The broker in whose name the account is maintained;

• The designated broker-officer, if the account is in the name of a corporate broker; or

• A salesperson licensed to the broker;

• An associate broker licensed to the broker; or

Interest Bearing Accounts 9

Commingling occurs when:

10 Withdrawals of Trust Funds

Trust Fund Liability

• The broker overdraws a particular beneficiary's account balance by mistake.

• A beneficiary's check bounces.

EXAMPLE OF TRUST FUND OVERAGE/UNDERAGE: Broker Bob maintains a trust

12 Trust Fund Liability

Trust Fund Conversion

The act of commingling trust funds is regarded as a serious matter by

Any licensee or broker who is guilty of conversion will lose

Trust Fund Liability 13

Attempt to Use Trust Funds as an Offset

14 Trust Fund Conversion

All advance fees received by a broker must be deposited into the

• The DRE will disapprove any materials found to be misleading.

• Use of material that has been disapproved is also a misdemeanor.

• Accounting procedures for receiving advance fees includes the following:

• Proper recording of the names of the agent and the principal

• The amount collected

• A description of the services rendered or to be rendered for the advance fee.

• Disbursements to pay commissions to agents and representatives

• Disbursements to pay for costs and profit

• Identify and explain good record keeping procedures and practices

The fiduciary duty of accounting requires the maintenance of accurate

• All trust receipts and disbursements and applicable account details

• The balance of each trust fund account must be calculated based on

Columnar Record System

• Reconciliation of the Bank Account Record with the Sepa