Trust Fund Handling Rules for California Agents

A $10,000 deposit from a client sits in your center console. You’re headed to a listing appointment, then a kid's soccer game, and you figure you’ll drop the check at the escrow office tomorrow morning. It’s just 12 hours, right?

Many trust fund cases begin with a dispute—a deal falls apart, a buyer wants their EMD back, or an escrow officer denies receiving a check on time. When the finger-pointing starts, the DRE looks at the custody trail, not your "intent."

Do this now: In modern times, it’s true that agents are less likely to take checks directly, remember if you have client funds in your possession, call the escrow officer immediately to confirm their intake hours, document the receipt in the transaction file (send a timestamped email to escrow and your broker confirming you have it), and deliver the funds today.

Trust Fund Handling: The 2-Minute Summary

• The Destination: Place funds in a neutral escrow depository or the broker’s trust account according to legally imposed timeframes.
• The Risk Window: Brokers treat custody as starting the second you take possession of client money.
• The Safest Practice: Maintain consistent, high-standard documentation for every cent received.
• The Top Risks: Commingling and Conversion are the primary causes of disciplinary actions.

What Actually Counts as “Trust Funds”?

The most common trust funds agents handle are Earnest Money Deposits (EMD), Rents, and Security Deposits. While other items like advance fees can technically be trust funds, treat these as edge cases—never touch them without the broker’s written instruction.

From an operational standpoint, your safest practice is to maintain robust documentation across all price points. If a DRE auditor sees a gap in a small transaction, they can infer there are systemic failures in your system.

Where Trust Funds Go in a Clean File

Operationally, there are two standard paths used in California real estate to handle client money.

1. Neutral Escrow Depository: The safest and most common path. You deliver funds directly to the escrow company named in the contract.
2. Broker’s Trust Account: A specifically designated account maintained by the broker, titled as a trust account.

The 4 Violations That Actually Get People Disciplined

The DRE is surgical about auditing money. To audit-proof your career, you must understand the concrete actions that trigger an investigation.

1. Commingling (Mixing Funds)

Audit Trigger: An auditor finds client funds deposited into a broker’s operating account or an agent’s personal account.

Hard Control: Safest practice: All trust fund checks go unendorsed directly to escrow or the broker’s trust account.

• Refuse physical cash: Direct the client to obtain a cashier's check instead.
• Depository compliance: If your broker forbids mobile deposit (many do), deliver the physical instrument directly to the designated depository.

2. Conversion (Using Funds)

Audit Trigger: A trust account balance drops below the total amount owed to all beneficiaries, often discovered after a client complaint.

Hard Control: Never "borrow": : Never use a deposit for unauthorized purposes, even if you plan to reimburse it later. Totally illegal.

• Build a "defense file": Create documentation in real time (not after the fact) that explains every dollar with matching receipts and the trust account should be reconciled monthly.

3. Failure to Account (Sloppy Records)

Audit Trigger: A broker or agent cannot provide a clear paper trail for a specific deposit during a routine file review.

Hard Control: Retain proof: Keep copies of every deposit confirmation, receipt, or proof of delivery.

• Cross-reference: Identify every deposit with the specific property address and client name according to DRE rules.

4. Delay / Failure to Deposit

Audit Trigger: An auditor cross-references the date on the EMD check with the date on the Escrow Receipt.

Hard Control: Timestamped communication: Document the moment you receive funds.

• Exposure limit: If the timeline exceeds 3 business days, your exposure spikes.

For more on how the state monitors these audit trails, see our guide on what the California DRE actually enforces.

The Clean Trust-Fund Handling Sequence

Follow this sequence to ensure your file is defensible from the moment you take custody:

1. Verify Payee: Confirm the payee is the correct legal entity before you accept custody.
2. Secure Receipt: Document receipt of check.
3. No Endorsement: Never sign the back of a client's deposit check.
4. Approved Custody: Do not hand checks to unapproved third parties (unlicensed assistants, TCs, etc.).
5. Physical Storage: Store checks in a locked, designated place in your office. Never leave trust funds in your car.
6. Deliver & Confirm: Deliver the funds same day whenever possible and obtain a signed receipt.
7. Chain-of-Custody Email: Send the timestamped email to your broker and escrow. This is a core professional standard in our California Real Estate Laws & Compliance Guide.

FAQ: High-Intent Questions

Can I hold the deposit check overnight?" Generally, yes, but the risk of loss or theft makes this a failure in most brokerage policies. Deliver it immediately.

Does my Transaction Coordinator (TC) count as me?" Yes. Delegation does not transfer responsibility. If your TC or assistant mishandles a check, the DRE holds you and your broker accountable for the lack of supervision.

What if the buyer gives me the check on a Friday night?" Document the receipt Friday night, store the check in a locked location (not your car), and deliver it per your broker's Monday morning intake process.

What about wire instructions and wire fraud?" Always verify wire instructions via a phone call to a known, verified number. Never accept last-minute changes via email.

The Clean File Standard

Trust fund handling is about creating a defensible file. By following these hard controls and maintaining a strict chain of custody, you ensure that even a surprise investigation results in a clean file. Understanding these operational rules is the first step in avoiding common DRE violations and how to avoid them.

For more on state requirements, return to our California Real Estate Laws & Compliance Guide.

Disclaimer: This article provides general best practices and does not constitute legal advice. Always confirm your broker’s written policy.