Real estate trust funds are third-party accounts that hold money belonging to a buyer, seller, tenant, or borrower until that money is legally due to someone else. Earnest money deposits, tenant security deposits, and mortgage escrow accounts are the three you will encounter most often. Whoever holds the money, whether a broker, property manager, or lender, has a fiduciary duty to keep it safe and separate from their own funds. Mishandling these accounts is one of the fastest ways a real estate professional loses a license or ends up facing criminal charges.
Earnest Money Deposits
When a buyer makes an offer, they usually put up an earnest money deposit to show the seller they are serious. The amount typically runs between 1% and 3% of the purchase price, though competitive markets push that number higher. A neutral party holds the deposit until the sale closes or the contract falls apart for a valid reason.
If the sale closes, the earnest money gets credited to the buyer and applied toward the down payment or closing costs. If the buyer backs out without a contingency protecting them, the seller usually keeps the deposit. Most states require the broker or escrow agent to deposit earnest money into a trust account within one to three business days of receiving it, though the exact deadline varies by jurisdiction.
Security Deposits Held by Property Managers
Property managers collect security deposits from tenants to cover unpaid rent or damage beyond normal wear and tear. Most states cap these deposits at one to two months’ rent. Managers who collect rent on behalf of an owner face the same trust fund rules, because that rent belongs to the property owner and has to sit in a trust account before being distributed.
Some states and cities require landlords to hold security deposits in interest-bearing accounts and pay the interest to the tenant. Others impose no interest requirement at all. When a tenant moves out, the landlord must return the deposit, minus any legitimate deductions, within a timeframe set by state law, and any deductions for repairs need to be documented with an itemized list.
Mortgage Escrow Accounts
Mortgage lenders collect a portion of each monthly payment and set it aside in an escrow account to cover property taxes, homeowners insurance, and sometimes flood insurance. Collecting a fraction each month keeps those bills current, which protects the home serving as collateral for the loan.
Federal law limits how much padding the lender can build into the account. Under the Real Estate Settlement Procedures Act, the escrow cushion cannot exceed one-sixth of the estimated total annual payments from the account.1Office of the Law Revision Counsel. 12 USC 2609 – Limitation on Requirement of Advance Deposits in Escrow Accounts That works out to roughly two months of escrow payments. The cushion is there to absorb unexpected jumps in tax assessments or insurance premiums; it is not a place for the lender to stockpile borrower money.
Lenders must also analyze the escrow account at least once a year. If the analysis shows a surplus of $50 or more and the borrower is current, the lender has 30 days to refund the overage. Surpluses under $50 can be credited toward next year’s escrow payments instead.2Consumer Financial Protection Bureau. 1024.17 Escrow Accounts Overcharges are common and borrowers rarely check.
How the Trust Account Itself Must Be Set Up
Brokers and escrow agents open trust accounts at banks insured by the Federal Deposit Insurance Corporation. The account title has to identify it clearly as a trust or escrow account, which keeps the funds legally distinct from the broker’s business money. If the broker goes bankrupt or gets sued, a properly labeled trust account is protected from the broker’s creditors.
FDIC Pass-Through Coverage
A single trust account might hold deposits from dozens of clients, which raises a question about FDIC insurance. The answer is pass-through coverage: the FDIC insures each client’s share separately, up to $250,000 per person, rather than capping the whole account at $250,000.3FDIC. Deposit Insurance at a Glance A trust account holding $1 million across ten clients can be fully insured, as long as no single client’s share tops $250,000.
Pass-through coverage only works if records identify who owns each portion of the money. The bank’s records must show the account is held in a fiduciary capacity, and either the bank, the broker, or a third-party recordkeeper must maintain documentation of each beneficiary’s interest.4eCFR. 12 CFR Part 330 – Deposit Insurance Coverage Sloppy recordkeeping can collapse the pass-through protection and leave the entire account subject to a single $250,000 cap.
Broker Funds and Recordkeeping
Regulations generally prohibit brokers from keeping more than a small amount of their own money in a trust account. Most states allow somewhere around $200 to $500 to cover bank service charges. Anything more starts to look like commingling.
Anyone managing a trust account also has to keep a separate ledger for each client showing every deposit, withdrawal, and running balance. Entries need the date, source, and purpose of each transaction. State licensing boards audit these records, and the retention period is typically three to five years. Disorganized records are one of the most common findings in regulatory audits and can trigger a deeper investigation even when no money is missing.
Commingling and Conversion
Commingling happens when a broker or property manager mixes client trust funds with their own business or personal money. It does not matter whether the client’s money is actually lost. The mixing alone violates licensing rules in every state and can result in license suspension or revocation. Fines commonly range from a few thousand dollars into the tens of thousands for repeat offenses.
Conversion is worse. Conversion means someone actually spent trust funds on something unauthorized, like using a buyer’s earnest money to cover the brokerage’s rent. Because that involves taking someone else’s money, it moves from a licensing violation into criminal territory. Depending on the amount and the state, conversion can lead to embezzlement or theft charges, with prison time that scales with the dollar value. Some states also let the victim recover two or three times their actual damages in a civil suit on top of the criminal outcome.
The line between commingling and conversion often comes down to intent. A broker who deposits a client check into the wrong account by mistake has a commingling problem. A broker who writes personal checks from the trust account has a conversion problem. Both can end a career; conversion is more likely to end in handcuffs.
Releasing the Money
The purchase agreement or lease dictates when trust funds get released. At closing, the escrow agent applies earnest money toward the buyer’s costs as spelled out in the settlement statement. For security deposits, the trigger is the tenant vacating, at which point the landlord has a state-defined window to return the deposit or provide an itemized accounting of deductions.
Disputes are where things get awkward. When a deal falls through and both buyer and seller claim the earnest money, the broker is stuck in the middle. If the parties will not agree to a mutual release, the broker can file an interpleader action. That is a court proceeding where the broker deposits the disputed funds with the court and steps out of the fight, and the court decides who gets the money based on the contract and the evidence. The interpleader protects the broker from liability for paying the wrong side.
Unclaimed Trust Funds
Trust funds sometimes go unclaimed. A tenant moves out without leaving a forwarding address. A deal collapses and neither party follows up on the earnest money. The broker cannot keep abandoned funds indefinitely. Every state has an unclaimed property law, sometimes called escheatment, that requires holders to turn dormant funds over to the state after a set period of inactivity. The dormancy period varies but typically runs three to five years for escrow and trust funds.
Before sending funds to the state, the holder is generally required to make a reasonable effort to contact the owner at their last known address. Once the money is turned over, the rightful owner can still claim it from the state, usually with no deadline. Sitting on unclaimed trust funds without reporting them creates its own legal exposure, so tracking dormancy periods is part of proper trust account management.
A Related Federal Rule on Cash
One federal rule sits next to trust fund handling and catches people by surprise. Any real estate business that receives more than $10,000 in cash during a transaction has to file IRS Form 8300 within 15 days of receiving the payment. This applies to sales of real property and to installment payments that together cross the threshold within a year, with the 15-day clock starting when the cumulative total tips over $10,000. The business must also send a written statement to each person named on the form by January 31 of the following year.5Internal Revenue Service. IRS Form 8300 Reference Guide Penalties are steep, and willful violations can bring criminal prosecution.