4.1 Hawaii Trust Account Requirements
Key Takeaways
- Every brokerage firm that does not immediately place funds in a neutral escrow depository must maintain a trust fund account in Hawaii at a federally insured bank or depository, designating the principal broker as trustee (HAR 16-99-4(a))
- Entrusted funds must be deposited by the NEXT BUSINESS DAY following receipt — not within 5 days (HAR 16-99-4(g))
- Commingling — mixing the broker's own funds with clients' trust funds — is prohibited; conversion (using client funds) can trigger revocation plus criminal theft charges
- Trust fund records must be retained for at least 3 years and are subject to inspection by HIREC at any time (HAR 16-99-4(b))
- Disbursements must follow the written deposit instructions in strict compliance; the broker may not unilaterally release a disputed earnest-money deposit
Trust Account Basics
A trust fund account (also called a client's account or escrow account) is a bank account in which a brokerage firm holds money that legally belongs to someone else — buyers, sellers, tenants, or landlords. Under HAR 16-99-4(a), every brokerage firm that does not immediately place entrusted funds into a neutral escrow depository must maintain a trust fund account in this State at a bank or recognized depository that is federally insured, and place all entrusted funds there. The account must designate the principal broker as trustee.
What goes into the trust account
| Fund Type | Typical Example |
|---|---|
| Earnest money deposits | Buyer's good-faith deposit on a purchase contract |
| Security deposits | Tenant deposits on managed rentals |
| Rent collections | Rent collected on behalf of an owner |
| Advance fees / pre-paid charges | Money paid before services are rendered |
| Closing proceeds | Funds held pending disbursement at settlement |
Trust property is broader than cash: HAR 16-99-4 defines it to include cash, checks, and personal property other than cash received to be held in trust. Personal property held in trust (e.g., keys, documents of value) also requires safeguarding and its own 3-year records.
Who Controls the Account
Only the principal broker (PB) — acting as trustee — controls the trust account. The chain of custody matters on the exam:
| Licensee | Trust-Fund Responsibility |
|---|---|
| Principal broker | Maintains and controls the trust account as trustee |
| Broker-in-charge (BIC) | May receive and handle funds under PB authority |
| Associate broker | Cannot maintain a brokerage trust account independently |
| Salesperson | Must turn over all funds to the PB/BIC — cannot hold them |
Critical rule: A salesperson who receives an earnest-money check must deliver it to the principal broker (or broker-in-charge) promptly. A salesperson who deposits a buyer's check into a personal account, or holds it in a desk drawer over a long weekend, has violated HAR 16-99-4 even if the money is later deposited intact.
Deposit Timeline — The Next-Business-Day Rule
This is the single most-missed fact on the Hawaii state exam. HAR 16-99-4(g) requires the brokerage firm to deposit or place trust funds into a neutral escrow depository or a trust fund account by the next business day following their receipt. Older and out-of-state study materials say "within five business days" — that figure is wrong for Hawaii.
| Situation | Hawaii Deadline |
|---|---|
| Earnest money received by salesperson | Deliver to PB, then deposit by next business day |
| Earnest money sent straight to neutral escrow | Place by next business day following receipt |
| Security deposit on a managed unit | Trust account by next business day |
| Collected rent | Trust account by next business day |
Worked example: A salesperson accepts a buyer's $20,000 earnest-money check at 3:00 p.m. on Friday. Saturday and Sunday are not business days, and Monday is a state holiday. The check must reach the trust account or neutral escrow by the close of the next business day — Tuesday. Holding it until the following Friday is a deposit violation regardless of intent.
Prohibited Practices
Commingling
Commingling is defined in HAR 16-99 as mingling or mixing the broker's own funds with money held in trust for others. It is prohibited. The classic fact pattern: the PB uses the trust account to pay the brokerage's office rent, or lets earnest money sit in the firm's operating checking account. Even brief, well-intentioned mixing is a violation.
| Permitted | Prohibited (Commingling/Conversion) |
|---|---|
| Clients' funds in the designated trust account | Clients' funds parked in the operating account |
| A small broker contribution to keep the account open (where bank requires a minimum) | Broker leaving large personal balances in the trust account |
| Separate ledger for each client/transaction | One pooled balance with no per-client ledger |
| Disbursing strictly per written instructions | Borrowing from the trust account to cover payroll |
Conversion
Conversion is using entrusted funds for an unauthorized purpose — effectively theft. It is the most serious trust violation and can produce, simultaneously:
- Immediate license suspension and likely revocation
- Criminal prosecution for theft/embezzlement (HRS 467-26 caps the chapter fine at $5,000 per violation; theft is charged separately under the Penal Code)
- Civil liability to the harmed party
- A Real Estate Recovery Fund payout to the consumer if the licensee cannot pay (covered in 4.2)
Disbursement and disputed deposits
HAR 16-99-4 requires that trust deposits be disbursed in strict compliance with the written deposit instructions signed by the owner of the funds, the PB/BIC, and other parties. When buyer and seller dispute who is entitled to earnest money, the broker must not simply pick a side and release the funds — the broker holds them until the parties agree in writing, a court orders disbursement, or the funds are interpleaded.
Record Keeping (3-Year Rule)
HAR 16-99-4(b) requires every brokerage firm to retain for at least three years the records of all trust funds received, and to keep them open to HIREC inspection. Required entries include:
| Required Record | What It Captures |
|---|---|
| Source of funds | From whom received, amount, date, where deposited |
| Transaction dates | Dates of receipt, deposit, withdrawal, disbursement |
| Disbursement detail | Amounts withdrawn/disbursed and to whom |
| Purpose | Description of the fund and why it was established |
| Per-client ledger | Individual running balance for each beneficiary |
| Monthly reconciliation | Bank statement reconciled to ledger totals |
The three-year clock also applies to records of personal property held in trust under HAR 16-99-4. Listing and transaction files are generally kept on the same three-year horizon.
HIREC Audits and Common Findings
The Real Estate Branch / HIREC may inspect trust accounts and records at any time. Frequent findings and their typical consequences:
| Finding | Likely Consequence |
|---|---|
| Shortage in the account | Serious — suspension/revocation, possible criminal referral |
| Late deposit (after next business day) | Citation, fine, or reprimand |
| No per-client ledgers / no reconciliation | Reprimand to suspension |
| Commingling | Fine up to revocation |
| Conversion | Revocation plus criminal referral |
Under Hawaii Administrative Rules, by when must a brokerage firm deposit entrusted funds into a trust account or neutral escrow depository?
How a Hawaii trust fund account must be titled at the bank reflects which requirement?
A principal broker uses earnest money sitting in the firm's trust account to cover a short payroll, intending to replace it in two weeks. What has occurred?
How long must a Hawaii brokerage firm retain its trust fund records?