3.3 Trust Account Management
Key Takeaways
- Article 25 of the Occupational Code (MCL 339.2512) requires brokers to deposit client funds in a separate trust/escrow account at a financial institution and to keep them out of operating funds
- Commingling (mixing client money with the broker's own) and conversion (using client money for personal purposes) are prohibited and are leading causes of license discipline
- Earnest money must be deposited promptly per the purchase agreement, and the BROKER — not the salesperson — controls the trust account
- Brokers must keep transaction records and reconcile the trust account, and LARA may audit it on complaint or for compliance
- In an earnest-money dispute the broker is a neutral stakeholder who holds funds and may file an interpleader rather than picking a side
Who Controls Client Money
In Michigan, the broker — not the individual salesperson — is responsible for all client funds. Article 25 of the Occupational Code (MCL 339.2512) makes it a disciplinable offense to fail to account for or remit money belonging to others. A salesperson who receives an earnest-money check must turn it over to the broker, who deposits it into the firm's trust (escrow) account.
Account requirements
| Requirement | Specification |
|---|---|
| Account type | Separate, designated trust or escrow account |
| Institution | A financial institution (bank/credit union) — funds kept separate from operating money |
| Naming | Account clearly identified as a trust/escrow account |
| Authority | Broker has signature authority and oversight |
Funds that belong in trust
| Fund type | Source |
|---|---|
| Earnest money | Buyer's good-faith deposit on a purchase |
| Security deposits | Tenant deposits when the broker manages rentals |
| Rent collections | Rents collected as property manager |
| Other client money | Any money held on behalf of a principal |
Prompt Deposit
Trust funds must be deposited promptly, in accordance with the terms of the purchase agreement. Many agreements specify a number of banking days; absent a stated time, deposit within a couple of business days. Worked trap: A salesperson holds an earnest-money check in a desk drawer 'until the offer is accepted.' If the agreement called for deposit within 2 banking days of the effective date, holding the check is a violation even though the money was never spent — the rule is about control and timing, not theft.
The Two Cardinal Sins
Commingling
Commingling is mixing trust funds with the broker's personal or business operating funds — for example, depositing earnest money into the firm's general checking account. It is prohibited. The narrow exception: a broker may keep a small documented amount of the broker's own money in the trust account to cover bank service charges, which is not commingling.
Conversion
Conversion is using client trust money for the broker's own purposes — paying office rent out of escrow, 'borrowing' a deposit. Conversion is far worse than a paperwork lapse: it can support license revocation and criminal charges.
| Violation | What happens | Typical sanction |
|---|---|---|
| Commingling | Trust money mixed with operating funds | Discipline, fines, ordered corrections |
| Conversion | Trust money spent for broker's benefit | Revocation; possible criminal liability |
| Late/no deposit | Funds not deposited per agreement | Discipline for failure to account |
Recordkeeping and Disbursement
- Maintain a record/ledger for each transaction.
- Reconcile the trust account against the bank statement on a regular (monthly) basis.
- Disburse only (1) per the contract, (2) at closing, (3) on mutual written agreement to release, or (4) by court order.
- Retain records for the period LARA requires; the account is subject to LARA audit on complaint, during investigation, or for routine compliance.
Earnest-Money Disputes
When buyer and seller each claim the deposit, the broker is a neutral stakeholder:
- Hold the funds — disburse to neither side without written agreement.
- Document the dispute and all communications.
- If the parties cannot agree, file an interpleader action and deposit the funds with the court, which decides ownership.
Exam trap: Choosing 'return the deposit to the buyer' or 'give it to the seller' in a dispute is wrong — taking either side without authorization is itself a violation. The safe answer is always to hold and, if needed, interplead.
Reconciliation, Audits, and Discipline
Trust-account integrity rests on reconciliation — periodically proving that the dollars in the bank match the dollars owed to clients. A simple rule of thumb: the trust account's bank balance should always equal the sum of the individual client ledgers (plus any small documented amount the broker placed there for bank fees). If those two numbers diverge, money is either missing or extra, and both are red flags.
Monthly three-way reconciliation
- Pull the bank statement balance and adjust for outstanding items.
- Total the individual client/transaction ledgers (each buyer's earnest money, each tenant's deposit).
- Compare to the broker's trust-account journal.
- All three must agree; investigate and document any difference.
- The broker reviews and signs off — this duty cannot be delegated away from the broker's responsibility.
LARA oversight
The Michigan Department of Licensing and Regulatory Affairs (LARA) administers real estate license law. LARA may examine a broker's trust records on a complaint, during an investigation, or for routine compliance. Records must be kept and produced on request; failing to maintain or produce them is itself a violation, separate from any underlying mishandling.
| Discipline tool | Used for |
|---|---|
| Citation / fine | Recordkeeping and lesser violations |
| License suspension | Serious or repeated violations |
| License revocation | Conversion, fraud, gross trust violations |
| Restitution order | Returning client money that was mishandled |
Why this is the #1 discipline area
Client money is traceable, the rules are bright-line, and harm to the public is direct, so regulators pursue trust violations aggressively. Worked trap: A broker's trust account is overdrawn by $300 because an operating expense auto-debited from the wrong account. Even though it was an accounting error and no client ultimately lost money, the broker has technically commingled/converted and failed reconciliation — all disciplinable. The lesson: keep trust money rigidly separate and reconcile every month so errors surface immediately.
A Michigan broker pays the firm's electric bill out of the trust account, intending to repay it next week. This is BEST described as:
The buyer and seller both demand the earnest-money deposit after a deal collapses. What must the Michigan broker do?