Trust Fund Recordkeeping – Avoiding California DRE Violations

Ask any experienced broker what they worry about most, and “trust fund problems” will almost always make the list. The California Department of Real Estate (DRE) takes trust fund handling seriously, and mistakes are one of the most common reasons brokers and agents face discipline. The consequences aren’t small—audits, citations, fines, even suspension or loss of a license.

Recent data drives the point home: in fiscal year 2023–24, 57% of DRE audits uncovered trust fund recordkeeping violations, and nearly a third revealed shortages in trust accounts. Year after year, these issues rank among the most frequent enforcement actions by the DRE.

This guide breaks down what counts as trust funds, what California requires, the most common pitfalls, and the habits that will help keep you—and your license—safe.

What Are Real Estate Trust Funds?

Trust funds are any money or items of value received on behalf of others in a real estate transaction. Examples include earnest money deposits, rent, security deposits, homeowners association dues, or loan payoffs handled through a brokerage or servicing. By law, these funds must be handled with strict care and accuracy.

Who’s on the hook? 

If a salesperson accepts trust funds, they must immediately turn them over to their broker, or if instructed, deliver them directly to escrow or deposit them into the broker’s trust account.

Ultimately, however, it’s the broker who carries the legal responsibility, including oversight of anyone authorized to sign on the trust account.

Why does it matter?

Proper handling of trust funds isn’t just good practice, it’s a legal requirement under the Business & Professions Code §10145 and the Commissioner’s Regulations. Missteps can lead to audits, enforcement actions, and even claims against the Consumer Recovery Account if funds are mishandled.

California DRE Requirements for Trust Fund Recordkeeping

If trust funds aren’t delivered directly to the owner or sent to escrow, they must be deposited into a trust account that is set up in the broker’s name as trustee at a California bank. These deposits have to be made within three business days of receiving the funds. There is one narrow exception for checks that are held uncashed under written instruction: if the offer is accepted, that check must be deposited within three business days of acceptance unless the parties agree otherwise.

Brokers are required to keep very detailed records of every trust fund that comes in and goes out. This includes maintaining a control record or journal, separate ledgers for each client or transaction, and a record of any undeposited funds that were forwarded rather than placed in the account. Every entry has to be supported with backup documentation—bank statements, deposit slips, and cancelled checks—so that the paper trail is clear and verifiable.

At least once a month, the broker must reconcile the trust account by comparing the bank statement, the journal, and the combined total of all ledgers. A written reconciliation report has to be kept on file each month as proof. Finally, all trust fund records and related transaction documents must be retained for at least three years after a transaction closes—or, if it never closes, from the date of the listing.

Common Recordkeeping Mistakes (and How They Show Up in Audits)

Mistake 1: No separate ledgers.

What goes wrong: Some brokers only watch the overall bank balance, which makes it impossible to show exactly how much belongs to each client or transaction.
Correct approach: Always keep a separate ledger for each client or deal, in addition to the main control record.

Mistake 2: Skipping the monthly three-way reconciliation.

What goes wrong: When the broker doesn’t compare the bank statement, the trust account journal, and the total of all separate ledgers each month, errors can slip through. Over time, those small discrepancies often add up to shortages or unexplained overages that show up quickly in an audit.

Correct approach: Complete the full three-way reconciliation every month the trust account has activity, and keep a written copy in your records. If there’s no activity in a given month, reconciliation isn’t required—but it’s still a good idea to review balances to make sure nothing was missed.

Mistake 3: Missing or incomplete documentation.

What goes wrong: Deposit slips, backup for disbursements, or a record of undeposited funds forwarded to escrow are missing, leaving gaps in the paper trail.
Correct approach: Keep full backup for every entry—bank statements, deposit slips, cancelled checks, and undeposited funds records.

Mistake 4: Commingling broker and client funds.

What goes wrong: Some brokers use the trust account like an operating account, or they leave their own earned fees in the account too long. Both count as commingling.
Correct approach: Keep the trust account strictly separate. The only broker funds allowed are up to $200 to cover bank fees and earned commissions that remain no more than 25 days before being withdrawn. Both must be tracked on a separate “broker funds” ledger.

Mistake 5: Late posting of transactions.

What goes wrong: When deposits or disbursements aren’t recorded promptly, the records fall out of sync with the bank, especially during high-volume periods like rent collection.
Correct approach: Post deposits and withdrawals right away and make sure deposits are made within the required timeline—generally three business days, or the next business day when acting as escrow.

A real case: In 2023, S.D.S. Realty & Property Management was cited by the DRE for failing to keep separate records, missing reconciliations, and leaving commissions in the trust account past the 25-day limit. The case shows how even seemingly small process errors can lead to violations.

Best Practices for Compliant Trust Fund Recordkeeping

Open a proper trust account‍

Use a California bank and title it in the broker’s name as trustee. Never use the operating account. Deposit trust funds within three business days of receipt.

Keep clear journals and ledgers‍

Maintain a control journal for all trust funds and a separate ledger for each client or transaction. If funds are forwarded to escrow instead of deposited, record them as undeposited funds.

Perform a monthly three-way reconciliation‍

Compare the bank statement, the journal, and the total of all ledgers every month. Keep a written record with dates, account numbers, and client balances.

Document every transaction promptly‍

Support all deposits and withdrawals with deposit slips, checks, and backup documentation. Record entries as soon as possible to stay current.

Use digital tools if helpful‍

The DRE allows reconciliations to be done manually or digitally. Many accounting systems make it easier to track, reconcile, and report trust funds accurately.

Control who can sign on the account‍

Only authorized signers are allowed under Regulation 2834. Adding signers doesn’t reduce the broker’s responsibility. Dual signatures for large disbursements are a recommended best practice.

Follow the commingling rules‍

Broker funds in a trust account are limited to $200 for bank fees and earned commissions held no more than 25 days. Track these separately on a broker‑funds ledger.

Train your team and review regularly‍

Use a checklist to review reconciliations and randomly check ledgers each month. The DRE’s Broker Self-Evaluation (RE 540) is a helpful tool for ongoing self-audit.

Preparing for a DRE Trust Fund Audit

Auditors focus on the basics: a properly titled trust account, funds deposited on time, a complete journal with separate ledgers for every client or transaction, and accurate bank statements.

They’ll check that monthly three-way reconciliations are done and that each deposit and withdrawal has clear supporting paperwork. They also test whether account balances match what’s owed and confirm who has signing authority.

Get audit-ready now:

• Keep monthly reconciliation reports filed in order by month.
• Make sure journals and ledgers are always up to date and tied back to deposit slips and checks.
• Track undeposited funds if money is forwarded to escrow or directly to an owner.
• Keep signer authorization forms and fidelity bond documents accessible (if required).
• Use the DRE’s RE 540 self-check tool to catch issues early.

Pro tip: run your own spot-checks—pick a random month each quarter and prove your reconciliation and records hold up. It’s easier to fix problems ahead of time than during an audit.

FAQ

How long do I have to keep trust fund records?

‍At least three years after closing—or from the listing date if the deal doesn’t close. Many brokerages keep them longer as a safeguard.

What happens if I miss a monthly reconciliation?

‍This is one of the most common audit findings. Monthly reconciliation with a written report is required. If you fall behind, catch up as quickly as possible and document each month going forward.

Can I keep trust fund records digitally?

‍Yes. Digital systems are allowed as long as they include all required details, support three-way reconciliation, and can be easily viewed or printed if requested.

Final Thoughts

Strong trust fund practices are the foundation of compliance. Get the basics right (account setup, ledgers, documentation), stay consistent (monthly reconciliations), and build good habits in your office (training and oversight). Review your system now and patch any weak spots before an auditor points them out.

Renewal coming up?‍

When you take your 45-hour continuing education package, be sure it includes the Trust Fund Handling course—either as a standalone 3-hour option or inside the survey course. Then set aside time to put what you’ve learned into practice in your office routines.

Checklist Sidebar — 7 Things Every Trust Fund Record Should Show

• Date funds were received
• Who the money came from
• Amount received
• Date deposited
• Check number and date for each disbursement
• If not deposited: who it was sent to and when
• Running daily balance of the trust account