Key Takeaways
- Michigan brokers must maintain trust accounts for client funds in federally insured financial institutions
- Earnest money and other client funds must be deposited promptly according to contract terms
- Commingling of trust funds with personal or business funds is prohibited
- Brokers must maintain accurate records and reconcile trust accounts regularly
- Trust account violations are a leading cause of license discipline
Trust Account Management in Michigan
Proper handling of client funds is one of the most important responsibilities of a Michigan real estate broker. Trust account violations are a leading cause of license discipline.
Trust Account Requirements
Account Setup
Michigan brokers must:
| Requirement | Specification |
|---|---|
| Account Type | Designated trust or escrow account |
| Location | Federally insured financial institution |
| Account Name | Must identify as trust/escrow account |
| Broker Control | Broker has signature authority |
Types of Funds Held in Trust
| Fund Type | Description |
|---|---|
| Earnest Money | Deposits on purchase contracts |
| Security Deposits | Rental property deposits |
| Rent Collections | When broker is property manager |
| Client Funds | Other money held for clients |
Deposit Timing
Prompt Deposit Required
Trust funds must be deposited promptly according to:
- Terms of the purchase agreement
- Broker's written policies
- Standard of reasonable promptness
Best Practice: Deposit earnest money within 2-3 business days of receipt to avoid any questions about handling.
What Counts as Receipt
A broker "receives" funds when:
- Check is physically received
- Wire transfer is confirmed
- Cash is received (avoid cash when possible)
Prohibited Practices
Commingling
Commingling is mixing trust funds with personal or business operating funds. It is strictly prohibited.
Exceptions:
- A broker MAY keep a minimal amount in the trust account to cover bank service charges
- This amount should be documented
Conversion
Conversion is using trust funds for personal purposes. It is:
- A serious violation
- Potential criminal offense
- Grounds for license revocation
Improper Disbursement
Trust funds should only be disbursed:
- According to contract terms
- When transaction closes
- When transaction terminates with agreement on funds
- By court order
Trust Account Maintenance
Recordkeeping Requirements
| Task | Requirement |
|---|---|
| Transaction records | Maintain for each transaction |
| Bank reconciliation | Regular (at least monthly) |
| Client ledgers | Track individual funds |
| Retention | Keep records as required by LARA |
Reconciliation Process
- Compare bank statement to records
- Prepare trial balance
- Identify and resolve discrepancies
- Document reconciliation
- Broker should sign off
LARA Audits
LARA may audit broker trust accounts:
- In response to complaints
- As part of investigations
- Randomly for compliance
Earnest Money Disputes
When parties dispute earnest money ownership:
- Hold the funds until dispute is resolved
- Do NOT disburse to either party without agreement
- Document the dispute and all communications
- Interpleader action - File with court if parties cannot agree
- Court will determine rightful owner
Key Point: The broker is a neutral stakeholder. Do not take sides in earnest money disputes.
What is "commingling" in the context of trust accounts?
When earnest money is disputed between buyer and seller, the broker should: