Key Takeaways
- South Dakota does NOT require brokers to maintain a trust account, but they may establish one for earnest money
- If a trust account is established, it must be properly titled and the SDREC must be notified of account details
- All earnest money must be deposited the first legal banking day after contract acceptance or as agreed in writing
- Monthly three-way reconciliation is required and failure to reconcile is a violation of SDCL 36-21A-80
- Commingling and conversion are prohibited; brokers may deposit limited personal funds to cover bank fees
South Dakota Trust Account Requirements
South Dakota has specific but flexible requirements regarding trust accounts for client funds.
Trust Account Basics
Is a Trust Account Required?
South Dakota license law does not require a broker to maintain a trust account, but brokers may establish a checking account for the purpose of maintaining earnest money.
Key Distinction: Unlike many states, South Dakota makes trust accounts optional. However, if you handle client funds, you should have proper procedures in place.
If a Trust Account is Established
| Requirement | Details |
|---|---|
| Account type | Checking account |
| Account title | Include broker's business name and address |
| Recommended labeling | Include "trust account" or "earnest money account" |
| Purpose | Avoid confusion with broker's operating account |
Notification to SDREC
If a broker establishes a trust account, they must notify SDREC of:
| Information Required |
|---|
| Name of the financial institution |
| Title of the account |
| Account number |
| Any changes to the trust account |
Important: Whenever there is a change in the trust account, SDREC staff must be notified of the change in writing.
Deposit Requirements
Timeline
| Situation | Deposit Deadline |
|---|---|
| Earnest money | First legal banking day after acceptance of contract |
| Alternative | As agreed to in writing by the parties |
Proper Deposits
All client funds must be deposited into the broker's trust account - not:
- Broker associate's personal account
- Broker's operating account
- Any other non-trust account
Critical Rule: The authority and responsibility for proper handling of the broker's trust account ultimately rests with the responsible broker.
Prohibited Practices
Commingling
Commingling is mixing client funds with broker's personal or business funds. It is strictly prohibited.
| Allowed | NOT Allowed |
|---|---|
| Client funds in trust account | Client funds in operating account |
| Broker deposit to cover bank fees | Large broker funds in trust account |
| Proper documentation | Using client funds for business expenses |
Broker Funds in Trust Account
A broker may deposit and maintain a sum of their own money to cover:
- Bank-assessed charges or fees
- Account maintenance fees
These funds must be:
- Accounted for in the ledger
- Typically titled "broker equity" or "broker funds"
Conversion
Conversion is using client funds for unauthorized purposes. It is a serious violation that can result in:
- License revocation
- Criminal charges
- Civil liability
Record Keeping and Reconciliation
Required Records
Brokers must maintain:
| Record | Description |
|---|---|
| Bank statements | Monthly statements from financial institution |
| Deposit receipts | Documentation of each deposit |
| Check records | Documentation of each disbursement |
| Client ledgers | Individual records for each client |
| Transaction records | All transaction documentation |
Monthly Three-Way Reconciliation
Written procedures should be followed for monthly reconciliation of:
- Bank statement balance
- Trust ledger balance
- Check register balance
| Requirement | Details |
|---|---|
| Frequency | At least monthly |
| Documentation | Keep copy of reconciliation |
| Records retention | Retain with bank statements |
| Violation | Failure to reconcile violates SDCL 36-21A-80 |
Warning: Failing to reconcile the bank statement, trust ledger, and check register at least monthly is a violation of South Dakota Codified Law 36-21A-80.
Co-Brokerage Transactions
When multiple brokers are involved in a transaction:
| Situation | Rule |
|---|---|
| Cooperative transaction | Earnest money held in one broker's trust account |
| Co-brokerage transaction | Earnest money held in broker's trust account |
Special Escrow Provisions
For certain transactions (such as timeshares), special escrow rules may apply:
| Requirement | Details |
|---|---|
| 7-day rescission period | No funds may be disbursed until after expiration |
| Purpose | Protects purchaser's right to cancel |
Common Trust Account Violations
One of the most common violations of South Dakota real estate law is improper handling and maintenance of a trust account.
Common Issues
| Violation | Consequence |
|---|---|
| Shortage of funds | Serious violation - potential revocation |
| Poor record keeping | Warning to suspension |
| Failure to reconcile monthly | Violation of SDCL 36-21A-80 |
| Commingling | Fine to revocation |
| Failure to notify SDREC of account changes | Administrative penalty |
Prevention Tips
| Best Practice | Why It Matters |
|---|---|
| Written procedures | Ensures consistency |
| Regular reconciliation | Catches errors early |
| Proper documentation | Provides audit trail |
| Separate accounts | Prevents commingling |
| Staff training | Reduces mistakes |
Exam Tip: Many trust account violations result from a lack of understanding about the purpose of a trust account and a lack of specific instructions on how to establish and maintain it properly.
Does South Dakota require brokers to maintain a trust account?
How often must a South Dakota broker reconcile their trust account?
What must a South Dakota broker do if they establish a trust account?