Legal Definitions - commingling

Commingling refers to the act of mixing funds or assets that belong to different parties, especially when one party has a legal duty to keep those assets separate. This practice is generally prohibited in situations where a person or entity is entrusted with managing another's property, as it can create confusion, make accountability difficult, and expose the entrusted funds to risks they shouldn't bear.

Most commonly, commingling occurs when a fiduciary—someone legally obligated to act in another's best interest, such as a lawyer, trustee, or financial advisor—mixes their personal funds with the funds they are managing for a client or beneficiary. This is considered a serious breach of their professional duty because it blurs the lines of ownership and can make client funds vulnerable to the fiduciary's personal debts, business failures, or even accidental misuse. Regulations often require fiduciaries to maintain separate accounts for client funds to protect those assets.

Commingling can also arise in states with community property laws, which generally consider assets acquired during a marriage to be jointly owned by both spouses. If one spouse has "separate property" (assets owned before marriage or received as a gift or inheritance during marriage) and mixes it with marital assets, for instance, by depositing it into a joint bank account used for household expenses, that separate property might lose its distinct status. In a divorce, it could then be treated as community property and divided between both spouses, rather than remaining solely with the original owner.

• Example 1 (Financial Advisor): Imagine a financial advisor who manages investment portfolios for multiple clients. Instead of maintaining separate, dedicated client accounts for their investments, the advisor deposits all client funds into a single personal bank account that also holds their own salary and personal savings. This is commingling because the advisor is mixing client money with their personal funds, making it difficult to track individual client assets and potentially exposing client investments to the advisor's personal financial risks.

• Example 2 (Real Estate Agent): A real estate agent receives an earnest money deposit from a buyer, which is meant to be held in trust until the sale closes. Instead of placing this deposit into a designated escrow or trust account, the agent deposits it directly into their general business operating account, which they use to pay office rent, utilities, and their own salary. This constitutes commingling because the client's earnest money, which the agent holds in a fiduciary capacity, is mixed with the agent's operational funds, violating the duty to keep client funds separate and secure.

• Example 3 (Community Property): Consider a couple living in a community property state. One spouse inherits a substantial sum of money from a relative, which is legally considered their separate property. However, instead of keeping the inheritance in a separate account, the spouse deposits it into the couple's joint checking account, which they both regularly use to pay for groceries, mortgage payments, and other shared household expenses. Over time, the inheritance funds become indistinguishably mixed with community funds. If the couple later divorces, a court might rule that the inherited money has been commingled and has lost its separate property status, making it subject to division as community property between both spouses.