Legal Definitions - trust account

A trust account is a special bank account used by professionals, such as lawyers, real estate agents, or financial advisors, to hold money or assets belonging to their clients or other third parties. The key characteristic is that the funds in a trust account are kept strictly separate from the professional's own personal or business operating funds. This separation is legally required to protect the clients' money and ensure it is not misused or commingled with the professional's assets. The professional managing the trust account has a fiduciary duty, meaning they are legally and ethically obligated to act in the best interest of the owner of the funds.

Here are some examples illustrating the use of a trust account:

• Example 1: Real Estate Transaction

  Imagine a homebuyer places an earnest money deposit of $10,000 when making an offer on a house. The real estate agent representing the seller receives this deposit. Instead of putting it into their general business account, the agent deposits the $10,000 into a dedicated broker's trust account. This ensures that the money remains the property of the homebuyer until the sale closes or the contract is terminated, and it is protected from the agent's business expenses or creditors. The agent is merely holding the funds on behalf of the buyer and seller until the transaction is complete.

• Example 2: Legal Settlement

  A personal injury lawyer successfully negotiates a $50,000 settlement for their client. When the insurance company issues the check, the lawyer deposits the full amount into a client trust account. From this account, the lawyer will then disburse funds to pay for medical liens, court costs, and their own legal fees, before transferring the remaining balance to the client. This process ensures that the client's settlement money is safeguarded and properly accounted for, preventing the lawyer from mixing it with their firm's operating funds.

• Example 3: Estate Management

  A financial advisor is appointed as the executor of a deceased client's estate. The estate includes various assets, such as bank accounts and proceeds from the sale of property. The advisor establishes an estate trust account to consolidate these funds. All money belonging to the estate, intended for distribution to heirs or payment of estate debts, is held in this separate account. This prevents the advisor from commingling the estate's assets with their personal finances or the assets of other clients, ensuring transparency and proper management of the deceased's legacy.