Marcia Hultman

Cabinet Secretary

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South Dakota Real Estate Commission

Summary of Trust Accounting for Earnest Money Deposits in Real Estate Sales

One of the most common violations of the real estate law is improper handling and maintenance of a trust account. Many of these violations result from a lack of understanding as to the purpose of a trust account and a lack of specific instructions on how to establish and maintain this type of checking account.

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. If a broker chooses to establish an account the checks and deposit slips should be printed with the broker's business name and address. It is recommended to also include the words ‘trust account’ or ‘earnest money account’ in the account title and on the checks and deposit slips to avoid confusion with a broker’s operating account. Trust account checks should be pre-numbered and all voided checks documented.

The guidelines have been established pursuant to South Dakota real estate license laws and rules for brokers who choose to establish a checking account for the purpose of maintaining trust funds. All brokers maintaining this type of account are urged to review and examine their own practices to determine if they are in compliance with South Dakota license laws and rules.

All earnest money and other trust funds received are to be deposited the first legal banking day after the acceptance of the contract or as agreed to, in writing, by the parties. The authority and responsibility for the proper handling of the broker’s trust account ultimately rests with the responsible broker.

The trust account must be supervised by the responsible broker. Written procedures should be followed by all persons authorized by the broker with the handling and monthly three way reconciliation of the earnest money deposits (A trust account reconciliation form is available in Adobe PDF format). A copy of this reconciliation should be retained by the broker, along with copies of the bank statements. Failing to reconcile the bank statement, trust ledger, and check register, at least monthly, is a violation of South Dakota Codified Law (SDCL) 36-21A-80.

The Broker shall inform the South Dakota Real Estate Commission (SDREC) staff of the name of the financial institution, the title of the account, and the account number. Whenever there is a change in the trust account the SDREC staff must be notified of the change in writing.

A broker may deposit and maintain a sum of their own money to cover bank assessed charges or fees which may be deducted from the account. These funds must be accounted for in the ledger. It is common for this ledger to be titled ‘broker equity’ or ‘broker funds.’ An alternative to this would be to have all bank charges on the trust account automatically deducted from the business operating account. Check with your financial institution regarding this option.

Trust account funds shall be retained in the trust account until the transaction is either consummated or terminated. If an accepted offer and agreement to purchase does not close, the trust funds cannot be disbursed except pursuant to a written instruction of all parties to the transaction or pursuant to a court order, such as small claims court.

The broker is required to maintain a record of all deposits made into the trust account. Bank deposit slips must show the date of the deposit, the amount, a description of the money source and where deposited.

The trust ledger is a record of receipts and disbursements that affect a single transaction between buyer and seller. The individual ledger sheet should contain the following:

  • A descriptive heading identifying the names of both parties to the transaction as well as the location of the property.
  • The date and amount of deposit as well as a description from whom the money was received and what the money was received for.
  • The date, the payee, check number and amount of funds disbursed.
  • The broker's equity, deposits and disbursements chronologically entered and detailed. An accurate running balance after each entry to show the exact amount of money in the account belonging to the broker should be maintained.

Upon completion of a transaction, the closed ledger sheet should be filed in the completed transaction file. A separate file folder should be maintained for each completed transaction. This file should contain the agency agreement and contracts, seller's property condition disclosure statement, purchase agreement and addendums, and copies of closing statements, and any other forms relevant to the transaction and required by law. The closed sale file may also contain any documents or notes which the broker determines to be of importance to that specific transaction. All records must be retained by the broker for a minimum of four years from the final closing of the transaction. These records shall be made available for examination and audit by the South Dakota Real Estate Commission, or a designated agent, upon request. Electronic storage is allowable. Refer the SDREC’s Electronic Storage Guidelines for recommended procedures (Electronic Storage Guidelines).

There are occasions when interest bearing trust accounts are permissible. They are not intended for funds being held for a relatively short period of time, and are not to be used in the normal routine of business. Interest bearing trust accounts are permitted only when substantial sums of money are to be deposited which relate to a specific transaction and those funds will be held for a lengthy period of time. The broker maintaining the interest bearing trust account cannot benefit from the interest earned on the account.

To establish an interest bearing trust account, all persons having an interest in the funds must agree to the deposit in writing. This written agreement must include instructions regarding the allocation or division of the interest. A copy of the agreement must be maintained in the specific file of the particular transaction to which it pertains.