What is a construction trust?
A construction trust is a legal instrument used in California to ensure that money paid by a client for a construction project is protected and used only for that project. This protection is especially important when the contractor or subcontractor is not licensed, insured, or bonded. When money is paid to a contractor or subcontractor, the trust holds the money in a separate account specifically designated for that project. If the contractor defaults or fails to perform, the trust protects the client’s money from being commingled with other funds from the contractor or subcontractor. A trustee is appointed to manage the trust and administer the payment of funds for construction projects. The trustee ensures that the funds are properly used for the contracted project and only disperses funds when they are due. The trustee may also be responsible for other duties, such as keeping records, tracking funds, and filing required documents. A construction trust offers an important layer of protection for both clients and contractors in California. It ensures that a client’s funds remain secure and are used only for the intended project. And it protects contractors and subcontractors from being exposed to liability for the mishandling of funds.
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