Construction Trust Fund Statutes
Guide & FAQs

Understand construction trust fund statutes, and how they affect your rights and requirements on a project.

What is a construction trust fund statute?

Construction trust fund statutes are laws enacted by several states to protect payments on construction projects. This is accomplished by automatically creating a constructive trust for any funds disbursed to a party on a construction project that is meant as payment for any subs and suppliers to the project.

Although these trust fund statutes, at first glance, appear to only benefit subs and suppliers on a project, they were originally intended to protect owners and general contractors. (defense to payment/proper payments) risk of double liability.

How a Construction Trust Fund statute protects payments

When project funds are disbursed from the property owner to the contractor (or lender to the property owner), to pay subcontractors and material suppliers on the project, they are deemed to be “held in trust” for the beneficiaries. Depending on the state, this also applies to down the payment chain. (Ex. subcontractor payments to sub-subs, etc.)

There are three basic elements to a trust:

  • Trustee: The party receiving money on a construction project
  • Trust property: The construction funds paid for work and/or materials furnished
  • Beneficiary: The subcontractors, material suppliers, laborers, etc. who supplied labor, services, or materials to the project

Fiduciary duty of trustees

Trustees owe a fiduciary duty to the beneficiaries, meaning that they must act only in the best interests of the beneficiaries. A trustee may not misappropriate, or otherwise misuse the funds, for any other purpose but to pay the subs and suppliers who earned the payments; i.e, the beneficiaries of the trust funds.

Trust property

The trust property (project funds) are meant to be held in trust for the beneficiaries. In some states, the construction trust fund statute strictly prohibits the “commingling of funds.” In these states, the trustee must deposit the trust property in a separate bank account or they will be found in violation of the trust fund requirements. However, most states do not have any prohibition on commingling funds, but good record keeping will typically be required to ensure compliance with the statute.

Effect of bankruptcy

One of the main advantages of a construction trust fund is the fact that project funds will not be deemed the property of a contractor’s estate should they declare bankruptcy. That’s because the money is being held specifically for the beneficiaries.

Under 11 USC §541(d) of the Bankruptcy Code, “property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest… becomes property of the estate.” If a valid trust has been formed by statute, then those funds will be exempt from third-party creditors when the trustee goes through bankruptcy court proceedings.

What states have a Construction Trust Fund statute?

Currently, there are 19 states that have a construction trust fund statute in their state laws. These states include Arizona, Colorado, Delaware, Florida, Illinois, Maryland, Michigan, Minnesota, Nevada, New Jersey, New York, Oklahoma, Pennsylvania, South Carolina, South Dakota, Texas, Vermont, Washington, and Wisconsin.

There are a few states, such as Arkansas, Georgia, and Virginia that do have some criminal statutes which impose liability for the misapplication of trust funds. However, in these states, the statute does not impose any trust obligations.

Lastly, many states allow for the creation of a trust through provisions in the construction contract (known as trust agreements). States providing for trust agreements include California, Maryland, Missouri, and Virginia.

Remedies for violation of a construction trust fund statute

The penalties and remedies for the misappropriation of construction trust funds, or any violation of the trust fund statute, vary from state to state. These penalties/remedies typically include one or more civil remedies, criminal penalties, or even potential personal liability.

Typical civil remedies include interest accrual on the unpaid amounts and attorney fees and court costs for an action to recover payment. In Wisconsin, for example, some circumstances warrant treble (triple) damages. Many state statutes also impose criminal penalties which can range from a misdemeanor to a felony, which comes with fines and imprisonment. Lastly, there are some state construction trust fund statutes that impose personal liability for the debt on the trustee or any directors or officers of the trustee company.

State-by-State Map Of
Construction Trust Fund Statutes

  • YES- states with Construction Trust Fund statutes
  • NO- states without Construction Trust Fund statutes

Frequently Asked Questions About Construction Trust Funds & Statutes

A construction trust fund provides extra protection to payments on a construction project. Get answers to some of the most frequent questions that contractors and suppliers ask.

What is a Construction Trust Fund statute?

Construction trust fund statutes are state laws that attach a trust to any funds that to be paid to a contractor, for the benefit of the subcontractors and suppliers who are furnishing labor or material to a construction project.

How does a Construction Trust Fund statute help me get paid?

When a trust is attached to construction project funds, it imposes a fiduciary duty on the person who received payment to act in the best interests of the beneficiaries (i.e. the subs and suppliers). Furthermore, the funds are protected in a bankruptcy proceeding.

Do the rules under Construction Trust Funds change according to project location?

Yes, while the general premise of a Construction Trust Fund statute doesn't change, the requirements and liabilities can vary from state to state.

You can visit our Resources Page and click on your state for a full breakdown of all the rules and requirements.

Do the rules under Construction Trust Funds change according to project type?

Yes, some states distinguish between public and private contracts and only apply to that specific project type. Other state construction trust fund statutes only apply to claims that would be the proper subject of a mechanics lien; therefore it stands to reason that in those states the statute only applies to private projects.

You can visit our Resources Page and click on your state for a full breakdown of all the rules and requirements.

Do Construction Trust Fund statutes require the funds to be held in a separate account?

Most state construction trust fund statutes do not require the trust funds to be held in a separate bank account. However, there are a few states that strictly prohibit the "commingling" of funds, and failing to deposit them in a separate account is a violation.

You can visit our Resources Page and click on your state for a full breakdown of all the rules and requirements.

How do Construction Trust Fund statutes work during bankruptcy proceedings?

One of the main advantages of a construction trust fund statute is the fact that the trust funds are protected during a bankruptcy proceeding. If the trustee files for bankruptcy, the funds, under federal law, are not considered "property of the bankruptcy estate."

What are the penalties for violating a Construction Trust Fund statute?

The penalties for violating a Construction Trust Fund statute vary from state to state. However, the more common penalties include: civil penalties such as interest and attorney fees, criminal penalties, and in some cases, personal liability on officers or directors of the company that misappropriated the trust funds.

You can visit our Resources Page and click on your state for a full breakdown of all the rules and requirements.