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Best Practices for Trust Account Management and Handling Client Funds in a Law Firm

Author

Marian Grace

Date

May 16, 2025

Proper trust account management is one of the most important financial responsibilities in any legal practice. Mishandling client funds can lead to malpractice claims, disciplinary actions, or even disbarment. As a general rule, attorney and client funds must always be kept separate in trust account management.

To protect client money and ensure regulatory compliance, law firms must follow strict trust accounting procedures. Law firms must also properly manage both attorney and client funds to ensure compliance and avoid ethical violations.

What Is a Client Trust Account?

A client trust account is a separate account used to hold funds that belong to clients, not the law firm. These funds can include settlement proceeds, advanced fees, flat fee payments, flat fees, or other client money held temporarily. Legal professionals must never treat these accounts as income until the funds are earned or used to pay client-related fees.

Depositing client funds, including a client's advance payments and flat fees, into a trust account is a legal requirement.

Trust accounting refers to the broader process of overseeing, recording, and using client funds only for permitted purposes. The purpose of a client trust account is to safeguard the client's funds and ensure they are only used for the client's benefit. This includes accurate tracking of deposits, withdrawals, and interest earned, all while following the applicable trust account rules from state bars and the American Bar Association.

The Importance of Trust Account Management

Managing client trust accounts requires more than good intentions. It demands a system built around transparency, compliance, and precision. Attorneys must maintain accurate records, follow state bar rules, and ensure the trust account balance reflects only client funds.

Maintaining transparency in all trust account transactions is essential to build client trust and prevent disputes.

Failure to do so can result in serious legal consequences. For instance, reporting client trust deposits as firm income is a critical accounting error. Similarly, using trust funds to cover firm expenses or failing to perform proper reconciliation can violate trust accounting regulations. Legal accounting software plays a crucial role in ensuring compliance with trust account regulations by facilitating accurate recordkeeping and reconciliation.

Law firms have a fiduciary duty to protect client funds and handle them ethically. Tracking client funds accurately, separating operating accounts from trust funds, and ensuring all disbursements are authorized are part of that duty. The trust account must serve as a safe holding place for client money, separate from business operations. Keeping track of all client trust account activities is necessary to prevent errors and maintain ethical standards.

Avoiding Commingling of Funds

Lawyers must strictly avoid commingling funds. This means that client trust account funds should never be mixed with a firm’s operating funds or a lawyer’s personal finances. Trust accounts are used to hold money on behalf of clients and must keep each client's funds separate from other client funds. Even temporary mixing of funds can result in ethical violations and serious disciplinary consequences.

Each client should have an individual ledger within the trust account. This ensures that all trust transactions are clearly documented and that the firm can trace every deposit, withdrawal, and balance specific to that client. A pooled account can be used to manage multiple clients' funds, provided accurate records are maintained for each client. Without this level of detail, firms risk losing track of how much belongs to each client.

In addition, attorneys must avoid paying firm expenses—like payroll, rent, or marketing—from a trust account. Only client-related disbursements, such as court filing fees or settlement payments, can come from client trust funds. All other firm-related costs should be paid through a separate operating account.

Key Trust Accounting Rules All Law Firms Must Follow

The following rules help ensure compliance and ethical conduct in managing attorney trust accounts:

Earned funds only: Attorneys can only withdraw money from a client trust account after it has been earned through legal services or when using the funds to pay fees or cover expenses on the client’s behalf.
Separate accounts: Maintain a strict division between client trust accounts and firm operating accounts.
Three-way reconciliation: Regularly reconcile the bank account, trust ledger, and individual client ledgers to ensure all records match.
Accurate records: Maintain up-to-date, detailed trust account records for every transaction.
Timely deposits: Client funds must be deposited into a trust account promptly.
No borrowing: Never use one client’s funds to cover another’s fees or expenses.
State bar compliance: Adhere to your jurisdiction’s trust accounting regulations and reporting requirements.
Reporting period review: At the end of each reporting period, review trust account activity and statements to ensure all transactions are accurate and compliant with legal and ethical standards.

Failure to follow these rules can lead to disbarment, civil liability, or criminal charges, especially if client money is lost or misused.

Understanding IOLTA Accounts

Interest on Lawyer Trust Accounts (IOLTA) programs are designed to generate revenue for civil legal services. The IOLTA program requires lawyers to deposit certain client funds into interest-bearing lawyer trust accounts, with the interest typically used to fund legal aid. When lawyers hold small or short-term client funds that can’t generate meaningful interest individually, they can place them into a pooled trust account. The interest earned from these IOLTA accounts is transferred to the state bar or legal aid organizations.

All states have IOLTA programs, but only 44 mandate participation. Lawyers trust accounts are also used in real estate deals to hold funds during property transactions, distinguishing them from other types of client trust accounts. Whether mandatory or not, the same standards for trust accounting apply to IOLTA trust accounts:

Interest belongs to the program, not the client.
Detailed records and ledgers must still be maintained.
Funds must be deposited promptly and held until earned or disbursed.
Attorneys must ensure the financial institution is IOLTA-approved.

The Trust Accounting Process Step-by-Step

Trust accounting involves managing pooled and individual trust accounts with care, accuracy, and transparency.

Trust assets must be managed separately from the law firm's own assets to ensure compliance and avoid misconduct.

The following process outlines best practices:

1. Open a Separate Trust Account

This must be with a financial institution that meets IOLTA requirements (if applicable). Keep it distinct from any personal or firm business account.

2. Maintain a Trust Ledger for Each Client

Each client should have their own ledger within the accounting system. Document the source and purpose of every deposit, fee, and disbursement.

3. Track All Trust Transactions Accurately

Whether using accounting software or spreadsheets (such as Excel spreadsheets, which are less reliable than specialized legal accounting software and not recommended), ensure each transaction is recorded immediately and correctly. Avoid manual errors with automation where possible.

4. Use Legal Accounting Software

Specialized legal accounting software can simplify trust accounting and improve compliance. Features like automated three-way reconciliation, alerts for balance limits, and reporting templates are designed to reduce risk.

Popular tools include:

CosmoLex
Clio Manage + Clio Grow
QuickBooks (with legal plug-ins)
TrustBooks
MyCase Accounting (facilitates trust accounting management, ensures compliance, and simplifies reconciliation with features like Automated Smart Deposits and Automatic Bank Reconciliation)

5. Perform Regular Reconciliation

Three-way reconciliation compares:

The trust bank account balance as shown on the bank statement
The total of all client ledgers
The overall trust account ledger

These three numbers must always match. Perform reconciliations monthly at a minimum and document the process for auditing.

6. Keep Detailed Supporting Documentation

Save all bank statements, check images, wire confirmations, deposit slips, client communications, and client trust account records. These records will support your ledger and help resolve any future discrepancies.

Common Trust Accounting Mistakes to Avoid

Even well-meaning legal professionals can make errors. Here are some of the most common:

Withdrawing too early: Funds must be earned before withdrawal. Withdrawing early is both unethical and a compliance violation.
Reporting trust deposits as income: This mistake can lead to incorrect tax filings and audit risks.
Failing to track interest: If using an IOLTA account, you must still track and report interest activity.
No three-way reconciliation: Skipping this process leaves gaps in records and can allow errors or misappropriation to go unnoticed.
Relying on Excel only: Manual systems increase the likelihood of error. Trust accounting software is more reliable.

Maintaining Compliance and Transparency

Every law firm should have a trust accounting policy in place. This internal document outlines:

Which staff handle deposits, withdrawals, and reconciliation
How often reconciliations occur
How trust accounts are monitored
What documentation is required

Staff should be trained in the trust accounting process and understand the risks of mishandling client trust account funds.

Trust Accounts and Cash Flow Management

It’s important to note that client trust funds do not belong to the law firm until earned. This means law firms should never rely on trust accounts for cash flow management. Instead, maintain a healthy operating account for firm expenses and treat trust account balances as untouchable until legal services are provided.

Many firms make the mistake of overextending operations based on the size of their trust account balance. But those funds are for clients—not for salaries, rent, or software subscriptions.

Billing and Trust Accounting: Integrating Invoicing with Trust Management

Integrating billing with trust accounting helps law firms maintain accurate records, ensure compliance, and streamline operations. When handled together, invoicing and trust management reduce errors, support transparency, and ensure client funds are tracked correctly.

Legal accounting platforms like MyCase and Clio automate invoicing, payment updates, and ledger maintenance. This makes three-way reconciliation easier and ensures all trust transactions are documented.

Integrated systems also improve client communication through clear, detailed billing. This builds trust and reinforces your firm's commitment to ethical financial practices.

By connecting billing and trust accounting, law firms can avoid mismanagement, stay compliant, and simplify their financial workflows.

The Role of the State Bar and Legal Obligations

Each state bar association has its own trust account rules, but the core expectations are consistent:

Maintain separate accounts
Do not commingle funds
Keep detailed records
Use funds only for client-related services

Regular audits may be conducted by the bar association, especially if a complaint is filed or the firm has a history of compliance issues. Firms must be prepared to provide:

Client ledgers
Bank account statements
Proof of reconciliation
Invoices tied to disbursements

Final Thoughts: Protecting Clients and Your License

Managing client funds is about more than bookkeeping. It's about trust. Clients place their money—and by extension, their legal futures—in your hands. Protecting that money means:

Following all legal accounting rules
Avoiding any appearance of impropriety
Using tools that ensure accuracy and accountability
Reconciling trust accounts regularly
Educating staff and enforcing internal policies

Mismanagement, even without bad intentions, can lead to irreversible damage to your reputation and career. Implementing these best practices ensures your firm is always in compliance, and your clients' funds are safe.

Remember: Trust account funds are not yours until they are earned. Keep them separate. Keep them safe. Keep meticulous records. And always follow your jurisdiction’s trust accounting rules to maintain integrity in your legal practice.