A law firm is responsible for managing its clients’ money and must keep these funds separate from its own. However, without a dedicated account to hold client finances, it can be challenging to manage these funds, leading to potential regulatory and security issues. This is where a lawyer trust account becomes essential. Such an account helps minimize errors by consolidating a client’s funds into a single, secure location.
Are you working at a law firm and looking for a secure method to store client funds? Or are you about to hire an attorney and want to understand what protections should be in place when selecting a legal professional? Here’s what you need to know about opening a trust account and how to use it effectively.
A lawyer trust account is a separate bank account where lawyers deposit client funds, distinct from their firm's operating funds. These accounts hold money belonging to clients, such as retainers, settlement proceeds, or other funds handled on their behalf. The attorney has a fiduciary responsibility to manage these funds responsibly and cannot use them for their own personal or firm expenses.
There are two types of client trust accounts, either pooled or separate. Pooled accounts hold funds for more than one client, while separate accounts hold a single client’s funds—usually when they require a larger sum of money.
So, what sets these accounts apart from other types of financial accounts? Ultimately, it can be summed up by four key characteristics:
While some attorneys may believe that maintaining a single trust account simplifies administrative tasks, this approach is highly prone to error. A properly managed client trust account is designed to keep client funds separate from the attorney’s general operating funds, ensuring that money belonging to clients or third parties is not mixed with the attorney’s business funds or personal finances. This principle, known as no commingling, is a fundamental ethical obligation. According to Rule 1.15 of the American Bar Association Model Rules of Professional Conduct, lawyers must safeguard client property by placing unearned funds in a separate account—maintained in the state where the lawyer’s office is located or elsewhere with client consent. This separation protects client interests and upholds the integrity of legal practice.
By depositing client money into a lawyer’s trust accounts, lawyers can earn interest for the client in cases with large sums of money being handled. However, if the money a lawyer handles is small or held briefly and can't earn more interest than it costs to collect, it's placed in a pooled trust account with other similar funds. With the creation of Interest on Lawyers Trust Accounts (IOLTA), lawyers who handle these types of cases can place all funds into a single, pooled, interest-bearing trust account as a method of raising money for charitable purposes, primarily the provision of civil legal services to underserved communities. Since 1981, IOLTA has generated over $4 billion in revenue throughout the United States, funding programs that provide legal assistance to those living in poverty.
While all accounts must have accurate and detailed records, this is especially true for lawyer trust accounts, since the attorney is maintaining funds for other people. By adhering to specific record-keeping and reconciliation procedures, the client funds are protected and used only as intended. Ultimately, firms must maintain accurate records of all money that comes into and leaves the account, ensuring that both the lawyer and client are updated on all activity.
Using a trust account properly is a requirement under professional conduct rules in every U.S. state. Mishandling client trust funds—such as by commingling or misappropriating—can lead to serious disciplinary action, including disbarment.
Here are the basic rules you must follow when managing a lawyer trust account:
To avoid obstacles or challenges along the way, be mindful of these common mistakes:
Regardless of whether you keep multiple clients' funds in a single account, it is essential never to mix money between different individuals. Even if one client has an excess of cash, using those funds to cover another client's fees can lead to confusion in record-keeping and discrepancies in account balances.
As with any type of account, never promise money before it is in the account. This can lead to delays in legal processes and result in bounced checks and deposits.
Your clients trust you to manage their money during legal proceedings. If you don’t return unused money—which belongs to the client to begin with—you can break trust and cause client frustration.
Every deposit, withdrawal, and transfer should be recorded to avoid accounting errors. For example, if you don’t consistently have a paper trail of each action taken, a deposit could be credited to the wrong account, resulting in confusion and possible fines.
As fiduciaries, attorneys have the responsibility to manage client funds securely. Mismanaging this money often results in banks reporting overdrafts to the state bar or regulatory authority, potentially leading to investigations and disciplinary actions.
Reconciliation is paramount in all accounting, ensuring that financial records agree and pinpointing any discrepancies, errors, or missed transactions. Here are the top ways you can track funds for accuracy:
You can trust Cathay Bank to take care of your clients’ finances in the same way that you care for their legal needs. Consider us an extension of your law firm, providing you with the ease and accessibility necessary to maintain effectiveness while keeping funds safe from unauthorized transactions.
Why Cathay Bank? For over half a century, our team has provided personalized, community-focused financial services in the wider Los Angeles area and across the globe. We know how important your finances, business, and family are, and we strive to provide solutions that will help you grow and thrive.
Need a secure solution for your law firm? Open a lawyer trust account with Cathay Bank today.
Lawyers use trust accounts to avoid commingling personal, business, and client funds, which can lead to errors and inaccurate accounting.
When a legal case ends, any unused funds in the trust account—also known as the client’s retainer—must be returned to the client. The attorney generally deducts earned fees or costs with an itemized invoice and returns the rest.
No, commingling operational and client funds isn’t allowed. The attorney has a fiduciary responsibility to manage these funds responsibly and cannot use them for their own personal or firm expenses.
State bar associations and supreme courts regulate lawyer trust accounts in the jurisdiction where the lawyer practices. These bodies establish rules under guidelines typically provided by the ABA Model Rules of Professional Conduct, especially Rule 1.15.
Lawyers are generally required to reconcile their trust accounts monthly, though the exact rule depends on the jurisdiction. Most U.S. state bar associations follow or adapt the ABA Model Rules, which strongly recommend monthly reconciliation as a best practice—and in many states, it's mandatory.
This article does not constitute legal, accounting or other professional advice. Although the information contained herein is intended to be accurate, Cathay Bank does not assume liability for loss or damage due to reliance on such information.
