Trust Accounting for Law Firms: The Complete Guide
Updated November 2025
A Sacramento attorney named James Benson faced a surprise audit. The outcome wasn't disbarment for theft - it was a six-month suspension for failing to reconcile his IOLTA account. Three years of unreconciled records. No missing client funds. Still suspended.
The American Bar Association reports that 38% of attorney ethics violations involve trust account mismanagement. The critical detail: 94% are preventable with proper systems.
Trust accounting is the process of tracking, segregating, and documenting client funds held separately from your firm's operating money. Every dollar a client entrusts to you - retainers, settlement proceeds, court deposits, estate funds - must be accounted for with precision that survives bar scrutiny.
This guide covers everything: what trust accounting requires, the monthly workflow that keeps you compliant, three-way reconciliation mechanics, common violations that trigger audits, and when professional help makes sense.
What Is Trust Accounting (And Why It Matters)
Trust accounting is the system attorneys use to manage funds that belong to clients, not the firm. These funds sit in dedicated trust accounts - completely separate from operating accounts - until earned or disbursed according to client instructions or legal requirements.
The funds requiring trust accounting include:
Advance retainers — Fees paid before work is performed. These remain client property until you earn them through billable work and properly transfer them to your operating account.
Settlement proceeds — Funds received on behalf of clients from insurance companies, opposing parties, or other sources. These require careful tracking, proper holds for liens, and documented disbursement.
Court deposits — Money held for filing fees, expert witnesses, court reporters, or other litigation expenses. Each dollar must trace to a specific purpose and client matter.
Estate funds — Assets held during probate administration, guardianship proceedings, or trust management. These often involve the longest holding periods and most complex accounting.
Real estate deposits — Earnest money, closing funds, and escrow amounts held during property transactions. Timing is critical - premature release creates liability.
Client cost advances — Money deposited to cover anticipated expenses like deposition costs, medical record fees, or investigator charges.
The moment your firm receives any of these funds, they must enter the trust account. Depositing client money into an operating account - even for one day, even by accident - violates ethics rules in every U.S. jurisdiction.
Why Trust Accounting Violations End Careers
Bar associations maintain zero tolerance for trust account failures because client funds represent the most sacred obligation in legal practice. The attorney-client relationship depends on absolute trust that money given to a lawyer will be protected.
Here's what happens when that trust breaks down:
Florida — A personal injury lawyer received a two-year suspension for failing to perform three-way reconciliations for 14 months. No client funds were missing. The violation was purely procedural—inadequate documentation of proper fund segregation.
Illinois — A family law attorney was fined $15,000 for commingling funds and failing to document transfers correctly. Her mistake: a client retainer deposited into the wrong account. One deposit. $15,000 fine.
New York — An estate planning lawyer lost his license after repeatedly failing to reconcile ledgers and bank statements. No funds were lost. The bar cited a "fundamental breach of fiduciary responsibility."
These attorneys didn't steal money. They failed to maintain systems that proved they weren't stealing money. That distinction doesn't matter to bar regulators.
The consequences of inadequate trust accounting include:
Immediate compliance violations triggering mandatory audits
Fines ranging from $5,000 to $50,000+ depending on severity
Suspension of trust account privileges
Professional liability claims from clients
Malpractice insurance complications
License suspension or permanent revocation
Bar regulators aren't investigating intent. They're evaluating competence. An attorney who cannot demonstrate proper fund segregation is an attorney who cannot be trusted with client money - regardless of whether any funds actually went missing.
IOLTA Requirements and Regulations
IOLTA (Interest on Lawyer Trust Accounts) programs exist in all 50 states, requiring attorneys to deposit client funds that are too small or held too briefly to earn net interest for the client into special pooled accounts. The interest earned goes to fund civil legal services for low-income individuals.
IOLTA compliance requires:
Proper account setup — Your IOLTA account must be established at an approved financial institution that agrees to report overdrafts directly to your state bar. Not all banks qualify. Verify before opening.
Correct fund routing — Only nominal or short-term funds go into IOLTA accounts. Larger amounts held for extended periods may require individual client trust accounts where the client receives the interest.
Interest remittance — Your bank automatically sweeps interest to the state IOLTA program. You don't keep it. You don't distribute it to clients. Attempting either violates the program rules.
Overdraft notification — Your bank must immediately notify the bar of any overdraft on your IOLTA account. This is automatic and mandatory—you cannot opt out or prevent notification.
IOLTA violations often occur when attorneys don't understand the distinction between IOLTA accounts and other trust accounts, commingle operating funds to cover shortfalls, or fail to maintain the required records. For detailed compliance requirements, review our complete IOLTA accounting guide.
The Monthly Trust Accounting Workflow
Consistent monthly reconciliation is the foundation of trust accounting compliance. Firms that treat reconciliation as optional or "when we get to it" face exponentially higher violation risk.
This six-step workflow, performed within 10 days of each month-end, keeps your trust accounts audit-ready.
Step 1: Schedule Non-Negotiable Reconciliation Time
The primary reason attorneys fall out of compliance: they reconcile "when they have time."
Block 60-90 minutes within five business days of receiving your monthly bank statement. Put it on the calendar. Treat it like a court appearance—non-negotiable, cannot be rescheduled for convenience.
This single discipline - consistent scheduling - eliminates most compliance failures before they start.
Step 2: Gather Required Documentation
Before beginning reconciliation, collect every required document. Missing even one creates delays and increases error risk.
Required documents:
Complete bank statement (all pages, not just the summary)
Trust account register showing all transactions for the period
Client ledger reports for every active matter with trust balances
Supporting documentation for each transaction (deposit slips, disbursement authorizations, fee transfer records)
Having everything assembled before you start prevents the interruptions that cause mistakes.
Step 3: Reconcile Bank Statement to Trust Register
Start by matching your internal trust register against the bank statement. This baseline reconciliation works like balancing a checkbook - but with significantly higher stakes.
The process:
Note the bank statement ending balance
Subtract outstanding checks (issued but not yet cleared)
Add deposits in transit (received but not yet reflected)
Compare this adjusted balance to your trust register balance
The numbers must match. If they don't, investigate immediately:
Look for missing transactions in your register
Check for bank fees you haven't recorded
Verify no transposition errors (typing $1,324 instead of $1,234)
Confirm all deposits posted to the correct account
Never proceed to the next step with an unresolved discrepancy.
Step 4: Complete Three-Way Reconciliation
This is where compliance happens or fails. Three-way reconciliation compares three figures that must match exactly:
Adjusted bank balance (from Step 3)
Sum of all individual client ledger balances
General ledger trust liability account
Generate a client ledger report listing every client with funds held in trust. Sum all positive balances as of the statement date. This total represents what you owe to all clients collectively.
That sum must equal your adjusted bank balance - to the penny.
If the figures don't match, common causes include:
Transactions recorded in the trust register but missing from client ledgers
Fees transferred from trust without corresponding ledger entries
Mathematical errors in individual client calculations
Timing differences between systems
For detailed three-way reconciliation procedures, see our complete reconciliation guide.
Step 5: Document Everything
Thorough documentation provides your strongest protection during audits. After completing reconciliation, compile a packet containing:
Complete bank statement (all pages)
Reconciliation report showing how adjusted bank balance was calculated
Client ledger summary showing each client's balance and the aggregate total
Signed and dated attestation confirming three-way reconciliation was performed and all figures matched
Store this packet securely and maintain it for at least five years (longer in some jurisdictions). This creates your audit trail - proof that you performed required reconciliation procedures.
Step 6: Investigate Discrepancies Immediately
When reconciliation reveals any inconsistency - any amount, no matter how small - act immediately. A $5 discrepancy today becomes a $5,000 discrepancy in six months if the underlying cause isn't identified and corrected.
For every discrepancy:
Document what was found
Record your investigation steps
Identify the root cause
Implement corrective action
Note what process change prevents recurrence
If the discrepancy is substantial or you discover a trust account violation, consult your bar association's rules. Some jurisdictions require prompt self-reporting of certain violations.
Client Ledger Management
Individual client ledgers track the specific funds held for each client and matter. While your bank balance shows total trust funds, client ledgers show who owns each dollar.
Every client with funds in trust needs a separate ledger showing:
Initial deposit (retainer, settlement, advance)
Each disbursement made on the client's behalf
Fee transfers to operating (with supporting invoices)
Current balance held in trust
The sum of all client ledger balances must always equal your total trust account balance. When these don't match, you have an accounting error requiring immediate investigation.
Client ledger red flags:
Negative balances — A negative client balance means you've spent more on that client than they deposited. This indicates you used another client's money to cover the shortage—a serious ethics violation. Learn how to fix trust account violations if you discover this issue.
Stale balances — Funds held for closed matters beyond 90 days require attention. Contact the client, attempt to distribute, or follow your jurisdiction's escheatment procedures for unclaimed funds.
Unidentified deposits — Money received without clear client attribution must be segregated and investigated. Never guess which client a deposit belongs to. Create an "unidentified funds" ledger entry and document your investigation efforts.
Common Trust Accounting Problems
Even firms with established workflows encounter recurring issues. Recognizing these problems early prevents them from becoming violations.
Credit Card Processing Fees
When clients pay retainers via credit card, processors deduct fees before depositing funds. If a client pays a $5,000 retainer and your processor deposits $4,850, your client ledger should still show $5,000 - because that's what the client paid.
The fix: Transfer $150 from your operating account to trust to make the client whole. The processing fee is a firm expense, not a client expense.
IOLTA Interest Tracking
Interest earned in IOLTA accounts gets remitted to the state bar program - it's not firm income and not credited to clients. During reconciliation, maintain a separate tracking entry for IOLTA interest so it doesn't create phantom discrepancies.
Outstanding Checks Beyond 90 Days
Uncashed checks disrupt reconciliation and create compliance issues. After 90 days, begin outreach to the payee. If checks remain uncashed beyond your jurisdiction's escheatment threshold, follow proper procedures for transferring unclaimed funds to the state.
Timing Differences Between Systems
If your practice management software and accounting system don't sync in real-time, timing differences create apparent discrepancies. A deposit recorded Friday in your legal software may not appear in QuickBooks until Monday. Understand these timing gaps to avoid false alarms during reconciliation.
Trust Accounting Software Options
Legal-specific software streamlines trust accounting but doesn't eliminate attorney responsibility for oversight.
Clio Manage — Integrates practice management with trust accounting, including automated bank feeds and client ledger tracking. As a Clio partner, we regularly work with firms using this platform.
MyCase — Combines case management with built-in trust accounting features, including three-way reconciliation tools and compliance reporting.
CosmoLex — All-in-one legal accounting designed for trust compliance, with automated reconciliation and audit-ready reporting.
QuickBooks with Legal Add-ons — Workable for trust accounting but requires careful configuration. Generic QuickBooks isn't designed for legal trust requirements—additional setup and discipline are necessary.
The software handles calculations and record-keeping. You remain responsible for oversight, verification, and ensuring the system is configured correctly for your jurisdiction's requirements..
When Systems Fail: The Real Causes
Four issues cause the majority of trust accounting violations:
1. Inadequate Record-Keeping
Client ledgers maintained in spreadsheets disconnected from your accounting system create reconciliation nightmares. When systems don't talk to each other, discrepancies hide until audits discover them.
The fix: Use integrated legal accounting software or ensure your separate systems are reconciled against each other monthly.
2. Commingling Earned and Unearned Funds
Without a clear process to transfer earned fees from trust to operating, the line between client money and firm money blurs. This is one of the most common violations - and one of the easiest to prevent with proper procedures.
The fix: Document your fee transfer process. Require invoices before transfers. Never transfer fees you haven't earned and billed.
3. Irregular Reconciliation
Quarterly or annual reconciliation allows small errors to compound into major discrepancies. A $100 mistake in January becomes a $1,200 problem by December.
The fix: Monthly reconciliation, no exceptions. If you're behind, catch up before problems multiply.
4. No Segregation of Duties
When one person handles deposits, disbursements, and reconciliation with no oversight, mistakes go undetected and fraud becomes possible. Even in small firms, some separation of duties is essential.
The fix: Have someone other than the person making deposits review monthly reconciliation. If you're solo, consider using outsourced bookkeeping for independent oversight.
Building a Compliance Culture
Monthly reconciliation is necessary but not sufficient. Firms that avoid violations treat trust accounting as a daily discipline, not a monthly task.
Real-Time Transaction Review
Don't wait until month-end to catch errors. Review trust account activity weekly (or daily for high-volume practices). Matching each transaction to source documentation as it occurs catches mistakes before they compound.
Staff Training
Everyone who touches client funds needs to understand the ethical stakes - not just the procedures. Training should cover both the mechanics of trust accounting and the professional consequences of violations.
Internal Audits
Quarterly internal reviews where someone outside the daily workflow examines reconciliation packets catch drift before it becomes a problem. Fresh eyes spot issues that familiarity obscures.
External Reviews
Annual review by a legal-specialized bookkeeper or CPA provides independent verification. Outside perspective reveals blind spots and strengthens your position if questions arise later.
When to Get Professional Help
Consider working with a professional who specializes in law firm trust accounting when:
Monthly reconciliations consistently take longer than 90 minutes
You regularly discover unexplained discrepancies
Multiple months are unreconciled
Staff turnover has created knowledge gaps
You've discovered negative client balances
You're preparing for a known audit
Recent rule changes in your jurisdiction require process updates
Your current bookkeeper lacks legal trust accounting experience
The cost of professional support - typically $800-$1,500 monthly depending on firm size - is minimal compared to violation penalties, which start at $5,000 for first offenses and escalate to license suspension for repeated failures.
Monthly Compliance Checklist
Use this checklist within 10 days of each month-end:
Bank Reconciliation:
Bank statement obtained (all pages)
Outstanding checks identified and listed
Deposits in transit identified and listed
Adjusted bank balance calculated
Adjusted balance matches trust register
Three-Way Reconciliation:
Client ledger report generated as of statement date
All client balances reviewed for accuracy
No negative client balances exist
Sum of client ledgers calculated
General ledger trust liability verified
All three figures match exactly
Documentation:
Reconciliation workpaper completed
Supporting documents assembled
Reconciliation signed and dated
Packet filed in chronological order
Any discrepancies documented and resolved
Follow-up:
Outstanding checks over 90 days addressed
Unidentified deposits investigated
Stale client balances reviewed
Process improvements noted for next month
Protecting Your License and Your Clients
Trust accounting isn't bureaucratic overhead. It's the documented proof that you're honoring the fundamental obligation clients place in you when they hand over their money.
The attorneys who face discipline aren't primarily thieves - they're practitioners who let systems slip, who reconciled "when they got around to it," who assumed everything was fine because no one complained.
Your trust accounting systems protect your license, your clients, and your reputation. If you're not confident those systems are working, now is the time to fix them.
Need support establishing reliable trust accounting systems? Schedule a discovery call with our team specializing in law firm financial management.
Why Your Law Firm Can’t Afford to Ignore Trust Account Compliance
The average trust accounting violation costs over $80,000 in penalties, remediation, and lost productivity. For attorneys serious about protecting their license, their clients, and their firm - compliance isn’t optional. It’s leadership. Properly managing operating expenses, such as salaries and rent, is crucial to ensure that these are covered by funds in an operating account, separate from client trust account funds.
If you’re not 100% confident in your trust account systems, it’s time to fix that. Schedule a discovery call and get expert support built for law firms.
Frequently Asked Questions
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Trust accounting is the system attorneys use to track, segregate, and document client funds held separately from the firm's operating money. It requires maintaining dedicated trust accounts for client property - including retainers, settlements, and cost advances - along with detailed records proving each dollar is properly allocated to specific clients. Every state bar requires compliant trust accounting, and violations can result in fines, suspension, or disbarment even when no funds are missing.
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A trust account holds client funds that belong to clients or third parties -money the firm is obligated to protect and disburse according to specific rules. An operating account holds the firm's own money used for business expenses like rent, salaries, and supplies. Depositing client funds into an operating account, or using trust funds for firm expenses, constitutes commingling - a serious ethics violation in every jurisdiction.
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Three-way reconciliation compares three figures that must match exactly: the adjusted trust bank balance, the sum of all individual client ledger balances, and the general ledger trust liability account. This process verifies that total funds in the bank equal total funds owed to clients, and that your accounting records accurately reflect both. Bar associations require monthly three-way reconciliation as proof of proper fund segregation.
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Bar associations require monthly reconciliation, typically within 10-15 days of month-end. Some jurisdictions require reconciliation within five business days. Quarterly or annual reconciliation violates ethics rules regardless of whether funds are missing - the requirement is monthly documentation proving proper fund management. Firms that reconcile less frequently face compounding errors and significantly higher violation risk.
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When reconciliation reveals a discrepancy, immediately investigate the cause before making any adjustments. Common issues include unrecorded bank fees, deposits posted to wrong clients, timing differences between systems, and data entry errors. Document your investigation and correction process. Never force balance through unexplained entries - this creates audit red flags. Substantial discrepancies may require self-reporting to your state bar.
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IOLTA (Interest on Lawyer Trust Accounts) is a program requiring attorneys to deposit nominal or short-term client funds into pooled accounts where interest benefits civil legal services rather than the firm or client. IOLTA accounts must be held at approved financial institutions that report overdrafts directly to the state bar. Violations include keeping IOLTA interest, failing to use approved banks, and inadequate record-keeping.
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No. A negative client balance means you've disbursed more funds for that client than they deposited - indicating you used another client's money to cover the shortage. This is a serious ethics violation in every jurisdiction regardless of intent. If you discover negative balances, immediately deposit firm funds to correct the shortage, investigate the cause, document your correction, and determine whether self-reporting is required.
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Required trust accounting records include: bank statements, canceled checks or images, deposit slips, client ledgers for each matter, general ledger entries, three-way reconciliation reports, and supporting documentation for all transactions. Retention requirements vary by jurisdiction but typically range from five to seven years. Records must be organized for quick retrieval during audits. Electronic records are acceptable if properly backed up.
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Common violations include: failing to perform monthly reconciliation, commingling client and firm funds, maintaining negative client balances, inadequate record-keeping, failing to promptly deposit client funds, improper fee transfers without supporting invoices, and using non-compliant banks for IOLTA accounts. Violations don't require missing funds - procedural failures alone trigger discipline. The bar evaluates systems and documentation, not just outcomes.
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Consider professional help when: reconciliations consistently take over 90 minutes, unexplained discrepancies occur regularly, multiple months are unreconciled, staff turnover has created gaps, negative balances have occurred, you're preparing for an audit, or your current bookkeeper lacks legal trust accounting experience. Professional trust accounting services typically cost $800-$1,500 monthly - far less than violation penalties starting at $5,000.
