Attorney trust accounts serve an essential purpose: protecting clients’ funds by segregating them from the law firm’s operating accounts. Keeping client funds separate will help ensure they aren’t used for the attorney’s personal or business expenses — either inadvertently or intentionally.

Attorneys have a professional responsibility to manage these trust accounts in good faith, also known as Interest Only Lawyers Trust Accounts (IOLTA). Failing to do so can have consequences, including disbarment. Since a firm doesn’t own the money in an IOLTA, misusing it is tantamount to theft. Considering the stakes involved, stay abreast of best practices for handling and accounting for client trust accounts.

Client Trust Fund Accounting Options

According to the National Law Review, client trust funds typically are used in three situations:

• • Clients pay upfront fees or retainers the attorney hasn’t yet earned.
  • The attorney receives payment from a settlement, and funds will be distributed to third parties, such as lien holders, once the accounting is complete.
  • The attorney acts as a fiduciary on behalf of a client or their estate.

There are generally two ways to maintain IOLTA funds:

• • The firm can maintain a single trust account and hold all client funds in one account.
  • The firm can maintain individual trust accounts for each client, so one client’s funds don’t comingle with another’s funds.

Either way, it’s crucial to keep track of the sources and uses for all funds.

Best Practices for Client Trust Fund Accounting

Following these best practices demonstrates you’re using the money legally and ethically and can help build trust with clients.

• • Use written agreements. Provide clients with a written agreement outlining how funds will be distributed, how retainer fees will be withdrawn, and how any fees will be charged to the account.
  • Don’t report trust deposits as income. Some firms report deposits to IOLTA accounts as income in their accounting software, which can have income tax consequences. These accounts should appear on your balance sheet as unearned revenue or deposits (liabilities), not income.
  • Never overdraft a client trust fund account. Money may not be immediately available after a deposit to the account. Allow adequate time for deposits to clear before writing a check or withdrawing funds.
  • Require dual signatures. Requiring two signatures on checks over a certain amount reduces the likelihood someone will write improper checks to themselves to a third party.
  • Prepare monthly reports for each client. These reports should list all activity in and out of the account and the ending balance.
  • Perform three-way reconciliations. To comply with state bar regulations, reconcile trust bank statements with client ledgers and the trust ledger quarterly, if not monthly.

• • Watch for bank fees. Banks ordinarily cannot charge fees directly to IOLTA trust accounts. Any necessary fees should be charged to the firm’s operating account instead. However, it’s the attorney’s responsibility to notify the bank. Contact your bank if you note any fees charged to the trust account during the reconciliation process.

• • Keep detailed records. Your record should include deposit slips (or printed deposit reports for remote deposits), bank statements, checkbook stubs, canceled checks, receipts, and invoices. States typically require attorneys to maintain records relating to trust accounts for at least five to seven years from the last transaction. Check with your state bar for the requirements in your state.
  • Use attorney-specific accounting software. Accounting software designed for law offices incorporates trust accounting rules, making it easier to track and reconcile all funds in your client trust accounts. Some software also provides the option to print trust activity on the client’s statement.

Each state has legal requirements for managing client funds and billing, so familiarize yourself with the laws in your state. At a minimum, every transaction in or out of your trust accounts should be accounted for — no matter how small—and you should be able to provide accurate and timely records for all trust accounts to the state bar upon request.