The proper handling of client funds is a foundational responsibility for lawyers. Trust accounting—specifically, the management and recordkeeping of client trust accounts—is an aspect of legal practice that demands meticulous attention. Whether dealing with escrowed funds, retainers, or settlement proceeds, the failure to comply with trust accounting rules can lead to disciplinary action, financial penalties, and the loss of professional reputation. This article identifies best practices for trust accounting and recordkeeping and outlines common pitfalls in an effort to help lawyers maintain compliance and uphold client trust.
The Attorney Trust Account
An attorney trust account is a separate account held by a lawyer or law firm where client funds are deposited. See generally ABA MRPC 1.15. Importantly, these funds do not belong to the lawyer and must be segregated from personal or business funds. Common types of funds held in trust include:
- Client retainers or advance legal fees
- Real estate escrow deposits
- Settlement funds
- Third-party funds (e.g., medical liens or child support payments)
Attorneys are the fiduciaries of these funds, and trust account mismanagement is one of the most frequent causes of disciplinary action by relevant authorities. See e.g., In re Dias, 201 N.J. 8 (2010) (an over disbursement from the attorney’s trust account caused the negligent misappropriation of other clients’ funds; the attorney’s deficiencies and trust account mismanagement were responsible for the misappropriation).
Core Principles of Trust Accounting
Several key principles guide the proper use of trust accounts. A cardinal precept is the appropriate segregation of funds. That is, client funds must be kept separate from a lawyer’s operating and personal funds. Commingling is a serious violation and there is a blanket prohibition against using client funds for firm or personal expenses. See Continental Cas. Co. v. McDowell & Colantoni, Ltd., 282 Ill. App. 3d 236, 238-39 (Ill. 1st Dist. 1996) (attorney who misappropriated client funds for personal use pled guilty to federal mail fraud charges and was disbarred). Lawyers must also promptly notify clients when receiving funds on their behalf and must deliver funds they are entitled to receive without undue delay. See ABA MRPC 1.15(d).
This underscores the need to clearly document every transaction involving client funds, including the routine reconciliation of trust accounts. Trust accounts must be reconciled on a regular basis – check the rules of your specific jurisdiction - in order to ensure accuracy and detect errors or unauthorized activity. Every month, lawyers should reconcile (a) the total balance in the trust account, (b) the sum of all individual client ledgers, and (c) the balance in the check register. Any discrepancies must be resolved immediately.
Proper trust accounting is not just about avoiding discipline, it is also about maintaining the trust placed in lawyers by clients and the public as a whole. When client funds are mismanaged, this can erode trust and damage both the relationship with the client and the legal profession as a whole.
Essential Recordkeeping Requirements
Recordkeeping rules for trust accounts vary slightly by jurisdiction, but generally include minimum requirements involving the maintenance of client ledger cards, bank statements, and receipts and disbursement journals. For example, an individual ledger should be kept for each client reflecting the following information:
- Check numbers or wire references;
- Dates and amounts of deposits and disbursements;
- Purpose/description of each transaction; and
- Running balances.
The ledger card serves to account for client funds and ensures that no funds are overdrawn. Attorneys must likewise maintain copies of monthly bank statements and images of canceled checks. Each check should clearly identify the client matter associated with the disbursement. Finally, a receipts and disbursements journal helps track the flow of all deposits and withdrawals from the trust account. These records must tie back to individual client ledgers.
Best Practices for Trust Accounting and Recordkeeping
In order to comply with ethical obligations and minimize the risk of errors, lawyers should be familiar with and adopt certain best practices. As a starting point, leverage technology in a responsible but efficient manner: lawyers have at their fingertips certain accounting platforms designed for legal practice such as Clio or TrustBooks to name a few. The use of accounting software is no excuse, however, for substandard training of staff or a lack of familiarity with recordkeeping requirements. Staff should be thoroughly trained and understand the ethical rules regarding trust funds and the importance of proper documentation.
Be sure to have written procedures for handling client funds to avoid confusion and leave no room for error. This should include how and when clients are notified of the receipt and disbursement of their funds, including by way of invoices, settlement statements, and – where applicable - authorization for any third-party payments.
The Bottom Line
The proper management of a trust account requires more than just good intentions; it demands a system of accountability, discipline, and documentation. Whether you are a solo practitioner or managing partner of a large firm, taking time to implement sound trust accounting and recordkeeping practices is essential. Trust account violations that could have otherwise been prevented with better recordkeeping practices are far too common. Let your trust account be a reflection of your integrity, not a liability to your license.
Reprinted with permission from the June 27, 2025 edition of The Legal Intelligencer © 2025 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.