How does an attorney trust account work?

A lawyer trust account is a special bank account in which clients' funds are kept safe until it's time to withdraw them. Whether it's known as a client's fund account or a lawyer's trust account, using a lawyer trust account is a good business idea for lawyers who have money as an advance (or any other money) on behalf of a client for their case. And there are lawyer trust accounting guidelines that every lawyer should understand and follow. Keep money that is not yours in a separate account so you don't spend it accidentally.

This includes unearned fees (usually paid as an advance), settlement funds or anticipated costs, and court fees. However, since the inception of IOLTA, lawyers who handle nominal or short-term funds from clients who are unable to earn net income for the client place these funds in a single common trust account that bears interest. The first fundamental rule in dealing with trust or escrow funds is that they must be kept intact in a properly named trust or trust account. For example, some jurisdictions may require lawyers to place in an attorney trust account any portion of a fixed fee that has not yet been earned.

While fiduciary accounting seems like a relatively straightforward concept, keeping track of customer trusts can be tricky if managing accounts for multiple clients. Instead, it will first go to the trust account so that the lawyer can deduct fees, third-party claims and expenses. Lawyers who go on strike on their own, whether as newly minted bar members or as veteran lawyers hanging their own shingle, will have to deal with a frustrating obstacle course of bar rules. When you open an attorney trust account, also known as an IOLTA account, you must be explicitly designated as such with your bank.

It is good business practice to prepare a monthly reconciliation of trust ledger balances, trust receipt and disbursement journals, bank account checkbook, and bank statements. However, IOLTA, which stands for “interest in attorneys' trust accounts,” allowed lawyers to place funds in interest-bearing trust accounts. Fortunately, there are legal billing software solutions like Smokeball that provide trust account accounting so there is never a question about how much money a customer has in their trust account. The reasoning is that if you don't use your trust account, it's easier not to violate trust accounting rules as required by your jurisdiction, even if it's at the expense of cash flow.

Funds that belong partly to a client and partly to the lawyer, present or potentially, must also be deposited into the attorney's trust account. Take horror stories about others' fiduciary accounting failures as cautionary tales and use your learnings to inform your own fiduciary accounting processes. But the rules about what money can be combined or kept can become complex, so if there is any doubt about where the client's funds should go, putting them in a lawyer trust account is the smartest decision. In some jurisdictions, it is not required to deposit clients' funds into a law trust account, while in others lawyers are allowed to deposit funds directly into the law firm's operating account as long as the funds have already been earned.

Katherine Moretto
Katherine Moretto

Avid pop culture nerd. Infuriatingly humble web guru. Certified food maven. General coffee fan. Passionate zombie enthusiast. Amateur baconaholic.

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