Client Trust Accounts and the Rules That Catch Lawyers Out
More lawyers are disciplined over the handling of money than over the quality of their advice. The safekeeping rule is short, mechanical, and unforgiving, and most violations begin with an accounting habit rather than an intention to take anything.
The rule in short
Property of clients and third persons must be held separate from the lawyer's own, in an account in the state where the lawyer's office sits unless the client consents otherwise, and complete records must be kept for a set period after the matter ends. Receipt of funds in which a client or third person has an interest triggers prompt notice, prompt delivery of what is owed, and an accounting on request. Disputed portions are held apart until the claim is resolved.
The safekeeping rule occupies less than a page and produces a disproportionate share of disciplinary work. Its premise is simple: money that is not the lawyer's must be kept somewhere the lawyer's creditors, habits and accounting errors cannot reach it. Nearly every violation is a departure from that premise rather than an act of theft, which is why the rule is enforced without much interest in motive.
Separation, and the single permitted exception
Funds belonging to clients or third persons must be held in one or more separate accounts, kept in the state where the lawyer's office is situated unless the client or third person consents to another location. Property other than money — securities, deeds, jewelry held in escrow — must be identified as such and appropriately safeguarded. The account is not a general holding place; it is a fiduciary account with a defined purpose.
There is exactly one exception permitting the lawyer's own money to enter. Funds sufficient to pay bank service charges may be deposited, and only in the amount necessary for that purpose. Anything beyond that is commingling, including a cushion kept against future bounced checks and a fee the lawyer has earned but not yet withdrawn. Advances of costs and expenses paid by a client belong in the account until they are spent.
Records, and the period they must survive
Complete records of account funds and of other property must be kept for a period after termination of the representation, five years in the model text and often longer in adopted state versions. What counts as complete is where the practical exposure sits. The expected set includes a receipts and disbursements journal, an individual ledger for every client or matter, reconciliations of the bank statement against both the journal and the sum of the individual ledgers, and supporting documents.
The three-way reconciliation is the control that catches errors early, and its absence is the finding that turns a small discrepancy into a serious charge. When a lawyer cannot reconstruct where a client's money went, the inability to account is itself the violation. The rule does not require proof of loss, and the absence of a complaining client is not a defense.
Discipline in this area does not require dishonest intent. A lawyer who overdraws a pooled account through arithmetic error has used one client's funds for another's disbursement, which the rule prohibits without reference to state of mind. Intent affects the sanction — the difference between a reprimand and disbarment is usually conversion — but it rarely affects whether a violation occurred.
Notice, delivery and the duty to account
On receiving funds or other property in which a client or third person has an interest, the lawyer must promptly notify that person. The lawyer must then promptly deliver whatever the client or third person is entitled to receive, and on request must render a full accounting of the property held. Each of those is a distinct obligation with its own timing.
Prompt is not defined by a number of days, and it is judged against the circumstances. A settlement check that has cleared and carries no competing claim should be disbursed without waiting for the next billing cycle. Holding funds to apply pressure in a fee negotiation is not permitted, and neither is delay for the convenience of the firm's cash position. The obligation to account on request has no exception for a client the lawyer regards as difficult.
| Money received | Where it belongs | When it may move |
|---|---|---|
| Advance fee not yet earned | Trust account, credited to the client's ledger | As it is earned, withdrawn against a record of the work |
| True retainer for availability, where a state recognizes one | Operating account, if the state permits | Immediately, but only where the fee is earned on receipt |
| Advance for filing fees and costs | Trust account | When the cost is actually incurred and paid |
| Settlement proceeds with a medical lien asserted | Trust account, lien portion segregated | The undisputed share at once; the rest when the claim is resolved |
| Fee the client disputes as unearned | Trust account until resolved | On agreement, arbitration award or judgment |
Funds two people claim
The rule's final provision is the one lawyers reason their way out of most often. When two or more persons claim an interest in property the lawyer holds, the property must be kept separate until the dispute is resolved, and the undisputed portion must be distributed promptly. The lawyer does not decide the contest, and paying a client over a third party's valid claim exposes the lawyer personally.
Not every assertion by a third party creates this duty. A statutory lien, a court order, or a letter of protection the lawyer signed will generally qualify; an unsecured creditor's demand generally will not. Where the status of a claim is genuinely unclear, an interpleader or a request for a court's direction is the orthodox answer. Where a fee is the subject of the dispute, the analysis runs alongside the requirements governing contingent fees and the settlement statement, since an accounting the client can check is the usual way such disputes are avoided.
Who inside the firm is answerable
Trust accounting is usually performed by a bookkeeper, and the responsibility is not delegable. A lawyer with managerial authority must make reasonable efforts to ensure the firm has measures giving reasonable assurance that non-lawyer assistants behave compatibly with the lawyer's own obligations, which is the same principle that governs supervision of non-lawyer staff generally. Signature authority given to a non-lawyer, without review of statements by a lawyer, is a recurring fact pattern in serious cases.
Two further points close the loop. Where a matter ends and money remains, the obligation to deliver survives the representation, and the steps required on departure — final accounting, refund of unearned fees, surrender of property — are part of what the rule on terminating a representation demands. And where a fee is shared with a lawyer outside the firm, the money still passes through the trust account and still requires the client's agreement, a point taken up in the rules on dividing a fee between firms.
Points to carry away
- Client and third-party funds must be held in a separate account and never mixed with the lawyer's own money.
- The only permitted deposit of the lawyer's own funds is the amount needed to pay service charges or bank fees.
- Complete records of account funds and other property must be preserved for a period after the representation ends.
- Receipt of funds triggers prompt notice, prompt delivery of what is owed, and an accounting on request.
- Where two people claim the same funds, the disputed portion is held apart until the claim is resolved.
- Interest arrangements, overdraft reporting and audit powers are set by each state and differ substantially.
Questions readers ask
Can a lawyer leave earned fees sitting in the trust account?
No. Once a fee is earned, it belongs to the lawyer, and money the lawyer owns has no business in an account meant to hold other people's property. Leaving it there is commingling in the same way as depositing personal funds, and it is often treated as a device to shelter money from creditors or to obscure the accounting. The correct step is prompt withdrawal to the operating account, recorded against the client's ledger. If the client disputes that the fee is earned, the disputed portion stays put.
What is an IOLTA account and when must one be used?
Interest on Lawyers Trust Accounts programs pool client money that is nominal in amount or held briefly, where the interest an individual client could earn would be consumed by the cost of computing and remitting it. The pooled interest is paid to a state-designated body, typically to fund civil legal services. Where a client's funds are large enough or will be held long enough to earn net interest for that client, a separate interest-bearing account for the client is the proper route. Participation rules differ by state.
What happens if a trust account is overdrawn?
In most states the bank is required to report the overdraft directly to the disciplinary authority, which then opens an inquiry regardless of whether any client complained. That reporting requirement is the reason many trust account cases begin. An overdraft on a pooled account also means one client's money was used to cover another client's disbursement, which is a violation independent of the shortfall's cause. Innocent explanations exist, including bank error and a deposit that had not cleared, but they must be documented.
Sources
- ABA Model Rules of Professional Conduct — Rule 1.15, Safekeeping PropertyThe separation, recordkeeping, notice, delivery and disputed-funds obligations in their model form.
- ABA Model Rules — Comment on Rule 1.15Addresses third-party claims, the lawyer's role as an intermediary and the limits of that role.
- ABA Commission on Interest on Lawyers' Trust AccountsThe national body explaining how IOLTA programs pool nominal or short-term client funds.
- ABA Model Rules — Rule 1.5, FeesGoverns what may be charged and therefore what may lawfully be withdrawn from trust as earned.
- ABA Model Rules — Rule 8.4, MisconductThe dishonesty provision under which serious trust account failures are commonly charged.
- The Florida Bar — Rules Regulating The Florida BarAn adopted state text with its own trust accounting, reporting and audit requirements.
- State Bar of California — Ethics and Professional Conduct ResourcesA second state's regime, including client trust account reporting obligations not found in the model rule.
Justice Partners Journal is a publication, not a law firm. This article states general rules and cites its sources; it is not advice about any particular case, and the law differs by state and changes over time.
