A lawyer trust account is a separate bank account where your attorney holds money that belongs to you or to a third party, kept entirely apart from the law firm’s own funds. Every state requires lawyers to maintain one under professional conduct rules modeled on ABA Model Rule 1.15, which forbids mixing client money with the lawyer’s personal or business finances.1American Bar Association. Model Rules of Professional Conduct – Rule 1.15 Safekeeping Property The account exists so your money is safe while the lawyer handles it on your behalf, and the rules give you concrete rights, including the right to a full accounting whenever you ask.
What Money Goes Into the Account
Any money a lawyer receives that belongs to someone else goes into the trust account. The two most common examples are advance fee payments (often called retainers) and settlement proceeds.
When you pay a lawyer upfront for work that hasn’t been done yet, that money sits in the trust account until the lawyer earns it by actually performing the services. If anything is left over when the matter ends, the balance comes back to you.1American Bar Association. Model Rules of Professional Conduct – Rule 1.15 Safekeeping Property
Settlement money works the same way. When your attorney receives a settlement check from an insurance company or an opposing party, it goes straight into the trust account. The lawyer then disburses it according to the terms: your share goes to you, outstanding liens get paid, and the attorney withdraws the fee they earned. Insurance payouts, escrow funds, and anything else received on your behalf during the representation land there first.
The underlying principle is simple. The money in a trust account is not the lawyer’s money. The lawyer is a custodian.
What Keeps It Separate From the Firm’s Money
A firm’s operating account holds the firm’s own earned money, used for rent, salaries, software, and the rest of running a business. Client funds never go into the operating account, and firm funds never go into the trust account. The one narrow exception: a lawyer may keep a small cushion of personal funds in the trust account to cover bank service charges, limited to the minimum needed for that purpose.1American Bar Association. Model Rules of Professional Conduct – Rule 1.15 Safekeeping Property
Mixing client and firm money, even accidentally, is called commingling. It’s one of the most common ethics violations in the profession, and depositing a personal check into the trust account or paying a firm expense out of it counts regardless of the lawyer’s intent.
How the Money Is Tracked
Lawyers must keep detailed records for every dollar that moves through the account. At minimum, that means a journal of all receipts and disbursements, individual ledger records for each client showing where deposits came from and where disbursements went, and the underlying bank statements, deposit records, and canceled checks or their electronic equivalents.2American Bar Association. ABA Model Rules on Client Trust Account Records – Rule 1 Recordkeeping Generally The ABA’s model calls for preserving these records for five years after a representation ends; some jurisdictions extend that to six or seven.1American Bar Association. Model Rules of Professional Conduct – Rule 1.15 Safekeeping Property
The standard check on all this is a three-way reconciliation, usually done monthly. The lawyer compares three numbers: the bank statement balance, the firm’s master trust ledger balance, and the combined total of every individual client ledger. All three have to match. When they don’t, something has been misallocated, mis-recorded, or worse. It’s the first thing an auditor looks at.
When Money Comes Out
Funds leave the trust account only in specific situations. Earned fees get transferred to the firm’s operating account as the lawyer bills against them. Money owed to you (or to a third party with a valid claim, like a medical lienholder) gets disbursed when it’s owed. Advance fee payments are withdrawn piece by piece as the lawyer actually does the work.1American Bar Association. Model Rules of Professional Conduct – Rule 1.15 Safekeeping Property
If there’s a genuine dispute over who’s entitled to a portion of the money, the lawyer can’t just pick a side. The disputed portion stays in the trust account until the disagreement is resolved. Any part that isn’t in dispute has to be distributed promptly.1American Bar Association. Model Rules of Professional Conduct – Rule 1.15 Safekeeping Property
What IOLTA Means on Your Statements
If the amount of your money being held is small, or it will only sit for a short time, your lawyer isn’t going to open a separate interest-bearing account just for you. Instead, those funds get pooled with other clients’ small or short-term funds in what’s called an Interest on Lawyers’ Trust Account, or IOLTA. The bank pays interest on the pooled balance, and that interest goes to the state’s IOLTA program to fund legal aid, not to the lawyer and not to any individual client.3American Bar Association. IOLTA – Interest on Lawyers Trust Accounts
Because neither the client nor the lawyer has any control over or right to that interest, the IRS has determined it isn’t includible in either party’s gross income, so you don’t owe tax on it.4Internal Revenue Service. Lawyer Trust Account Fund – Excludability of Income
If your funds are large enough or will be held long enough to earn meaningful interest on their own, the lawyer should put them in a separate interest-bearing account for your benefit instead of pooling them.
Your Rights as a Client
You have enforceable rights whenever your money is in a lawyer’s trust account. These aren’t courtesies; they’re professional obligations the lawyer can be disciplined for ignoring.
- Your lawyer must notify you promptly when they receive funds or property in which you have an interest. If a settlement check arrives on Monday, you shouldn’t be finding out two weeks later.
- Your lawyer must deliver your funds to you promptly once you’re entitled to them.
- If you ask for an accounting of your trust funds, the lawyer must provide one. The rule says “upon request,” so you don’t need a reason.1American Bar Association. Model Rules of Professional Conduct – Rule 1.15 Safekeeping Property
What Protects the Money
FDIC insurance applies to lawyer trust accounts on a pass-through basis. Each client’s funds are insured individually up to $250,000, as if they were deposited in the client’s own name, rather than lumped together under a single $250,000 cap for the whole account.5FDIC.gov. Trust Accounts For that pass-through coverage to work, the bank’s records must show the account is held in a fiduciary capacity and the lawyer’s own records must identify each client and their balance.6eCFR. 12 CFR 330.7 If the records are sloppy enough that individual ownership can’t be established, the whole account could be treated as the firm’s, with only one $250,000 cap for everyone.
State bar associations also don’t simply trust lawyers to follow the rules. The ABA has published a model rule allowing random audits of trust accounts, under which lawyers can be selected without any suspicion of wrongdoing, though no lawyer or firm is subject to a random audit more than once every three years.7American Bar Association. Model Rule for Random Audit of Lawyer Trust Accounts – Preface Complaints from clients or banks can trigger targeted investigations, and many jurisdictions require banks to report trust account overdrafts or bounced checks directly to the state bar.
What Happens When a Lawyer Breaks the Rules
Trust account violations are among the most severely punished ethical breaches in the legal profession. At the less severe end, poor recordkeeping or sloppy reconciliation can produce a formal reprimand or a requirement to complete remedial training. Many jurisdictions offer ethics diversion programs for lawyers whose problems appear to be disorganization rather than dishonesty.
Deliberate misuse of client funds is a different matter. Lawyers who knowingly take money from their trust accounts face suspension or permanent disbarment, and some jurisdictions treat knowing misappropriation as an automatic disbarment offense with no room for discretion. Beyond losing their license, lawyers who steal client funds face criminal prosecution for theft, wire fraud, or embezzlement, and several high-profile cases in recent years have ended in federal prison sentences of 14 years or more.
If you ever suspect something is off with your money, start by asking for an accounting in writing. If the response doesn’t add up, or doesn’t come, the state bar’s disciplinary office is the place to take it.