Client money accounts are the trust, escrow, or IOLTA accounts that attorneys, real estate brokers, escrow agents, and other fiduciaries use to hold funds belonging to someone else. The rule that governs every one of them is simple to state and unforgiving in practice: the money in the account is the client’s, not yours, and your bookkeeping must prove that at every moment. Everything else, from how you title the account to how often you reconcile it, exists to make that provable.
What Counts as Client Money
Client money is any amount you receive while acting as an agent or fiduciary for a specific purpose on someone else’s behalf. Earnest money deposits in a real estate transaction, settlement proceeds waiting to be disbursed, retainers paid to an attorney that have not yet been earned, and funds held in escrow pending a closing all qualify. The money belongs legally and beneficially to the client from the moment you receive it until you disburse it according to the agreement.
Under the ABA Model Rules of Professional Conduct, a lawyer holding client property must keep it separate from personal property, and complete records must be preserved for at least five years after the representation ends.1American Bar Association. Rule 1.15 Safekeeping Property The model rules apply directly to attorneys, but almost every profession that holds client funds operates under a parallel set of requirements from its own licensing authority.
Keep It Separate: The Commingling Rule
Segregation is the foundation. Client funds must be kept entirely apart from your operating capital, your personal accounts, and any other non-client money. The separation protects clients if your firm faces creditors or bankruptcy, and it is the reason trust account rules exist at all.
Mixing client money with your own is called commingling. It is one of the most serious professional conduct violations in every regulated industry, and it does not require any client loss to be a violation. The problem is the mixing itself, because once the funds are blended, you can no longer prove whose dollar is whose.
The line runs both ways. Advance fees and retainers go into the trust account when received and can only be withdrawn as fees are earned or expenses are actually incurred.1American Bar Association. Rule 1.15 Safekeeping Property Once a fee is earned and billed, it becomes your money and should be moved promptly to your operating account. Letting earned fees sit in the trust account is also commingling, just in the opposite direction.
One narrow exception exists. You may deposit a small amount of your own funds to cover bank service charges or minimum balance requirements.1American Bar Association. Rule 1.15 Safekeeping Property That amount must be clearly tracked. Otherwise, the balance in the trust account must always equal the total owed to all clients combined.
Opening the Account
Setting up a client trust account is more involved than opening a standard business account. The title on the account must clearly signal its fiduciary nature, usually with language like “Trust Account,” “Escrow Account,” or “IOLTA Account.” The naming puts the bank and any third party on notice that the funds inside are not yours.
IOLTA and Separate Interest-Bearing Accounts
IOLTA stands for Interest on Lawyer Trust Accounts. In most jurisdictions, pooled IOLTA accounts are required for client funds that are too small or held too briefly to justify a separate account. The interest generated on the pooled funds goes to a state-designated foundation that funds civil legal aid and access-to-justice programs. When an amount is substantial or will be held for an extended period, you place those funds in a separate, interest-bearing trust account for that specific client, with the interest paid to the client directly.
Bank Approval and Overdraft Reporting
Trust accounts must be maintained only at financial institutions approved by the relevant regulatory authority.2American Bar Association. Model Rules for Trust Account Overdraft Notification – Rule 1 To earn approval, the bank must agree to report any instance in which a properly payable instrument is presented against a trust account with insufficient funds, whether or not the bank honors it.3American Bar Association. Model Rules for Trust Account Overdraft Notification – Rule 2 The overdraft notification acts as an early warning for potential misuse. A trust account cannot be held at any institution that refuses to make these reports.
Confirm as well that the bank will not exercise a right of setoff against the trust account. A bank with notice that an account holds trust funds cannot seize those funds to satisfy debts you owe the bank, but many jurisdictions require an explicit written waiver on top of the proper account title. Without that protection, clients’ money could be exposed to your firm’s financial problems.
After the account is open, notify your licensing authority. The notification typically includes the bank’s name, the account number, and the official designation. Your regulator keeps a registry of trust accounts under its jurisdiction, and you have an ongoing duty to update the information when anything changes.
FDIC Pass-Through Coverage
A pooled trust account holding money for multiple clients can receive FDIC insurance well beyond the standard $250,000 per-depositor cap through what the FDIC calls pass-through coverage. Instead of insuring the whole pooled account as a single deposit belonging to the fiduciary, the FDIC treats each client’s share as a separate deposit insured up to $250,000.4Federal Deposit Insurance Corporation. FDIC Deposit Insurance Guide for Bankers – Fiduciary Accounts
Pass-through protection applies only if three conditions are met. The funds must actually be owned by the clients and not by the professional. The bank’s records must reflect the fiduciary nature of the account through its title. And either the bank’s records, your records, or a third party’s records must identify each client and their ownership interest.4Federal Deposit Insurance Corporation. FDIC Deposit Insurance Guide for Bankers – Fiduciary Accounts If any requirement is missing, the entire pooled account is insured as one deposit capped at $250,000.5Federal Deposit Insurance Corporation. Understanding Deposit Insurance For a trust account holding funds for dozens of clients, the shortfall could be ruinous. The client ledgers you keep for compliance are the same records that make pass-through coverage work.
Moving Money In and Out
Deposits
All client funds you receive must be deposited promptly. Most jurisdictions define that as within one to three business days of receipt, with some requiring the next business day. The funds must go in intact. You cannot withhold a portion for fees before depositing. Each deposit must be identified with the client’s name and the matter it relates to so it can be tracked on the individual client ledger from day one.
Cash payments over $10,000 in a single transaction or related transactions trigger a federal reporting duty. You file IRS Form 8300, which reports the payment to both the IRS and the Financial Crimes Enforcement Network.6Internal Revenue Service. Form 8300 and Reporting Cash Payments of Over $10,000 Failure to file carries significant penalties, and structuring transactions to stay under the threshold is a separate federal offense.
Withdrawals
Funds may leave the trust account for only two reasons: to benefit the specific client whose money it is, or to pay fees that have been legitimately earned. You cannot pull from one client’s funds to cover a shortage in another client’s matter, no matter the circumstances. Every withdrawal needs supporting documentation, and disbursements should go out as checks or electronic transfers that create a clear audit trail.
Never disburse against uncleared funds. If a client’s check has been deposited but has not cleared, drawing against the deposit risks using other clients’ money to fill the gap. Wait for the funds to clear. When fees are earned and billed, move them to your operating account promptly, because leaving earned fees in trust muddles the accounting and makes reconciliation harder.
Records and Three-Way Reconciliation
Three parallel sets of records are needed: a trust ledger tracking all activity across the entire account, individual client ledgers showing activity for each matter, and the bank’s records. Each client ledger must show the date, source, purpose, and amount of every transaction so you can read any client’s balance at a glance. Under the ABA framework, the records must be preserved for at least five years after the representation ends.7American Bar Association. ABA Model Rules on Client Trust Account Records – Rule 1 Recordkeeping Generally Some jurisdictions extend that to seven years, so check your local rules.
The monthly three-way reconciliation is the single most important compliance task. You verify that three numbers match: the adjusted bank statement balance, the trust ledger balance, and the combined total of all individual client ledger balances. When all three agree, every client dollar is accounted for. Any discrepancy, however small, signals a potential error or something worse, and it must be investigated at once. Regulators treat the absence of regular reconciliations as a violation in itself, separate from whatever the reconciliation might have uncovered.
For IOLTA accounts, the bank handles sending interest to the state foundation. Your job is to confirm the bank is doing it correctly and that no interest ever lands with your firm. Keep the bank’s interest remittance confirmations with your trust account records.
Disputed Funds
Disputes come up more often than most professionals expect, especially in real estate deals where a transaction collapses and both buyer and seller claim the earnest money. The rule is clear. When two or more parties claim the same funds, you hold the disputed portion separately and release nothing until the dispute is resolved. Any portion that is not in dispute goes to the rightful owner promptly.1American Bar Association. Rule 1.15 Safekeeping Property
You are a neutral custodian and cannot decide who wins. If the parties cannot agree, the standard remedy is an interpleader action, a civil lawsuit asking the court to take custody of the disputed funds so the claimants can argue it out before a judge. Once the court accepts the deposit into its registry, it typically releases you from the dispute. Reasonable attorney’s fees and court costs for the interpleader are often deducted from the disputed funds first, which reduces the amount available to the eventual winner.
For federal tax purposes, disputed funds held under court jurisdiction are treated as a separate entity taxable as a C corporation. The administrator must obtain an EIN, file income tax returns, and pay tax on any earnings while the funds are held.8eCFR. 26 CFR 1.468B-9 – Disputed Ownership Funds
Verifying Wiring Instructions
Wire fraud against trust accounts is now one of the most dangerous threats to client funds. Business email compromise schemes, where a criminal impersonates a client, opposing counsel, or a title company and sends fraudulent wiring instructions, accounted for over $2.7 billion in reported losses in 2024. Once a wire reaches a fraudulent account, recovery is rare. Courts have not settled who bears the loss when funds are misdirected, and some jurisdictions assign liability to whichever party was most at fault for enabling the fraud, which can put the professional on the hook.
Verification before any electronic disbursement is no longer optional in practice. At a minimum, confirm wiring instructions by calling the recipient at a number you already have on file, not the number listed in the email containing the instructions. Treat any last-minute change to wiring instructions as a red flag and verify again from scratch. Document every verification step. A bank callback service, where the bank contacts a designated person at your firm for verbal confirmation before releasing a wire, adds minutes to each transaction and closes off the most common attack vector.
Dormant Funds and Escheatment
Client funds that sit untouched in a trust account for an extended period do not become yours. Every state has an escheatment law requiring abandoned property to be turned over to the state treasury. The dormancy period varies by jurisdiction, and the trend has been toward shorter windows, with many states reducing from five years to three years for certain property types.
Before escheating anything, conduct a diligent search for the client and document every attempt to make contact. Only after those efforts fail do you initiate escheatment. Turning the funds over to the state removes the liability from your books, and the state holds the money until the owner or their heirs come forward.
What Happens When You Get It Wrong
Trust account violations draw zero tolerance from almost every licensing authority. The consequences scale with what happened and whether client funds were actually harmed.
- Commingling without any client loss is still a standalone violation and can result in formal reprimand, suspension, or required supervision of your accounts going forward.
- Conversion or misappropriation, meaning any unauthorized use of client funds even temporarily, moves from regulatory violation to potential criminal exposure. Depending on jurisdiction and amount, charges can include theft, embezzlement, or federal mail and wire fraud. Conviction typically brings disbarment or permanent license revocation, restitution, and incarceration.
- Record-keeping failures are their own violation. If you cannot produce complete trust account records during an audit, regulators reasonably assume you may not be in compliance, regardless of how the underlying funds were actually handled.
Audits can be triggered by a routine review cycle, a client complaint, or an overdraft notification from the bank.3American Bar Association. Model Rules for Trust Account Overdraft Notification – Rule 2 When one starts, you need monthly three-way reconciliations, complete client ledgers, and supporting documentation for every transaction. The professionals who end up in the worst trouble are almost never the ones who set out to steal. They are the ones who got sloppy with the bookkeeping and lost track of whose money was where.