I will not be quoting rules and citing case law.  The purpose of this article is to give best practices for managing Client Trust Accounts in California Law Firms.  We have found in our work that law firms sometimes need guidance on trust account management.  Firms do not intentionally mishandle trust money, but sometimes they take advice from people who have not managed law firm trust accounts before.  We have.  Our team has more than 60 years of management experience in law firms.

The Foundation:  Client money is not yours until you earn it, bill for it, and have no client disputes over it.

What To Do

  1. When a client gets a bill for services from you and then pays you, the money is deposited into Operating.
  2. When you get money from a client at the time of signing your agreement, but you have not started working for them, it goes into your IOLTA Trust account.
  3. If you are charging flat fees and taking partial payment on signing, you can put it directly in Operating IF you have given the client the option to put the money in a Trust first in writing. This should be written into your engagement letter/fee agreement/retainer agreement.
  4. If you take payment at signing and the client leaves your firm before the work is done, you must return the unused portion of the Flat Fee Deposit.
  5. If you get a payment that is part yours and part someone else’s [Client, Opposing Party, Co-Party] the total payment should be deposited into IOLTA and from there your fees can be paid.
  6. Accounting for the Trust Account is very important. You must know how much each client has in trust at any time.
  7. Identify all deposits with the appropriate client name in all your systems, practice management, QuickBooks/Zero or anywhere else you are tracking income.
  8. Use three-way reconciling. Bank, Billing and Accounting systems should all have the same balance in your IOLTA Trust Account.  This must be reconciled each month.
  9. Each client must have her own ledger card that can be produced at any time.
  10. Client money is not yours until you earn it, bill for it, and have no client disputes over it.

In Summary

If your firm is not handling your IOLTA Trust Account using the list above, stop what you are doing and put these practices in place.

Stop putting Trust Money into Operating.  Stop pulling money from your IOLTA Trust Account before you physically bill a client for your work and the appropriate waiting period has passed.

Add proper language to your engagement agreement for your client’s Trust Money.

You can get fined and/or disbarred for Trust Account violations.

If you need help with any of this, please contact us or someone else who has experience with trust accounting.

CA Bar Trust Accounting Handbook

Subscribe To Our Newsletter

Join our mailing list to receive the latest news and updates from our team. You will also get 2 free resources when you subscribe:

  • Law Firm Startup Checklist
  • Legal Management Software List

You have Successfully Subscribed!