Trust Accounting Mistakes Lawyers Can't Afford to Make
By Laura Popps
Managing a client trust account is one of the most important and closely scrutinized parts of practicing law. Because these accounts hold client funds, even inadvertent errors can raise concerns and trigger disciplinary review. Understanding the trust-account rules and building good habits around them is the best way to protect both your clients and your license. With that in mind, here are some common mistakes to avoid when managing client trust accounts.
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Not Understanding When a Trust Account is Required
If you are in private practice and handle client or third-party funds, you must have a separate trust account in which to deposit those funds. Texas requires use of IOLTA[1] bank accounts when the funds are nominal and to be held only briefly – which covers most situations.[2] Getting your trust account set up correctly from the start makes compliance simpler and helps prevent unnecessary problems down the road.
Funds that must be deposited directly into a trust account include any funds that belong, in whole or in part, to a client or third person. Common examples include advanced fees and deposits/retainers, advanced expenses, settlement proceeds, and overpayment of invoices.
Conversely, fully earned fees, reimbursements owed to the lawyer, and other funds that belong entirely to the firm should never be placed in the trust account.
Commingling Funds
Commingling happens when the lawyer mixes client money with the lawyer’s own funds and can take several forms, all of which are improper. One example would be placing client funds into the firm’s operating account. Client funds must always be kept separate and remain in the trust account until earned. Once earned, they become the lawyer’s property and should be promptly transferred to the firm’s operating account. Failing to make those transfers within a reasonable time can itself amount to commingling.
Lawyers may not add their own money to a trust account to create a “buffer” against overdrafts. The only permissible exception is a small amount of firm funds kept in the account to cover bank service charges or transaction fees, and only in an amount that is reasonably necessary.
Even when done out of convenience or caution, combining client funds and firm funds blurs the line between client property and firm property and must be avoided.
Confusing Earned and Unearned Fees
Any unearned fees–such as advance payments, deposits and most retainers–must be deposited into a trust account until the work is performed. One area that frequently causes confusion is the treatment of flat fees. Although a flat fee is an advance payment for work that hasn’t yet been performed, some lawyers mistakenly assume they can place those funds directly into their operating account by adding language to the fee agreement stating that the fee is “earned upon receipt” or “nonrefundable.”
In Texas, however, an advanced legal fee is never earned until the work has been completed and therefore must be held in trust until earned. Simply labeling a payment as “earned upon receipt” does not change its character. The only exception is a true non-refundable retainer, which is paid solely to secure the lawyer’s availability—not for any legal work—and is, in practice, quite rare.
For more on this topic, see When is it Acceptable for a Texas Lawyer to Charge a Non-Refundable Fee?
“Borrowing” from the Trust Account
It should go without saying, but lawyers may never “borrow” from the trust account, even with every intention of paying the money back. This rule applies no matter how little is at issue or how short the intended time frame may be. Client funds are not a source of short-term financing or cash flow relief. This practice not only violates the disciplinary rules but potentially criminal laws on misapplication of fiduciary property, regardless of whether the money is later returned.
Failing to Timely Notify and Deliver Client Funds
When a lawyer receives funds on behalf of a client or third party, such as a settlement check, it’s important to act promptly. The lawyer must notify the client or third party and, once the funds have cleared and all conditions are met (for example, paying liens or expenses), disburse the money reasonably promptly. Holding onto client funds longer than necessary can raise serious ethical concerns. If any part of the funds is disputed, that amount must remain in the trust account until the dispute is settled.
Upon request of the client or third party, the lawyer must promptly provide a full accounting regarding such funds/property. That’s only possible if the lawyer keeps clear, detailed trust account records, as explained below.
Inadequate Record Keeping
Under TDRPC 1.15(a), lawyers must maintain complete records of all trust account funds and preserve those records for at least five years after the representation ends. Each deposit or withdrawal should be documented with the date, client matter, amount, and purpose, along with supporting materials such as receipts, invoices, copies of checks, etc. Using dedicated trust-accounting software is the easiest and most accurate way to manage this information and ensure accuracy over time.
A corollary is the need for regular reconciliation of the trust account. It may not surprise you to know that this is an often overlooked area, especially for solos and small firms who juggle both legal work and administrative tasks themselves. Without regular reconciliation, though, errors will creep in and pile up over time, making it difficult to trace the source of discrepancies. In addition, infrequent oversight can allow employee theft or misappropriation to go unnoticed.
You should reconcile your trust account every month by comparing the bank balance with your own accounting records and client ledgers. Monthly reconciliation keeps your books accurate and helps you catch mistakes before they multiply. And like most trust-accounting tasks, the right software makes the process faster, easier, and far less stressful than doing it by hand.
Protect Your Clients, Protect Your License
Most trust account problems don’t come from bad intent, but from being too busy, disorganized, or unsure of the rules. Avoiding mistakes like commingling, confusing earned and unearned fees, or delaying client payments comes down to good habits: use a proper trust account, communicate promptly, reconcile regularly, and keep solid records.
Investing the time to build strong systems now will protect your clients, your practice, and your peace of mind.
Laura Popps defends Texas attorneys before the State Bar, advises on legal ethics, and
handles criminal appeals. A former prosecutor, Laura has been Board Certified in
Criminal Law by the Texas Board of Legal Specialization since 1999. She then served
for ten years as Regional Counsel at the State Bar of Texas’ Office of Chief
Disciplinary Counsel before founding her own firm.
Laura can be reached at laura@poppslaw.com or (512) 865-5185.
[1] Interest on Lawyers’ Trust Accounts (IOLTA) Program. In Texas, most client trust accounts fall under the IOLTA Program. These are interest-bearing trust accounts in which the interest generated is pooled and forwarded to the Texas Access to Justice Foundation, which uses the funds to support legal services for low-income Texans.
[2] Larger amounts held for longer periods may be put in a separate interest-bearing account for that client’s benefit.