Essential Guide to Managing Client Funds for Law Firms
Whether you’re a solo attorney or a law firm owner, handling client funds is an inevitable part of your practice. This includes managing advance payments, settlement checks, and expense reimbursements. As a fiduciary, you must carefully oversee these funds by implementing strict controls, maintaining accurate records, and ensuring compliance with ethical and legal standards.
Mishandling client funds is one of the leading causes of attorney disbarment, making proper management crucial—especially for small firms that may lack dedicated financial resources. With some state bar guidelines on trust accounts spanning over 150 pages (such as California’s), the process can seem overwhelming. However, given the risks involved, firms of all sizes must prioritize client fund management as a core operational responsibility.
Key Principles of Client Fund Management
To effectively manage client funds, keep these essential guidelines in mind:
- Client funds must always be kept separate from a law firm’s operating funds—co-mingling is strictly prohibited.
- Funds can be deposited into either:
- A Client Trust Account (CTA) for larger sums and ongoing client matters.
- An Interest on Lawyer’s Trust Account (IOLTA) for smaller or short-term funds, where any earned interest supports nonprofit legal aid organizations.
- CTAs must be interest-bearing accounts designated for the benefit of clients.
- IOLTA accounts must be held at state bar-approved banks, with interest directed to legal aid organizations.
Additionally, managing these funds requires detailed accounting practices. If multiple clients’ funds are held in a single trust account, they must be meticulously accounted for separately.
- Sub-accounting ensures that each client’s funds are tracked individually within the firm’s ledger.
- Every transaction—including deposits, withdrawals, interest, and fees—must be recorded with a clear audit trail.
Safeguarding Client Funds Amid Banking Uncertainty
Recent bank failures have heightened concerns about protecting client funds. Many attorneys lack the time or expertise to evaluate a bank’s financial stability, yet law firms could be held liable if their chosen bank collapses.
The best way to safeguard client funds is to ensure all trust accounts are fully FDIC-insured. FDIC coverage applies to client trust accounts through pass-through insurance, providing up to $250,000 per client, per institution. If client funds exceed this limit, working with multiple banking partners can help ensure full protection.
Leveraging Technology for Compliance and Security
Given the complexity of trust account management, law firms can benefit from external support:
- Legal accounting software can automate record-keeping and compliance tracking.
- Specialized financial service providers can assist with trust account management, optimizing banking choices while ensuring full FDIC coverage.
Regardless of the tools used, law firms must always consider regulatory compliance, accurate accounting, and bank security when handling client funds. Proper management not only protects clients but also safeguards the firm’s reputation and legal standing.
