Client money accounts are the segregated bank accounts that attorneys, real estate brokers, escrow agents, and other fiduciaries use to hold funds belonging to their clients. The governing principle across every regulated profession is the same: the money in the account belongs to the client from the moment you receive it until you properly disburse it, and the account must be structured, titled, and maintained so that fact is never in doubt. That means a separate account at an approved bank, meticulous per-client records, prompt deposits, controlled disbursements, and a monthly reconciliation that ties everything together.
What Counts as Client Money
Client money is any funds you receive while acting as an agent or fiduciary for a specific purpose on someone else’s behalf. Earnest money on a real estate contract, settlement proceeds waiting to be paid out, retainers that have not yet been earned, and escrow deposits held pending a closing are the everyday examples. Legal and beneficial ownership stays with the client throughout.
For attorneys, the ABA Model Rules require that client property be kept separate from the lawyer’s own property, and that complete records be preserved for at least five years after the representation ends.1American Bar Association. Rule 1.15 Safekeeping Property Nearly every other profession that holds client funds operates under parallel requirements from its own licensing authority. Check the specific rule that governs your license; the structure below reflects the shared framework.
The Segregation Rule
Segregation is the foundation. Client funds go into an account that holds only client funds. They never touch your operating account, your personal account, or any other pool of money you control. This separation matters both routinely and in a crisis: if your firm faces financial trouble, creditors and bankruptcy proceedings cannot reach money that is clearly not yours.
Mixing client money with your own is called commingling, and it is one of the most serious violations across every regulated profession. It runs in both directions. Depositing client funds into your operating account is commingling. So is leaving your earned fees sitting in the trust account after they have been billed. Once a fee is earned, transfer it out promptly. The trust account balance should always equal the total owed to all clients, no more and no less.
One narrow exception exists. You may deposit a small amount of your own funds into the trust account to cover bank service charges or minimum balance requirements.1American Bar Association. Rule 1.15 Safekeeping Property That amount must be tracked separately, and it is the only sanctioned instance of your own money living in the client account.
Opening the Account
A client money account is not a standard business account. The title must signal its fiduciary nature on its face, using language like “Trust Account,” “Escrow Account,” or “IOLTA Account.” That naming puts the bank and any third party on notice that the balance is not the property of the account holder.
The bank itself has to qualify. 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 Approval typically requires the bank to agree that if any properly payable instrument is presented against the trust account with insufficient funds, the bank will report it to the regulator whether or not it honors the instrument.3American Bar Association. Model Rules for Trust Account Overdraft Notification – Rule 2 That overdraft notification acts as an early warning system. A bank that will not report cannot hold your trust account.
Confirm the bank will not exercise a right of setoff against the account. Under longstanding common law, a bank with notice that an account holds trust funds cannot seize those funds for debts the professional owes the bank, and proper titling gives that notice. Many jurisdictions still require an explicit written waiver of setoff rights from the bank, and getting that in writing at account opening is the safe move.
Once the account is open, notify your licensing authority. The notification usually includes the bank’s name, the account number, and the official account designation, and you have an ongoing duty to update the registry if anything changes.
IOLTA Accounts vs. Separate Interest-Bearing Accounts
IOLTA stands for Interest on Lawyer Trust Accounts. In most jurisdictions, a pooled IOLTA account is required for client funds that are either too small in amount or too briefly held to justify their own interest-bearing account. Interest on pooled IOLTA balances goes to a state-designated foundation that funds civil legal aid.
When the amount is substantial or the funds will sit for an extended period, open a separate interest-bearing trust account for that specific client, with the interest paid to the client. There is no bright-line dollar threshold in the model framework; the judgment turns on whether the interest earned on that particular deposit would exceed the cost of setting up and administering a dedicated account.
Keeping FDIC Pass-Through Coverage
A pooled trust account can be insured beyond the $250,000 per-depositor limit through what the FDIC calls pass-through coverage: each client’s share is treated as a separate deposit and insured up to $250,000 on its own.4Federal Deposit Insurance Corporation. FDIC Deposit Insurance Guide for Bankers – Fiduciary Accounts Three conditions have to be satisfied:
- The funds must actually be owned by the clients, not the professional.
- The bank’s records must reflect the fiduciary nature of the account through its title.
- Either the bank’s records, your records, or a third party’s records must identify each client and the amount of their ownership interest.4Federal Deposit Insurance Corporation. FDIC Deposit Insurance Guide for Bankers – Fiduciary Accounts
If any condition fails, the entire pooled account is insured as a single deposit of the fiduciary, capped at $250,000 total.5Federal Deposit Insurance Corporation. Understanding Deposit Insurance The client ledgers you keep for compliance are the same records that preserve pass-through coverage if the bank fails.
Deposits and Disbursements
Client funds must be deposited promptly. Most jurisdictions define this as within one to three business days of receipt, and some require deposit by the next business day. Funds go in intact. You cannot pull a fee out of the check before depositing the balance. Each deposit is identified with the client’s name and the matter it relates to, so it lands on the correct individual ledger from day one.
Cash payments over $10,000 in a single transaction or in related transactions trigger a federal reporting obligation. You must file IRS Form 8300, which reports the payment to both the IRS and FinCEN.6Internal Revenue Service. Form 8300 and Reporting Cash Payments of Over $10,000 Failing to file carries significant penalties, and structuring transactions to slip below the threshold is a separate federal offense.
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 actually been earned. You cannot cover a shortfall in one matter with another client’s money for any reason. Every disbursement needs supporting documentation and should move by check or electronic transfer so there is a clear audit trail.
Never disburse against uncleared funds. If a deposit has hit the account but has not yet cleared the banking system, drawing against it uses other clients’ money to fill the gap. Wait for clearance before releasing any disbursement tied to that deposit. And when a fee has been earned and billed, move it to your operating account without delay.
Three-Way Reconciliation and Records
You need three parallel sets of records: a trust ledger tracking every deposit and withdrawal for the account as a whole, an individual client ledger for each matter, and the bank’s records. Each client ledger shows the date, source, purpose, and amount of every transaction so any client’s balance is available at a glance. Under the ABA framework these 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 require seven, so confirm your local rule.
The monthly three-way reconciliation is the single most important compliance task. Three numbers must match: the adjusted bank statement balance, the trust ledger balance, and the sum of all individual client ledger balances. When they agree, every client dollar is accounted for. Any discrepancy, however small, is a signal to investigate immediately. Regulators treat the absence of regular reconciliations as a violation on its own, separate from anything the reconciliation might have caught.
For IOLTA accounts, the bank handles remitting interest to the state foundation. Your job is to confirm the remittance is happening and that no interest is ever credited to your firm. Keep the bank’s remittance confirmations with your trust account records.
When Two Parties Claim the Same Funds
Disputes over client funds happen often, especially in real estate when a deal collapses and both buyer and seller claim the earnest money. The rule is straightforward: hold the disputed portion separately and release it to no one until the dispute is resolved. Any portion that is not in dispute should be distributed promptly to the party entitled to it.1American Bar Association. Rule 1.15 Safekeeping Property
You are a neutral custodian, not a judge. If the parties cannot agree, the standard remedy is an interpleader action: you file a civil suit asking the court to take custody of the funds so the claimants can litigate ownership. Once the court accepts the deposit, it typically releases you from the dispute. Reasonable attorney’s fees and court costs for the interpleader can be deducted from the disputed funds before deposit, 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 employer identification number, file returns, and pay tax on any earnings while the funds are held.8eCFR. 26 CFR 1.468B-9 – Disputed Ownership Funds
Wire Fraud Verification
Business email compromise, where an attacker impersonates a client, opposing counsel, or a title company and sends fraudulent wiring instructions, is now the most dangerous threat to trust account balances. Once a wire lands in a fraudulent account, recovery is rare, and courts in different jurisdictions have split on who bears the loss, with some allocating liability to whichever party was most at fault for enabling the fraud.
Verification before every electronic disbursement is a practical necessity. Call the recipient at a number you already have on file, not a number pulled from the email containing the instructions. Treat any last-minute change in wiring instructions as a red flag and re-verify from scratch. Document every verification step. If your bank offers a callback service that requires verbal confirmation from a designated person at your firm before releasing a wire, use it.
Dormant Funds Do Not Become Yours
Client funds that sit untouched in a trust account do not convert to your property, no matter how long they sit. Every state has an escheatment law requiring abandoned property to be turned over to the state treasury. Dormancy periods vary, and the national trend has been toward shorter windows, with many states moving from five years to three for certain property types.
Before escheating, conduct a diligent search for the client and document every contact attempt. Only after those efforts fail can you initiate the escheatment process. 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 the Rules Are Broken
Trust account violations get a zero-tolerance response from almost every licensing authority. The severity of the consequence tracks what happened and whether client funds were actually harmed.
- Commingling without any loss to a client can still trigger formal reprimand, suspension, or mandated supervision of the account going forward. The mixing itself is the violation.
- Using client funds for any unauthorized purpose, even temporarily, is conversion or misappropriation. Depending on the jurisdiction and the amount, it can bring theft, embezzlement, or federal mail and wire fraud charges. Conviction typically means disbarment or permanent license revocation, restitution, and incarceration.
- Inability to produce complete records during an audit is itself a violation, regardless of whether the underlying funds were handled correctly. Regulators reasonably assume that if you cannot show compliance, you may not have it.
Audits get triggered by scheduled review cycles, by client complaints, and by overdraft notifications from the bank.3American Bar Association. Model Rules for Trust Account Overdraft Notification – Rule 2 When one begins, the examiner will ask for monthly three-way reconciliations, complete client ledgers, and supporting documentation for every transaction. The professionals who get into the worst trouble with trust accounts are rarely the ones who set out to steal. They are the ones whose bookkeeping got sloppy and who lost track of whose money was where.