Why trust money is different
Money a client gives you in advance for fees not yet earned, settlement proceeds, or funds held for a third party is not the firm's money. It goes into a client trust account, kept apart from the operating account. Mixing the two, called commingling, is a serious ethics problem, even when no one intended harm.
Track each client's balance
Keep a ledger for every client who has funds in trust, showing deposits, disbursements and the running balance. A balance can never go negative, because that would mean using one client's money for another. Many firms use legal-specific software or a careful setup in general accounting software with a sub-ledger per client.
Earned fees move out at the right time
When a lawyer earns fees against an advance, the transfer from trust to operating should follow the engagement agreement and be supported by an invoice. Transferring too early or too late can create problems. Costs advanced for a client, like filing fees and expert reports, are tracked as client costs and billed back, so the firm can see which costs remain unrecovered.
Three-way reconciliation
Each month, reconcile three numbers: the bank statement balance for the trust account, the trust account balance in your books, and the total of the individual client ledgers. All three should agree after considering outstanding items. Any unexplained difference needs immediate attention. Keep signed reconciliations in the file for the period your bar requires.
Operating books and good habits
The firm's own books are more like any service business. Track fee income by practice area, billable hours realized, aging of unpaid invoices, rent, staff and technology. Keep a clear line between personal and firm expenses. Do not pay firm bills from trust, and do not deposit earned fees into trust except where rules allow a small amount for bank charges.
Use positive pay and dual approval where possible, restrict who can sign on trust, and conduct periodic reviews. Bookkeepers need training on the trust rules, but only attorneys should decide questions about the rules. If a mistake occurs, call the bar's ethics hotline or your counsel promptly, rather than hiding it.
Records to keep and who reviews them
State rules usually require that trust records be kept for a specific number of years, including bank statements, deposit records, ledgers and reconciliations. Check the length with your bar. Have an attorney other than the one handling most of the trust activity review the monthly reconciliation when the firm size allows it. For solo lawyers, a periodic review by an outside accountant who understands trust rules adds a second set of eyes.
Send invoices on a regular schedule, with clear descriptions and a statement of trust funds applied. Clients are less likely to dispute a bill that arrives monthly and itemizes the work. Prompt, itemized invoicing also makes the transfer from trust to operating easy to support if the bar ever asks.
Common questions
Can my bookkeeper handle trust account entries?
They can support the process under attorney supervision. The lawyer remains responsible for the funds.
Is a flat fee paid upfront always trust money?
That depends on the state rules and your agreement. Ask your bar's ethics resources before depositing it.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.