Ask a new solo attorney in Massachusetts what keeps them up at night, and the trust account is usually near the top of the list. It holds money that is not yours, the rules are specific, and a mistake can be serious. The good news is that the concept is simple, and the routine that keeps it right is very manageable once it is set up.
Here is a plain explanation for solo attorneys and small firms in Boston, Quincy, Plymouth, and across the Commonwealth.
What an attorney trust account is
An attorney trust account is a bank account that holds money belonging to clients or third parties, kept separate from the firm’s own money. Retainers paid in advance, settlement proceeds waiting to be disbursed, and funds held for closing costs are common examples.
The core idea: client money and firm money never mix. Your operating account pays the firm’s rent and salaries. The trust account holds what you are safeguarding for someone else.
What IOLTA means
IOLTA stands for Interest on Lawyers’ Trust Accounts. In Massachusetts, client funds that are nominal in amount or held for a short time go into a pooled IOLTA account. Because the interest on any single client’s money would be too small to matter, the interest on the pooled account goes to the Massachusetts IOLTA Committee, which uses it to fund legal aid.
When funds are large enough or held long enough to earn meaningful interest for the client, they generally belong in a separate interest-bearing trust account for that client instead.
The records Massachusetts expects
Massachusetts Rule of Professional Conduct 1.15 sets out the recordkeeping for trust accounts. In plain terms, a firm keeps:
- A check register for the account, listing every deposit and disbursement in order, with a running balance.
- An individual ledger for each client matter, showing that client’s deposits, disbursements, and balance.
- A ledger for bank fees and charges, since those are not a client’s to pay.
- Reconciliation reports, prepared at least every sixty days, comparing all three.
That last item is the three-way reconciliation, and it is where most of the real work lives.
Three-way reconciliation, briefly
A three-way reconciliation compares three numbers:
- The adjusted bank balance: the statement balance, plus deposits in transit, minus checks that have not cleared.
- The check register balance.
- The total of every client matter ledger, plus the bank fees ledger.
When all three agree, the account reconciles. When they do not, someone traces the difference to its source. Listing every matter’s balance also exposes a negative client balance, which the rule prohibits.
The rule calls for this at least every sixty days. At Larsen, we reconcile our law firm clients’ IOLTA accounts monthly, because small differences are far easier to trace when they are a few weeks old.
Try it
Do your three numbers agree?
Enter the statement balance, the check register balance, and the total of the client matter ledgers to compare all three.
Common trouble spots
- Earned fees left sitting in trust after they have been earned.
- Client cost advances recorded as income in the operating books.
- Bank fees paid from client funds instead of being tracked separately.
- Checks outstanding for months, which keep the bank balance and the register apart.
- A difference nobody can explain, carried forward month after month.
In one recent case, a firm’s IOLTA account was off and no one could explain why. We worked back through about three years of records, found where the error began, and corrected the reconciliations for the full period.
Frequently asked questions
The account remains the attorney’s responsibility. A bookkeeper’s monthly reconciliation reports let you see whether it reconciles, and raise anything that needs your decision.
Not necessarily. We keep law firm books in QuickBooks Online, set up to track each client matter and produce the reports the rule expects.
Some firms keep an in-house bookkeeper for day-to-day entries and bring us in for the monthly three-way reconciliation and a second set of eyes on the books.
Talk it through
Larsen Bookkeeping has worked with law firms for 12 years, and works with solo attorneys and small firms in Massachusetts only. If you would like a clear, monthly read on your trust account, request a consultation. You can also call 781-924-1489.
This article is general education, not legal advice. For questions about your obligations under Rule 1.15, consult the rule itself, the Massachusetts IOLTA Committee, or the Office of Bar Counsel.