What is a trust account?

A trust account is a separate bank account that holds clients' funds rather than the firm's, and is kept segregated from operating funds for legal and ethical reasons. For professional service firms, particularly those handling client retainers, advance payments, or funds held for client purposes, trust accounts ensure client money is protected and available when needed. Trust account management typically requires specific recordkeeping, regular reconciliation, and, often, regulatory compliance.

Key characteristics

• Holds client funds separate from firm operating funds

• Required for retainers and advance payments in many contexts

• Subject to strict recordkeeping requirements

• Requires regular reconciliation to individual client records

• Often governed by professional or regulatory rules

• Protects client funds and the firm from commingling issues

Why it matters for professional service firms

Trust account management is both a legal requirement and an ethical obligation for firms holding client funds. Commingling client funds with operating funds creates liability, regulatory violations, and trust issues. Even for firms not legally required to maintain trust accounts, segregating client advances from operating cash prevents the accidental use of client funds. Professional service firms that receive retainers or hold client funds should maintain separate trust accounts with meticulous records and regular reconciliation.

Real-world example

Lisa's legal consulting firm collected retainers averaging $180K at any time across clients. Initially deposited into the operating account, creating confusion about which funds belonged to the firm versus clients. When cash ran tight, Lisa inadvertently used client retainer funds for payroll, creating a temporary shortfall when clients requested refunds. Established proper trust accounting: separate trust account for all retainers, ledger tracking each client's balance, monthly reconciliation of total trust account to sum of client ledgers, and transfer to operating account only as fees are earned. Result: clear separation of client and firm funds, proper revenue recognition timing, and no more accidental use of client money.