How to keep client trust funds separate from operating funds
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Keep client money in a dedicated, clearly labeled trust or IOLTA account that is separate from the operating account. Keep an individual ledger for every client, move fees to operating only once they are earned, never pay business bills from trust, and reconcile three ways every month. The core rule is simple: client money must never be commingled with the firm's operating money. The details below are where firms actually get caught.
The two accounts, and what belongs in each
Separation starts with two distinct bank accounts. The bank account separates the money physically. The client ledgers separate ownership in your records.
Account | What belongs there |
|---|---|
Client trust / IOLTA account | Unearned retainers, advance court and filing fees, settlement proceeds, and other money belonging to clients or third parties |
Operating account | Earned fees, business revenue, and the money used to pay overhead such as payroll, rent, and taxes |
Individual client ledger | A record inside the trust account showing exactly how much of the pooled balance belongs to each client, and every deposit and disbursement |
Label the trust account clearly at the bank, with words like "Trust Account" or "Client Funds," so no one mistakes it for a business account.
The rules that keep the two apart
Client money goes to trust. Retainers, advances, and settlement funds land in the trust account, not the operating account.
Move earned fees promptly. Once a fee is actually earned, transfer it to operating. Do not leave firm money sitting in trust.
Never run the firm from trust. No payroll, rent, taxes, or vendor bills paid from the trust account, and no borrowing from it, even for a day.
Keep a ledger per client. Every client's balance and every transaction is tracked individually, even though the cash is pooled in one account.
The two traps that catch careful firms
Most commingling is not theft. It is a process gap. Two in particular catch firms that think they are being careful.
Negative client balances. Never disburse more on behalf of one client than that client's own ledger holds. If you do, you are spending another client's money, which is commingling and, in effect, misappropriation. A per-client ledger with a hard floor of zero prevents it.
Merchant processing fees. When a client pays a retainer by card, the payment should land in the trust account, but the processing fee and any chargeback must come out of the operating account. A payment processor that deducts its fee from the trust account creates commingling automatically, so it has to be configured to pull fees from operating.
The control that proves it: the monthly three-way reconciliation
Separation is only real if you can prove it. Every month, three numbers must match to the cent.
The trust bank statement balance
The master trust ledger in your accounting system
The sum of all individual client ledgers
If the three do not agree, stop and find the difference before it grows. This is the single control a bar auditor cares about most, and it is the fastest way to catch a mistake while it is still small.
A monthly internal controls checklist
The trust account is separate and clearly labeled at the bank.
Every client has an up-to-date individual ledger.
No client ledger is negative.
Earned fees were transferred to operating, and nothing else was.
No business expense was paid from trust.
Merchant fees and chargebacks came out of operating, not trust.
The three-way reconciliation matches to the cent, and any difference is documented and resolved.
How Numetix keeps it clean
Numetix runs this whole checklist for you every month. Per-client ledgers kept current, earned-fee transfers made on time, merchant processing set up so fees never touch trust, and a three-way reconciliation that ties out to the cent.
Numetix is a legal-specific service for small law firms of 3 to 20 attorneys. It closes the books by the 15th and keeps the trust records a bar auditor expects, so separation is not just a rule on paper but something you can prove any month of the year.
Frequently asked questions
What is commingling and why is it a problem?
Commingling is mixing client trust money with the firm's operating money, whether by paying business expenses from trust, leaving earned fees in trust, or overspending one client's balance. It is a common trigger for bar discipline because the duty to safeguard client funds stays with the lawyer.
Can you deduct credit card fees from a trust account?
No. Retainer payments can route into trust, but processing fees and chargebacks must come from the operating account. A processor that pulls fees from trust creates commingling, so it must be configured correctly.
How often should a trust account be reconciled?
Monthly. The trust bank balance, the master trust ledger, and the sum of all client ledgers should match to the cent every month, and any difference should be resolved right away.
Want trust and operating kept cleanly separate every month?Per-client ledgers, no negative balances, fees out of operating, three-way reconciliation to the cent, closed by the 15th.
Numetix · AI-augmented bookkeeping and trust accounting for small law firms · numetix.ai
Numetix is an AI-first accounting firm. AI runs the bookkeeping, tax, payroll, and reporting workflow. Industry experts handle the judgment, month-end close, review, and advisory. We serve founder-led service firms across law, consulting, IT, healthcare, creative, and nonprofit. Headquartered in California, serving clients nationwide.
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