Trust Accounts and Client Funds

Keep client and third-party property separate

ABA Model Rule 1.15 requires a lawyer to safeguard money and other property held in connection with a representation. Client and third-party property must be kept separate from the lawyer’s own property. Client or third-party funds generally belong in a separate trust account, and other property must be identified and safeguarded. The lawyer must keep complete records for the period specified by the rule as adopted in the jurisdiction.

The practical test is ownership and entitlement, not whose bank account is convenient. A settlement check may include money owed to a client, a medical provider, and the lawyer. A lawyer cannot place the whole amount in the operating account just because the lawyer expects to distribute it later. Funds held for others remain separate until the person entitled to them receives payment.

The ABA Model Rule permits a lawyer to put the lawyer’s own funds in a trust account only in the amount necessary to cover bank service charges. The account cannot be used as a cushion for the law firm, a place to park earned fees, or a temporary operating account. Commingling creates risk that client money will be used to pay the lawyer’s expenses and makes it difficult to trace ownership.

Advance fees and expenses

Rule 1.15(c) requires legal fees and expenses paid in advance to be deposited in a client trust account and withdrawn only as fees are earned or expenses incurred. An advance payment is not automatically the lawyer’s money the moment it arrives. The agreement may specify the fee basis, but the lawyer must follow the applicable rule and the fee must be reasonable under Rule 1.5.

Suppose a client pays an advance for work that will take place over several stages. The lawyer places the funds in trust and transfers the earned portion as each stage is completed under the agreement. The unearned balance remains client property. If the representation ends early, the lawyer must account for the work performed and return any unearned amount, subject to the governing agreement and jurisdiction’s rules.

“Retainer” is used loosely in practice, so the label alone does not determine ownership. A true availability retainer may compensate the lawyer for reserving time and can be earned when paid under the applicable law and agreement. An advance fee for future services is generally held in trust until earned. Some jurisdictions permit a flat fee to be placed in an operating account if the client receives specified notices and protections; others require trust treatment. For MPRE analysis, apply the ABA Model Rule: advance fees and expenses go into trust until earned or incurred, unless the question supplies a jurisdiction-specific rule.

Receiving, notifying, delivering, and accounting

When a lawyer receives funds or property in which a client or third person has an interest, Rule 1.15(d) requires prompt notice to that person. The lawyer must promptly deliver property the person is entitled to receive and, on request, provide a full accounting. The lawyer cannot delay distribution just because the client has not asked yet, or keep property after the reason for holding it ends.

A lawyer who receives settlement funds should identify all claims and the interests of the client, any lienholder or provider, and the firm. The lawyer should notify those with an interest, resolve valid claims, and distribute amounts no longer disputed. If the client disputes a provider’s claim, the disputed portion must remain separate while the lawyer distributes the undisputed balance promptly.

Example: a settlement check includes proceeds for a client and a health provider asserting a lien. The client agrees that the provider should receive part but disputes the amount. The lawyer should hold the amount genuinely in dispute in trust, promptly deliver the balance everyone agrees belongs to the client, and attempt to resolve the claim. The lawyer should not give the entire fund to the client while ignoring the provider, nor hold all proceeds indefinitely when only a portion is disputed.

Disputed funds

Under Rule 1.15(e), if two or more persons claim an interest in property held by the lawyer, the lawyer must keep the disputed property separate until resolution. The lawyer must promptly distribute portions that are not in dispute. This preserves everyone’s claim without allowing the lawyer to use the disputed funds or unnecessarily freeze the whole account.

The lawyer should not decide disputed ownership by simply following the client’s instruction. If a third party has a valid lien, assignment, or other interest, the lawyer must honor it as required by law and the agreement. If the claim is doubtful, the lawyer should investigate and seek resolution, interpleader, or other legal process when appropriate. The ethical rule requires safekeeping and prompt release of undisputed property while the substantive dispute is resolved.

A lawyer may keep earned fees from a trust account only when the client has been notified and the fee is earned under the agreement and applicable rules. If the client disputes the lawyer’s fee, the lawyer should keep the disputed amount in trust while promptly delivering the undisputed amount. The lawyer cannot transfer the contested share to the operating account merely by sending an invoice.

Third-party claims and settlement checks

Medical providers, lenders, insurers, taxing authorities, and other third parties may assert interests in settlement proceeds. The lawyer must distinguish a valid property interest from a request or moral expectation. Rule 1.15 requires safeguarding funds in which a third person has an interest, but the existence and priority of that interest depend on lien law, contract, notice, and other applicable law.

If the lawyer knows a provider has a valid lien, disbursing all funds to the client may breach duties to the provider and expose the client to liability. If the provider merely sends an unsubstantiated demand and the client contests it, the lawyer should not assume the demand is valid or pay it automatically. Preserve the disputed amount while examining the claim and distribute only what is undisputed.

The lawyer should use a clear written accounting showing amounts received, charges, fees, third-party payments, and the net amount delivered. The accounting should match the trust ledger and bank activity. A client’s request for an accounting requires a prompt and complete response.

Fees and reasonableness

Rule 1.5 bars unreasonable fees and expenses. Reasonableness depends on factors such as time and labor, difficulty, skill, customary local fees, amount involved, results, time limits, length of the relationship, the lawyers’ experience, and whether the fee is fixed or contingent. No single factor controls in every matter.

The lawyer must communicate the scope and basis or rate of the fee and expenses before or within a reasonable time after starting, preferably in writing, except when charging a regularly represented client on the same basis. Changes also must be communicated. A written agreement helps the client understand what is included and what additional services may cost.

Contingent fee agreements must be in a writing signed by the client and state how the fee will be calculated, including applicable percentages, treatment of litigation expenses, and whether expenses are deducted before or after calculating the fee. The client must be told about expenses owed even if the client does not prevail. At the end, counsel must provide a written statement of the outcome and, if there is a recovery, the remittance and calculation. A contingent fee is prohibited in a criminal defense matter and when payment or amount depends on securing a divorce or the amount of alimony, support, or property settlement in lieu.

When lawyers outside the same firm divide a fee, the total fee must be reasonable; the division must be proportional to services or each lawyer must assume joint responsibility; and the client must agree to the arrangement, including each lawyer’s share, confirmed in writing. The client should not discover the fee division only after the work is complete.

Common trust-account mistakes

Using client funds temporarily

A lawyer may not borrow client trust money to cover payroll, office rent, or a short cash-flow gap, even if the lawyer intends to replace it. The fact that the client has not requested payment does not convert the money into firm funds.

Leaving earned fees in trust forever

Trust accounts protect property not yet belonging to the lawyer. Once a fee is earned, the lawyer should promptly withdraw the earned amount after the required notice and accounting. Keeping firm money mixed with client funds can also create problems; only the narrow amount permitted for bank charges may be deposited as the lawyer’s money under the ABA Model Rule.

Withholding all funds over a small dispute

If only one portion of a settlement is disputed, preserve that amount and deliver the undisputed balance. Rule 1.15(e) does not allow the lawyer to use a narrow disagreement as a reason to hold every dollar.

Treating every advance as earned

An advance fee for future work is generally held in trust and withdrawn as earned. A label such as “nonrefundable retainer” does not override the substance of the payment or the jurisdiction’s limits on nonrefundable fees. The lawyer must communicate the fee basis and comply with the applicable rule.

Trusting a spreadsheet without reconciliation

Accurate books matter because a pooled trust account contains money belonging to different people. The lawyer must maintain records that identify each client’s balance and reconcile the ledger with account statements. Bank fees, outstanding checks, and deposits in transit should not obscure a client’s ownership.

Original MPRE-style applications

Settlement check with a disputed lien

A lawyer receives a settlement check for a client. A medical provider asserts a lien, and the client disputes part of the demand. The lawyer must promptly notify the interested parties, keep the disputed amount separate, and distribute the undisputed client funds. The lawyer should investigate the lien and provide an accounting. Paying the entire amount to either claimant before resolving the dispute risks violating Rule 1.15.

Advance fee after early termination

A client pays in advance for a defined project. The lawyer deposits the fee into trust, completes only part of the work, and the client terminates the representation. The lawyer may withdraw the amount earned under the agreement and applicable law, but should return the unearned balance and account for the work. The lawyer cannot claim the whole advance solely because the engagement letter calls it nonrefundable.

Client disputes the invoice

A lawyer bills for completed work and transfers the entire amount from trust. The client disputes a portion. The lawyer should leave the disputed portion in trust while promptly withdrawing any amount the client does not dispute and returning undisputed client property. The lawyer may pursue the disputed fee through appropriate procedures but should not decide the dispute by taking the money.

Third party pays fees

An employer pays the employee-client’s legal fees. The lawyer must obtain the client’s informed consent, protect confidentiality, and ensure the employer does not interfere with professional judgment. Funds paid in advance for legal services remain subject to trust-account rules even though the payer is not the client.

Flat fee versus availability retainer

A client pays a lawyer to reserve availability during a business transaction, not for a specific block of future work. Whether the fee is earned immediately depends on the substance of the agreement and applicable jurisdiction law. By contrast, money advanced for future legal services is not earned merely on receipt under the ABA Model Rule. Identify what the fee buys before deciding who owns the funds.

A reliable analysis sequence

• Identify each person with a legal or claimed interest in the money or property.
• Determine whether the payment is client property, an advance for future fees, earned fees, or money subject to a third-party claim.
• Place property of others in the proper separate account and keep records.
• Notify interested persons and provide an accounting when requested.
• If ownership or amount is disputed, preserve the disputed portion and promptly distribute the undisputed portion.
• Assess fee reasonableness and required written disclosures separately from safekeeping.
• Check whether the question gives a jurisdiction-specific rule for flat fees, retainers, or lien priority.