Concept
Handling Client Funds
Safekeeping funds and other property of clients
Handling Client Funds
A lawyer who receives a client's money faces a practical question before anything else: where does it go? The second sentence of Rule 1.15(a) answers. Funds must be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person.1 The rule's first sentence requires the lawyer to hold entrusted property apart from the lawyer's own, and this sentence supplies the means: a bank account that exists for entrusted money and nothing else. An account does the job better than a promise to be careful because it leaves a record. Every deposit and withdrawal appears on a statement that a client, a bank, or a disciplinary authority can read.
One question organizes every rule in this section: whose money is this dollar, and is it sitting in the right account? The trust account holds money belonging to clients and third persons. The lawyer's own money belongs in the lawyer's own accounts. The rules then regulate the boundary cases: the narrow amount of lawyer money allowed in to pay the account's bank charges, the advance fees that become the lawyer's only when earned, and the interest that entrusted money generates while the lawyer holds it. The table maps the territory before the subsections take each piece in turn.
| Money | Whose it is | Where it goes |
|---|---|---|
| Funds a client or third person entrusts to the lawyer | The client's or third person's | Separate trust account |
| The lawyer's own operating funds | The lawyer's | The lawyer's own account |
| The lawyer's money covering the trust account's bank charges | The lawyer's, in a limited amount | Trust account, for that purpose only |
| A fee or expense paid in advance | The client's until earned or incurred | Trust account |
| A general retainer for availability | The lawyer's when paid | Not the trust account |
| An earned, undisputed fee | The lawyer's | Out of trust and into the lawyer's account |
| Interest on entrusted funds | The client's where a net return is possible; otherwise it funds a state program | Interest-bearing account for the client, or pooled IOLTA account |
The Separate Trust Account
Model Rule 1.15(a) puts two independent commands into its sentence about where entrusted money must live. The account must be separate, and it must be maintained in the state where the lawyer's office is situated unless the client or third person whose money it is consents to another location.2 Meeting one command does not excuse the other. An account can be separate and still sit in the wrong state, and an account can sit in the right state and still fail to be separate.
Separate means a distinct bank account that holds entrusted funds and nothing else. The lawyer's operating account fails that test, and so does the lawyer's personal account, because client funds cannot be deposited in an attorney's personal account.3 A desk drawer or an office safe fails it too. Lawyers once kept clients' money in an office safe, but the modern rule obliges the lawyer to place funds in a trust account at a financial institution, administered under detailed state court rules on which institutions qualify, how interest is handled, how records are kept, and how audits are performed.4 The Model Rule supplies the baseline from which those state rules start. The insistence on a bank account follows from the paper it generates. A safe or drawer produces no statement of what came in and what went out, while a distinct account produces a record that a regulator can audit and whose balance cannot be mistaken for the lawyer's spending money.
The location command works as a default. The rule makes the state of the lawyer's office the home for the account, and a lawyer who places it elsewhere on the lawyer's own initiative violates the command, however sensible the choice may seem.
The consent exception explains why a State B bank can be acceptable in a different story. The consent belongs to the person whose property is held, because that person bears the risk of a distant account and is the one entitled to accept it. The lawyer's own preference counts for nothing here.
When the funds belong to a third person, such as a lender whose payoff the lawyer holds until a closing, that third person's consent controls rather than the client's. States also refine the mechanics. One state's rule, for example, permits trust funds to be held other than in a bank or savings and loan account only if the lawyer first obtains the client's written permission.5 The Model Rule asks only for consent, so an exam answer on location should name whose consent it was and whether it came from the right person.
The Commingling Prohibition
Commingling means mixing a fiduciary's personal funds with those of a beneficiary or client, and the Model Rules prohibit a lawyer from doing it.7 Rule 1.15(a) states the corresponding duty: entrusted property is held separate from the lawyer's own, and funds go in a separate account.8 Because two pools of money exist, either one can be poured into the wrong container, so the prohibition runs in both directions. The trust account holds entrusted money and, apart from one narrow exception taken up next, nothing else. The lawyer's own money lives in a separate operating account. A violation occurs whenever money crosses the line either way.
Start with the lawyer's own money entering the trust account. Rule 1.15(b) bars it, allowing the lawyer's funds in only for the narrow purpose of paying the account's bank service charges.9 A lawyer facing a judgment creditor may see the trust account as a convenient shelter, but a lawyer who uses it that way has turned it into something other than a trust account. A balance padded with the lawyer's own funds also hides shortages. If the lawyer later draws on a client's share, the extra personal money keeps the total looking adequate and no one sees the gap. The account works best when it holds only other people's money, so that any shortage shows at once and every withdrawal traces to a particular client.
Entrusted money can also flow the other way, into the lawyer's operating or personal account. The motive is usually convenience, such as saving a trip to the bank or a transfer fee, and the lawyer often fully intends to pay the client promptly. Convenience changes nothing. The moment the deposit lands, the client's dollars sit in an account whose balance reads as the lawyer's own, exposed to the lawyer's spending. Exam facts often make the mixing look harmless: the money was out within days, the client was paid in full, and the lawyer meant no harm. Those facts bear on the sanction and leave the violation in place.
Because commingling turns on the match between a dollar's owner and the account that holds it, any deposit or withdrawal can be tested with the same short sequence of questions.
A client's check deposited into trust while office rent is paid from the operating account passes at step three, since each pool stays in its own container. Both hypotheticals above fail there, and nothing in steps one through three asks what the lawyer meant or who lost money.
The violation is complete once the pools mix, which is why neither theft nor client loss is an element. Whether the lawyer meant any harm, or repaid the money at once, matters, if at all, to the sanction and not to whether a violation occurred. The consequences rise sharply once the lawyer converts client funds to the lawyer's own use, because disciplinary authorities respond to misappropriation with severe sanctions, presumptively disbarment.10 The rule can dispense with proof of harm because mixing destroys the visibility the separate account exists to supply. Once the pools share a balance, no bank statement shows whose dollars are whose, so the damage to the system is built into the act.
The same logic reaches the lawyer's own earnings. A fee that has been earned and is undisputed belongs to the lawyer, so a lawyer who leaves it in the trust account and draws on it as needs arise is mixing the lawyer's money with entrusted money, and the fee should come out promptly.11 Advance fees are different, because they remain entrusted until they are earned, as the next sections explain,12 and contested amounts raise questions taken up later in the chapter.
Bank Service Charge Exception
Model Rule 1.15(b) carves one narrow opening out of the commingling prohibition. A lawyer may deposit the lawyer's own funds in a client trust account for the sole purpose of paying bank service charges on that account, but only in an amount necessary for that purpose.14 The exception solves a practical problem. A trust account is a bank account like any other, and banks charge for maintaining it, so someone's money has to cover those charges. If the bank deducts them from the balance, client money pays a cost of the lawyer's practice. If the lawyer tops up the account from personal funds, the lawyer has mixed personal money with entrusted money. Without an exception, every lawyer holding client money would face a choice between two violations, and Rule 1.15(b) resolves the choice by admitting the lawyer's own money for this one purpose.
Two limiting phrases keep the exception tight, and each does separate work. The words sole purpose govern why the money is in the account: the purpose must be paying bank service charges on that account, so fees on the lawyer's operating or personal accounts never qualify. The words only in an amount necessary govern how much may go in, and the amount must track the charges the account actually generates. The amount limit matters because any lawyer money beyond what the charges require is lawyer money sitting in a balance meant to hold only other people's money, and an oversized cushion blurs the picture just as a padded balance does. Because the two limits operate independently, a deposit can satisfy one and fail the other.
An exam question on this exception will usually attach a label to the deposit, such as a cushion, a reserve, or a safety margin, and the label signals that the purpose or the amount has drifted beyond bank charges. The analysis takes two questions: what the lawyer's money is for, and whether its size is tied to the charges on the trust account. The exception also runs in only one direction. It lets a limited amount of lawyer money in, and it gives the lawyer no license to leave earned fees in the account or to treat trust money as a source for the lawyer's own expenses.
Advance Fees and Expenses
Rule 1.15(c) governs the most common way client money reaches a lawyer's hands: a payment made before the work is done. The lawyer must deposit legal fees and expenses paid in advance into a client trust account and may withdraw them only as fees are earned or expenses incurred.16 The rule has a deposit half and a withdrawal half. The deposit half says where the money goes on the day it arrives, and the withdrawal half says when it may leave.
The money goes into trust because of who owns it when it arrives. A fee paid before any services are performed is a deposit against future work, and the lawyer's right to keep it depends on doing that work.17 Until then the client has received nothing for the money, so the money is still the client's. If the lawyer treated it as the lawyer's own, it could be spent before any refund came due, and a client whose lawyer left the case early would hold a claim against a lawyer with no money to pay it. Trust treatment keeps the refund available for as long as it might be owed.
The rule covers fees and expenses, and each has its own trigger for release. A fee is earned as the lawyer performs the work. An expense is incurred when the lawyer actually bears a cost on the client's behalf, such as a filing fee. One state's version states the principle common to both: money entrusted for a specific purpose, including advances for fees, costs, and expenses, is held in trust and must be applied only to that purpose.18 A lawyer's expectation of eventually doing the work satisfies neither trigger.
Withdrawals therefore follow the work. On an hourly engagement the lawyer may withdraw periodically, in step with the hours worked at the agreed rate, and need not wait for the matter to end. The lawyer controls the timing of each transfer, but the right to transfer exists only once the fee is earned or the expense incurred. A withdrawal ahead of that point is misappropriation, which the sources treat as theft of client funds, and disciplinary authorities typically respond with severe sanctions such as revocation of the license.19 The closing section of this chapter takes up those consequences. The trust rule governs where the money sits and when it may move, and it leaves untouched the separate Rule 1.5(a) question whether the amount charged is reasonable, which that rule measures by an objective standard.20
The usual mistake is to treat a prepayment as already earned because the work is certain to follow.
The same ownership logic produces the refund duty. When the representation ends before the work is done, the unearned portion of a fee paid in advance goes back to the client.21 The unearned balance never became the lawyer's, so returning it delivers the client's own property to the client, and the lawyer's duty under Rule 1.15(d) to deliver promptly funds the client is entitled to receive reaches it.22 Calling the payment nonrefundable in the fee agreement does not change what it buys, since a payment for future services remains a deposit against those services until they are performed.23
One kind of payment made in advance is not an advance fee at all. A general retainer compensates the lawyer's promise of availability and does not pay for the performance of services.24 Because it is not payment for services, the lawyer earns it when it is paid, so it belongs to the lawyer from that moment and is not deposited into the client trust account. It is also not an advance deposit against future legal services, which would be separately calculated and charged if the client actually called on the lawyer. Placing it in trust would put earned money among entrusted funds, which the commingling prohibition already forbids.
The word used in the engagement letter therefore decides nothing. An exam fact pattern will often attach the word retainer to a payment that buys services, and the analysis turns on what the payment buys. If it buys the lawyer's work, it is an advance fee, it belongs to the client until earned, and it goes into trust. If it buys only the lawyer's availability, it is earned when paid and stays out of trust.
Interest and IOLTA Accounts
Rule 1.15(a) itself says nothing about the interest entrusted funds earn, and the details are left to state court rules that vary from state to state.26 The ownership idea that organizes this chapter points toward an answer: interest that money earns for a client belongs with the client. Washington's program, described in Brown v. Legal Foundation of Washington, shows how a state can turn that idea into a rule. One kind of interest-bearing trust account pays interest, net of any transaction costs, to the client, either through a separate account for each client or through a single pooled account with subaccounting that tracks each client's share.27 A lawyer who kept that interest would be taking income produced by the client's own money, and the duty to deliver promptly any funds the client is entitled to receive reaches it.28
Interest does not always exist for a particular client, and that fact explains the second half of the rule. When a deposit is small or will be held only briefly, the bank would not separately calculate and pay interest on it, and the service charges on a separate account would likely exceed any interest earned.29 Demanding client-specific interest on every deposit would deliver nothing to clients and would saddle the lawyer with an account that could never pay off. States typically respond by requiring the lawyer to place such funds in a pooled interest-bearing trust account, known as an IOLTA account (Interest on Lawyers' Trust Accounts), with the bank paying the accrued interest to a state commission. The state then applies the money to law-related purposes: the administration of justice, education about the law, student scholarships, and grants to organizations providing legal services to the poor.30
| Interest account for the client | Pooled IOLTA account | |
|---|---|---|
| When it fits | The funds could earn a positive net return for the client | The funds are too small or held too briefly to earn net interest for the client |
| Form | A separate account for the client, or a pooled account with subaccounting | One pooled trust account holding many clients' deposits |
| Interest goes to | The client, net of transaction costs | A state commission or foundation, for law-related programs |
Pooling changes the arithmetic. One account holding many clients' small and short-term deposits is large enough for a bank to pay interest on, although no single deposit could ever have earned a positive return for its owner. Because every dollar in an IOLTA account is entrusted money, using it raises no commingling problem, and because the bank pays the interest directly to the state program, the lawyer collects nothing from it. In Washington's version, the lawyer directs the bank to pay interest, net of service charges, to the Legal Foundation of Washington, a nonprofit entity set up for the purpose, and to send regular reports to the Foundation and to the lawyer or firm.31
The choice between the two kinds of account belongs to the lawyer, and the rule confines that choice tightly. Washington leaves the decision to each lawyer's discretion but requires the lawyer to base it solely on whether the funds could be invested to provide a positive net return to the client.32 The restriction closes off an obvious temptation. A lawyer who may weigh the program's needs, or the convenience of a pooled account, can sweep client money into IOLTA and divert interest that belonged to the client. The rule lists three considerations: the interest the funds would earn during the period they are expected to be held, the cost of establishing and administering an interest-bearing account, and the capability of financial institutions to calculate and pay interest to individual clients. Those three considerations make a short sequence.
Failures at step four usually come from a lawyer reasoning about the wrong subject, so the fact patterns below stage the mistake and the correct choice side by side.
The two lawyers did the same thing physically, since each put entrusted money into a pooled trust account, and the difference lies in size and duration, the facts that decide whether a positive net return was possible. An exam question that describes a large deposit held for a long time, together with a lawyer's good motive for directing the interest elsewhere, is testing whether the answer notices that motive does not matter. The usual cue in the opposite direction is a small amount held briefly, which points to the pooled account.
The Washington Supreme Court justified its program by observing that it creates income where there had been none before and that the income thus created would never benefit the client under any set of circumstances.33 That rationale describes the small and short-term deposits that pooled accounts hold, and it explains why the rule sends only those deposits to IOLTA. Whether a particular state's program survives constitutional challenge is beyond this section. The safekeeping rule asks only that the lawyer choose the account by the client's possible net return.