What Is a Client Trust Account?

A client trust account is a dedicated bank account for holding funds that belong to clients, distinct from the professional’s or firm’s own money. This specialized account is a fundamental component of financial and ethical responsibility for various professionals. Its primary function is to safeguard client assets, ensuring these funds are managed with transparency and integrity. It also prevents the misuse or commingling of funds.

Understanding Client Trust Accounts

Client trust accounts protect funds received by professionals on behalf of their clients. This separation ensures client money is not treated as income or operating capital for the professional’s business. Funds commonly held include advanced retainers for services not yet rendered, settlement proceeds, escrow deposits, or money designated for specific client-related expenses such as court fees or property transactions.

These accounts are important in professions that routinely handle substantial client funds, such as legal services, real estate brokerage, and escrow agencies. Ethical obligations and legal requirements mandate their use to prevent financial impropriety. The funds within a client trust account remain the property of the client; the professional acts as a custodian, managing funds according to client instructions or legal authorization.

Key Operational Principles

A central principle for client trust accounts is the strict prohibition against “commingling,” meaning mixing client funds with the professional’s personal or business operating funds. This separation prevents the use of client money for the professional’s expenses. Any funds earned by the professional, such as fees for services rendered, must be promptly transferred out of the trust account into an operating account.

Record-keeping is a fundamental requirement for these accounts. Professionals must maintain detailed records, including a trust account journal documenting all transactions and separate ledgers for each individual client. These records are typically required to be kept for a period, often five years, after the client’s matter concludes.

Interest earned on client trust accounts is handled differently depending on the nature of the funds. For nominal amounts or funds held for a short duration, the interest is often pooled and directed to a charitable foundation through an Interest on Lawyers’ Trust Accounts (IOLTA) program. For larger sums or funds held for an extended period, the interest typically accrues to the benefit of the individual client. Funds can only be disbursed from the trust account with the client’s explicit instruction or as legally authorized.

Distinction from Other Accounts

Client trust accounts differ significantly from a professional’s business operating accounts and personal bank accounts. A business operating account holds the firm’s earned revenue, which is used for business expenses. In contrast, a client trust account holds funds that legally belong to clients, not the professional or the firm, even though the professional oversees its management.

Personal bank accounts are for an individual’s private funds and expenses, separate from any business or client-related financial activities. Unlike operating accounts, client trust accounts are never a source of income for the professional. The purpose of a trust account is strictly fiduciary, ensuring client money is protected and used only for its intended purpose.