Client Trust Accounting in California: A Lawyer's Guide

Any California law firm must have solid client trust accounting. While keeping good trust accounting records is important for any U.S. lawyer, the specific rules differ for each jurisdiction, so it is vital to know the California-specific rules. 

In this blog, we summarize some of the main principles of client trust accounting in the Golden State, including maintenance of California IOLTA accounts.

A primer on trust accounting 

When a lawyer holds client funds in trust, they must utilize trust accounting to keep track of those funds and maintain them separately from the firm’s funds. This is critical for settlement payments, retainers for future services, or other situations where the firm holds funds on behalf of the client.

Attorneys are generally required to open a separate client trust account for each client where the firm will hold substantial client funds for a lengthy amount of time. The firm cannot use one client’s funds to pay a different client’s obligations. Nor can the firm use client funds to pay its own expenses, or commingle client trust account funds with the firm’s operating account funds. 

Finally, a legal practice must maintain detailed records of all transactions involving client trust accounts.

What is an IOLTA account? 

When a law firm is only holding a small amount of client funds, or holding the funds for a short amount of time, it is generally not practical to open a separate client trust account. In these cases, the funds can be deposited in a pooled trust account known as an IOLTA (Interest on Lawyers Trust Account) account. The interest on the pooled funds will then go to the state bar in order to fund various public service initiatives, like low cost legal aid. 

The purpose of IOLTA accounts is to allow for the safekeeping of client funds, even when those funds are held in small amounts or on a short-term basis. Under these circumstances, the cost of opening and maintaining a separate client trust account would exceed the interest the funds would earn. When a firm pools such funds into an IOLTA account, the total interest on the pooled funds can go toward public good, while the client is still assured of accurate recordkeeping.

Trust Accounting and IOLTA Rules in California 

Under California law, attorneys who handle client funds must hold them in an interest-bearing bank account. With non-IOLTA accounts, the interest earned will go to the client. For each account, the name of the account must clearly identify it as a client trust account. 

The only payments the firm can make out of the client trust account are payments made on behalf of the client, which include the following:

• Client costs and expenses, including court filing fees and deposition transcript costs
• Settlement proceeds
• Earned and undisputed legal fees, such as a contingency fee taken out of settlement proceeds
• Bank charges for the account

The firm is not allowed to make payments out of the client trust account for personal or business expenses. Nor can payments be made for anything not related to carrying out legal duties for the client. Also note that if the client disputes your legal fees, the funds must remain in the trust account until the dispute is resolved.

As for IOLTA accounts in California, these may only be opened at eligible financial institutions listed by the State Bar. The bank will automatically transmit the interest on the IOLTA account to the State Bar and handle all reporting requirements. The interest earned from IOLTA accounts is directed to nearly 100 nonprofit legal organizations located statewide.

In late 2022, California enacted the Client Trust Account Protection Program (CTAPP) to help ensure attorneys fulfill their client trust accounting duties. CTAPP requires California attorneys to do the following:

• Register client trust accounts (both IOLTA and non-IOLTA) annually with the State Bar
• Complete an annual self-assessment of compliance with best practices for trust account management
• Certify with the State Bar that they understand and comply with all regulations relating to client trust accounts

Final thoughts on IOLTA and trust accounting in California 

Client trust accounting is mission-critical for any attorney, and California takes these obligations seriously for in-state attorneys. Accordingly, be sure you understand and follow all California laws and regulations for all trust accounts, both IOLTA and non-IOLTA. Also, consider implementing the right trust accounting software to ease the burden on you and your firm.