A negative client trust balance is easy to spot. But a positive balance can hide problems that are just as serious. Here’s how a three-way trust account reconciliation reveals the errors hidden in a positive balance.
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A client called me last year because his trust account was “off.” His word. He couldn’t explain how, exactly. The balance was positive. Nothing was overdrawn. QuickBooks matched the bank statement. But something felt wrong, and he wanted me to look at it.
He was right to call. The account had $184,000 in it, and about $31,000 of that didn’t belong to any active client. Some of it traced back to matters that closed eight months earlier. Some of it had no documentation at all. The balance looked fine. The account was a mess.
That’s the problem with trust accounts. The number at the bottom of the statement tells you almost nothing. A trust account can have the right balance and still be out of compliance. It can look healthy and be hiding months of errors. What matters is whether every dollar in that account can be traced to a specific client, for a specific purpose, with documentation to prove it.
Why a Bank Balance Is Not a True Trust Account Reconciliation
Here’s where most attorneys get stuck. They log into their bank, see a number, and assume things are fine. That number confirms the money is there. It says nothing about who it belongs to.
A trust account balance is the total of every client’s funds sitting in one pooled account. If you have 12 active clients with retainers, settlement funds and cost advances, those 12 individual balances should add up to the number on your bank statement. When they don’t, you have a problem. When they do, you still might have a problem, because matching totals can hide offsetting errors.
I’ve seen accounts where the bank balance and the book balance matched to the penny, but one client was $3,000 short and another was $3,000 over. The totals looked right. The account was wrong. That’s why the bar requires a three-way reconciliation, not a bank statement review.
What a Three-Way Reconciliation Actually Shows You
Three-way reconciliation compares three numbers:
- The bank balance
- The book balance (what your accounting software says)
- The client ledger total (the sum of every individual client’s trust balance)
All three have to match. If any one of them is off, you need to find out why before anything else happens.
The bank balance is usually the easiest to verify. The book balance depends on whether transactions were recorded correctly and on time. The client ledger total is where things fall apart, because it depends on every deposit, every disbursement and every transfer being posted to the right client.
When I run a three-way reconciliation for a new client, I almost always find discrepancies.
The common discrepancies:
- Deposits recorded in the books but posted to the wrong client.
- Disbursements made from trust but never recorded.
- Transfers between client ledgers with no documentation.
- Bank fees charged to the trust account that nobody moved to the operating account.
None of these show up if you’re only looking at the total balance. They only surface when you perform a client-level trust account reconciliation.
The Errors That Hide in a Positive Balance
A negative client trust balance is easy to spot. It means you disbursed more than the client had on deposit, which is a compliance violation in every jurisdiction. But a positive balance can hide problems that are just as serious.
Unidentified funds are the most common. Money sitting in the account that can’t be traced to a specific client or matter. Sometimes it’s a retainer that was deposited but never recorded in the practice management system. Sometimes it’s a refund from a vendor. Sometimes nobody knows what it is, and it’s been sitting there for two years.
Old balances on closed matters are the second pattern. The matter resolved, the final disbursement was made, but $200 is still sitting in the client’s ledger. Maybe it’s unearned fees that were never refunded. Maybe it’s a cost advance that was never billed. The attorney moved on, the client moved on, and the money stayed.
Every state has rules about what happens to unclaimed trust funds. The typical requirement is a reasonable effort to return them, and if you can’t, remittance to the state under unclaimed property laws. Ignoring old balances doesn’t make them go away. It makes them a compliance issue that compounds over time.
Your Accounting Software Isn’t Doing What You Think
QuickBooks Online tracks debits and credits. That’s what it was built to do. It was not built to track fiduciary obligations. It can tell you how much money is in the account. It cannot tell you, without significant customization, whether that money is correctly allocated across clients, whether any client is in a negative position, or whether your ledger totals match your bank.
Practice management software with built-in trust accounting features gets closer. CosmoLex, Clio Manage with Clio Accounting, MyCase, LEAP, Tabs3 and LeanLaw (a legal billing system that sits on top of QuickBooks) all have trust ledger functionality. But the outputs are only as good as the inputs. If deposits aren’t tagged to the right client at the time of entry, the ledger is wrong from that point forward. If disbursements are recorded as operating expenses instead of trust transactions, the software can’t catch what it can’t see.
I’ve worked with firms running Clio’s trust features that still had five-figure discrepancies. The tool was capable. The data entry was inconsistent. The trust account reconciliation hadn’t been run in months. The software gave the firms a false sense of security because it looked like they had a system, and the system looked like it was working.
What to Do With Your Trust Account This Month
- Run the trust account reconciliation. Not next quarter. This month. Make sure it’s a full three-way check. Compare your bank balance, your book balance, and the sum of every client ledger. If all three match, you’re in good shape. If they don’t, start with the client ledger, because that’s where most errors originate.
- Pull a list of every client with a trust balance. Look for anything that doesn’t make sense: closed matters with remaining funds, balances that haven’t moved in six months, negative balances, round numbers with no supporting documentation. Each one is a question you need to answer.
- Check for unidentified deposits. Any amount in your trust account that isn’t allocated to a specific client needs to be researched and resolved. If you can’t determine what it is, talk to your bookkeeper. If you don’t have one, this is a good reason to get one.
If you haven’t reconciled in more than 60 days, don’t try to catch up alone. The longer the gap, the harder it gets, and the more likely that errors have compounded. Get help from someone who does this work regularly. A clean trust account is not something you set up once and forget. It’s something you maintain every month, because every month, money moves.
That client with $184,000 in trust and $31,000 in unallocated funds? It took three weeks to sort out. Two of those weeks were spent tracking down documentation that should have been filed when the transactions happened. The third week was reconciliation. He said he wished he’d called sooner. They always do.
Related on Attorney at Work
Avoiding Common Trust Accounting Errors for Well-Intentioned Lawyers Megan Zavieh
Lawyer Tips for Handling Client Trust Accounts by Mark Bassingthwaighte
Would You Pass a Trust Account Audit? by Peggy Gruenke
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