What Is Commingling Funds and How Can Lawyers Avoid It?

Trust account dollars legally belong to clients until the firm earns them, so every dollar must live in a separate account and be traceable back to an individual matter. 

When those lines blur, resulting in the commingling of funds, firms can face suspension or disbarment. Still, our 2025 Legal Industry Report revealed that 49% of firms said they struggle with trust accounting. 

 In this article, we'll discuss the basics of why commingling funds is a serious matter, the consequences, and how lawyers can avoid state bar violations by following proper trust accounting practices and using software designed specifically to support trust account compliance.

What Are Examples of Commingling Funds? 

For law firms, commingling funds happens when client trust money crosses paths with a lawyer’s operating cash, or when attorneys commingle personal and business funds in the same bank account.

 The mistake can be intentional or accidental; a rushed bookkeeper clicks the wrong account, a staff member deposits lawyer retainers into the operating account, credit card fees come out of trust, or a lawyer pays the firm’s rent from a client ledger. Each slip muddies ownership of the money and puts your license at risk.

 Here are three quick examples of commingling funds you can avoid in your law practice.

• Depositing client payments into the wrong account. Funds meant for a client trust account cannot be deposited into an attorney's business or personal bank account.

• Using a trust account for personal expenses. Attorneys cannot pay office expenses, payroll, rent, etc., directly from a client's trust account.

• Pulling funds from a trust account too soon. A client's payment may represent an advance of funds that the lawyer can bill against as they perform work for the client. In this circumstance, until the lawyer performs the work and invoices for that work to the client, those advanced funds constitute the client's property and must be held in a trust account by the lawyer.

What Are the Potential Consequences of Commingling Funds?

The penalty for commingling funds can snowball from a slap on the wrist to career-ending discipline because every dollar you misplace chips away at fiduciary duty. Bar regulators see mixed accounts as a breach of trust; clients view it as misappropriation. 

A few potential consequences of commingling funds: 

• Disciplinary actions, like suspension, mandatory restitution, or full disbarment

• Reputational damage, like negative reviews, lost referrals, and higher malpractice premiums

• Financial or legal fallout, like fiduciary-duty suits, legal-malpractice claims, and civil liability

• Criminal exposure, like fraud or embezzlement charges in severe or repeated violations

• Operational inefficiencies, like inaccurate cash-flow reports, missed tax deductions, and time-draining audits

How Can Lawyers Avoid Commingling Funds?

A good way to avoid commingling funds is to build guardrails like clear policies and real-time bookkeeping that make mixing money practically impossible. 

The next five steps break down how to put those safeguards in place.

1. Understand Your State's Specific Bar Rules

Trust-account requirements start with ABA Model Rule 1.15, which provides guidance on how to handle client money as a lawyer. However, each state also has its own rules and can have different interest-remittance schedules, overdraft-notification forms, and naming conventions for client ledgers. 

Before you open a single account, download your jurisdiction’s professional-conduct rules and any trust-account handbook the bar provides. Highlight the sections on deposits, disbursements, and record-keeping, then build a one-page cheat sheet for everyone who touches client money. 

If you practice in multiple states, you can maintain a side-by-side chart so staff doesn't have to guess which rule controls a particular matter. This can function as your firm's first line of defense against accidental commingling.

2. Maintain Separate Operating and Trust Accounts

A simple guardrail (and often a requirement) against commingling is to physically separate the firm's bank account for firm revenue and expenses, from the client money held in trust. Your trust account, often called an interest on lawyer trust account (IOLTA), works like a secure vault where client funds stay traceable to a single matter and are withdrawn only for authorized disbursements.

Many lawyers accidentally engage in commingling due to confusion over which funds qualify as client funds that must be held in trust and which funds can be deposited into the firm's operating account.

These funds must be held in a trust account:

• Unearned fees and retainers

• Advance fees

• Funds held for third parties

• Court judgement funds

• Escrow funds

• Settlement funds

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 Understanding the mechanics of trust accounting for lawyers can help keep these issues at bay. Here are some best practices for using a trust account:

• Opening the account at an approved bank with overdraft-notification agreements

• Labeling client deposits with matter IDs the moment they clear

• Reconciling the bank balance, trust ledger, and individual client ledgers at least monthly

• Transferring earned fees out promptly; leaving them in trust too long is still commingling

• Documenting every deposit, disbursement, and transfer with source paperwork

• Ensure that any interest earned is sent to a state bar or a designated non-profit organization

3. Record Transactions Right Away

Every hour you delay entering a deposit or disbursement increases the odds of an “orphan” entry that throws your ledgers out of balance and makes commingling harder to spot. A good way to avoid commingling funds is to record transactions as soon as possible—before you forget who the money came from and what it was for. 

Batch posting at week’s end might feel efficient, but one missed receipt can snowball into days of reconciliation work. A real-time law firm accounting workflow, ideally inside a practice management or accounting platform, keeps trust balances accurate to the penny. It also helps you catch overdraft risks early and simplifies month-end reports.

4. Conduct Regular Audits and Reconciliations

Every month-end, pull the bank statement, your master trust ledger, and each client’s sub-ledger, then run a three-way reconciliation. Any number that doesn’t line up, like an unposted credit-card fee or a missing disbursement, gets flagged and fixed before it snowballs into a commingling violation or overdraft notice.

Quarterly, widen the lens with a spot audit. Pick a handful of matters at random and trace every dollar from deposit to final payment. That fresh-eyes review catches pattern errors, like duplicate entries or slow fee transfers, that routine reconciliations might miss. Consistent checkpoints keep your books clean and your bar regulator happy.

5. Keep Clear Documentation

For every trust-account transaction, store the source document, such as retainer agreement, settlement statement, the bank slip or ACH confirmation, the entry in your master ledger, and the matching line in the client’s sub-ledger. Organized records show a clean chain of custody for each dollar and make reconciliations painless.

Save everything in one searchable system with scanned PDFs linked to ledger entries or, better yet, uploaded directly into your practice management platform. 

When every receipt, deposit, and withdrawal lives a click away from the corresponding ledger line, you can answer any compliance question in seconds and avoid the paper-chase stress that often accompanies bar audits.

How Can Law Firms Correct Prior Commingling of Funds?

To unwind a commingling error, you can show a clear audit trail that separates client funds, restores each client’s exact balance, and locks in controls so the mistake can’t recur. 

The fix starts with a three-way reconciliation, then (preferably under the guidance of a legal-savvy accountant) moves through reclassification, reimbursement, and documented safeguards.

Here's how this process typically looks for law firms:

• Reconcile all accounts: Match bank balances to master and client ledgers.

• Identify personal transactions: Flag every entry that belongs in operating or trust, not both.

• Classify transactions correctly: Recode deposits or disbursements to the right general ledger accounts and client matters.

• Enlist an accountant: A fresh set of eyes ensures tax and interest implications are handled.

• Document the error and corrective action: Note the date(s) of steps the firm has taken, and policy changes it has implemented to prevent repeat violations.

What Tools Can Law Firms Use To Prevent Commingling Funds?

Law firms can use software that separates dollars, flags misposts in real time, and produces airtight audit trails to help minimize the chances of commingling funds.

Rather than juggling spreadsheets and manual transfers, your firm can plug in a tech stack that routes each payment to the right account, locks down user permissions, and surfaces discrepancies before month-end reconciliation.

Compliance-friendly tools to put on your shortlist:

• Electronic payment processors with built-in trust segregation to keep client money in trust while routing card fees to the operating account.

• Legal accounting software that assigns every deposit to a matter and blocks overdrafts.

• Spend-management platforms that allow you to pre-approve expenses and real-time budget alerts.

• Financial reporting dashboards that expedite reconciliations and export auditor-ready ledgers.

An important note is that not all payment platforms are designed with legal ethics in mind. Without the right safeguards in place, even well-meaning billing practices can lead to trust violations or breaches of client confidentiality.

Using generic or consumer-grade payment platforms can seem like an efficient way to collect fees, but it instead creates hidden ethical risks. This can be especially problematic when the tools lack proper trust accounting safeguards or impact client confidentiality by defaulting to public transaction settings.

Nicole Black Esq.

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