Accounting

The Smart Law Firm's Guide to Managing Client Expense Deposits Without the Drama

Key Takeaways:

  • Trust account mismanagement is one of the most common causes of attorney disciplinary action, making proper expense deposit handling critical for mid-sized firms
  • Implementing automated tracking systems and clear policies can reduce trust accounting errors by up to 90% while improving cash flow
  • Legal-specific software integrated with QuickBooks Online streamlines expense deposit management and ensures compliance with state bar requirements

Every law firm partner knows that feeling—the monthly trust account reconciliation lands on your desk, and suddenly your coffee doesn’t taste quite right. For mid-sized law firms juggling dozens of active matters, managing client expense deposits can feel like navigating a minefield blindfolded.

Here’s the reality check: Trust account violations that could have otherwise been prevented with better recordkeeping practices are far too common. But what if managing expense deposits could be as straightforward as tracking your billable hours?

Understanding Client Expense Deposits: More Than Just Money in the Bank

Client expense deposits aren’t just another line item in your accounting software. They’re the lifeblood of efficient case management and, when handled incorrectly, a fast track to disciplinary proceedings.

In accounting terms, any retainers received are liabilities — funds that haven’t yet been earned and still belong to someone else (the client). This fundamental principle applies equally to expense deposits, which fall into two main categories:

Hard Costs – The tangibles that keep cases moving:

  • Court filing fees
  • Expert witness fees
  • Deposition and transcript costs
  • Travel expenses for case-related activities
  • Medical record retrieval fees

Soft Costs – The overhead that some firms bill back:

  • Photocopying and scanning
  • Long-distance phone calls
  • Postage and courier services
  • Online legal research charges

The critical distinction? An easy way to think of these costs is to ask yourself, “but for this case, would I be spending this money?” If the answer is no, it’s likely a reimbursable expense that needs careful tracking.

Building Your Trust Account Foundation

Before diving into expense management, let’s establish the groundwork. Your trust account isn’t just a holding pen—it’s a fiduciary responsibility with serious consequences for mismanagement.

Choosing the Right Account Structure

Pooled trust account: This is the most common method for storing client trust funds. One account is created to house all clients’ trust money. For most mid-sized firms, a pooled IOLTA account works perfectly for expense deposits, especially when dealing with multiple smaller amounts.

However, Firms can also create trust accounts for each client if they hold large sums of money, hold the funds for a long period, or if the client specifically requests it. Consider separate accounts when:

  • Expense deposits exceed $10,000
  • The matter will run longer than six months
  • The client specifically requests segregation
  • State bar rules require it for certain amounts

The Non-Negotiables of Trust Accounting

Just as it would be inappropriate for an attorney to use a client’s checking account to pay for office supplies, it would be equally inappropriate to use client trust account funds for personal or firm expenses. This means:

  1. Absolute Segregation: Client expense deposits never touch your operating account until properly earned or expended
  2. Meticulous Documentation: Every penny in and out needs a paper trail
  3. Timely Notification: Clients must know when you receive and use their funds
  4. Prompt Disbursement: Unused deposits return to clients immediately upon matter completion

Best Practices That Actually Work in the Real World

Theory is great, but you need practical solutions that work when you’re billing 50 hours a week. Here’s what successful mid-sized firms are doing:

1. Front-Load Your Communication

Start with crystal-clear expense deposit agreements. Your engagement letter should specify:

  • The initial deposit amount and what it covers
  • How you’ll request additional deposits
  • Your notification process for expenses over a certain threshold
  • The timeline for returning unused funds

Pro tip: Some firms adjust their fees to include these costs. Another option could be to charge a one-time administrative fee that reasonably estimates these costs.

2. Implement the Three-Touch System

Every expense should be touched three times:

  • First Touch: Entry into your accounting system when incurred
  • Second Touch: Review during weekly trust account reconciliation
  • Third Touch: Final review before client billing

This redundancy catches errors before they become bar complaints.

3. Master the Three-Way Reconciliation

To maintain accurate records and ensure compliance with attorney trust account rules, it’s crucial to perform three-way reconciliation regularly. Every month, compare:

  • Your trust account bank statement
  • Individual client trust ledgers
  • Your firm’s trust account journal

Any discrepancies? Stop everything and resolve them immediately.

4. Create Expense Deposit Triggers

Set up automatic reminders when:

  • A client’s expense deposit drops below 25% of the original amount
  • Monthly expenses exceed 80% of the remaining deposit
  • A matter has been inactive for 30 days with funds remaining

The Pitfalls That Sink Ships (And How to Avoid Them)

Even well-intentioned firms stumble. Here are the most common expense deposit disasters and their prevention:

The Commingling Catastrophe

The Problem: Another common violation of attorney trust account rules is blending client trust account funds with your own business accounts.

The Solution:

  • Use different banks for trust and operating accounts
  • Print checks in different colors
  • Never, ever “borrow” from expense deposits, even temporarily

The Documentation Disaster

The Problem: Missing or incomplete records when the state bar comes calling.

The Solution: Electronic or physical equivalents of bank statements, deposit records, pre-numbered canceled checks, substitute checks from the financial institution, and checkbook registers should be maintained for every transaction.

The Timing Trap

The Problem: Lawyers cannot advance funds from a trust account to pay the client while they wait for the bank to process the check.

The Solution: Build in a five-business-day buffer for check clearing before disbursing any funds.

The Credit Card Conundrum

The Problem: A common mistake that arises with generic payment solutions is charging credit card fees to trust accounts.

The Solution: Use legal-specific payment processors like LawPay that automatically route fees to your operating account.

Technology: Your Secret Weapon

Here’s where mid-sized firms gain a massive advantage over their smaller counterparts—the resources to implement proper technology.

Why Legal-Specific Software Matters

Generic accounting software treats expense deposits like any other transaction. Legal-specific platforms understand that client costs represent your own money used to cover bills on behalf of your clients and require special handling.

Look for software that:

  • Automatically segregates expense deposits from earned fees
  • Tracks individual client balances in real-time
  • Generates compliant trust account reports
  • Integrates with your existing accounting system (especially QuickBooks Online)
  • Sends automatic low-balance alerts

The QuickBooks Online Advantage

For firms already using QuickBooks Online, adding legal-specific functionality transforms expense deposit management. LeanLaw time tracking software solves that by giving you multiple easy ways to track time. Enter time in seconds, and those increments of time will automatically be pushed to your invoice in QuickBooks Online. The same seamless integration applies to expense tracking.

Building Your Digital Audit Trail

Modern trust accounting software automatically creates the documentation trail you need:

  • Time-stamped transaction logs
  • Digital check images
  • Client-specific ledger reports
  • Monthly reconciliation reports
  • Audit-ready compliance documentation

Creating Your Firm’s Expense Deposit Policy

A written policy isn’t just good practice—it’s your protection against inadvertent violations. Your policy should address:

Intake Procedures

  1. Standard expense deposit amounts by practice area
  2. Documentation requirements for receipt
  3. Client notification templates
  4. Trust account deposit timelines

Ongoing Management

  1. Expense approval thresholds
  2. Documentation standards for disbursements
  3. Monthly reconciliation responsibilities
  4. Low-balance procedures

Training Requirements

It is critical to maintain distance between the trust account funds and all other funds. Every team member handling expense deposits needs training on:

  • State bar requirements
  • Your firm’s specific procedures
  • Software usage
  • Red flags and escalation procedures

Monitoring and Compliance: Staying Ahead of Problems

Proactive monitoring prevents reactive panic. Implement these checkpoints:

Weekly Reviews

  • Outstanding expense deposits by matter
  • Recent disbursements against deposits
  • Upcoming anticipated expenses
  • Any accounts below minimum thresholds

Monthly Deep Dives

  • Complete three-way reconciliation
  • Aging report on unused deposits
  • Compliance check against state bar rules
  • System audit for any irregularities

Quarterly Strategy Sessions

  • Review and update deposit minimums
  • Analyze expense patterns by practice area
  • Update policies based on lessons learned
  • Plan for technology upgrades or training needs

The Bottom Line for Your Bottom Line

Managing client expense deposits doesn’t have to be the part of practice that keeps you up at night. With the right systems, technology, and vigilance, it becomes just another smooth-running component of your firm’s operations.

According to Clio’s Legal Trends Report, firms with utilization rates above the industry average of 33%—which amounts to 3 hours of billable hours per day—spend 12% more on software. That investment in technology, particularly for trust accounting and expense management, pays dividends in reduced errors, improved cash flow, and most importantly, peace of mind.

Remember: Trust account violations that could have otherwise been prevented with better recordkeeping practices are far too common. Don’t let your firm become another statistic.

Take action today:

  1. Audit your current expense deposit procedures
  2. Implement at least three of the best practices outlined above
  3. Invest in legal-specific software that integrates with your accounting system
  4. Create or update your written expense deposit policy
  5. Schedule regular training for your team

Your future self—and your state bar—will thank you.


Frequently Asked Questions

Q: How much should we require as an initial expense deposit?

A: There’s no one-size-fits-all answer, but successful firms typically require deposits equal to 110-125% of anticipated expenses for the first 60-90 days. Litigation matters often require $2,500-$5,000, while transactional work may need only $500-$1,500. Always err on the side of overestimating—it’s easier to refund excess deposits than to chase clients for additional funds mid-matter.

Q: Can we use expense deposits to cover our attorney fees if the client agrees?

A: As you earn the funds, or are required to pay off fees, expenses, or third-party claims, you’ll typically write a check from your trust account to pay the amount into your operating account. However, you must have clear written authorization from the client and follow your state’s specific rules about converting expense deposits to fee payments. Never assume—always document.

Q: What’s the biggest mistake firms make with expense deposits?

A: Commingling funds remains the cardinal sin. Another common violation of attorney trust account rules is blending client trust account funds with your own business accounts. The second biggest mistake? Poor documentation. If you can’t prove where every penny went, you’re asking for trouble.

Q: How often should we reconcile trust accounts holding expense deposits?

A: Monthly reconciliation is the minimum standard, but successful firms reconcile weekly. Every month, lawyers should reconcile (a) the total balance in the trust account, (b) the sum of all individual client ledgers, and (c) the balance in the check register. For high-volume practices, consider daily quick checks of your trust account balance against your ledger totals.

Q: Should we charge clients interest on expense deposits?

A: Generally, no. Interest earned on IOLTA accounts goes to legal aid programs, not to clients or firms. For large deposits held in separate interest-bearing accounts, the interest belongs to the client. Check your state’s specific rules, as they vary significantly on this issue.

Q: What happens if we accidentally use one client’s expense deposit for another client’s expenses?

A: This is a serious violation requiring immediate action. As soon as discovered, you must restore the funds to the proper client ledger, document the error and correction thoroughly, and consider whether self-reporting to your state bar is required. Implement additional controls to prevent recurrence—this is where automated software really shines.

Q: Can we pay expense deposits by credit card?

A: Yes, but be extremely careful about fee handling. Credit card fees should be charged against your operating account and the client’s trust deposit is credited in full in the trust bank account. Use only legal-specific payment processors that understand and comply with trust accounting rules.


Sources and Additional Resources

  1. American Bar Association Model Rules of Professional Conduct, Rule 1.15
  2. State Bar of California Client Trust Accounting Resources
  3. LeanLaw Trust Accounting Resources
  4. QuickBooks Online for Law Firms Integration Guide
  5. IOLTA – Interest on Lawyers Trust Accounts
  6. LawPay Trust Account Best Practices
  7. Thomson Reuters State of the Legal Market Report