Most lawyers in private practice must maintain a client trust account – primarily to hold retainers, settlement proceeds, or other client funds that haven’t been earned or disbursed yet. For small and mid-sized law firms in Michigan unfamiliar with trust accounting, this guide will walk you through the essentials of IOLTA accounts and Michigan’s trust accounting rules. We’ll break down what IOLTA is, why it matters, Michigan-specific regulations (from the State Bar of Michigan and the Michigan Rules of Professional Conduct), and how to stay compliant. Importantly, we’ll also highlight best practices and how tools like LeanLaw can make trust accounting easier.
(Fun fact: Mishandling client trust funds is one of the most common reasons lawyers get in trouble. The Michigan Attorney Discipline Board’s 2020 report found that nearly half of the attorneys disciplined that year had violated the trust account rules (MRPC 1.15 or 1.15A)!)
What Is IOLTA and Why Does It Matter?
IOLTA stands for Interest on Lawyers’ Trust Accounts. It’s a special type of pooled trust account that attorneys use to hold client funds that are small in amount or kept for a short time. The concept is simple: attorneys deposit many clients’ small sums into one IOLTA account, and any interest earned on that money is automatically turned over to a state-run fund for legal aid (not kept by the lawyer or client). In Michigan, the IOLTA program is administered by the Michigan State Bar Foundation (MSBF), and the interest collected helps fund civil legal services for low-income individuals and other public service programs.
Why use an IOLTA? If you were to hold each client’s small retainer in a separate account, the interest might be just a few cents – not even enough to cover the bank fees. Rather than that interest going to waste, IOLTA programs pool these funds to support access to justice. Michigan, like most states, requires lawyers to use an IOLTA account for client funds that are “nominal or short-term”. This ensures compliance with ethics rules and puts those pennies of interest to good use.
Example: Imagine a new client pays your firm a $1,000 retainer for an upcoming matter. You can’t put that money in your business account – it’s client money, not earned fees. But opening a separate interest-bearing account just for that $1,000 (for a short period) wouldn’t meaningfully benefit the client, since the net interest might be near zero after bank charges. In Michigan, you would deposit that $1,000 into your IOLTA account.
The money stays there safely until you earn it (by doing the work and billing the client), and any small amount of interest it accrues will go to the MSBF’s IOLTA fund to support legal aid. If instead the sum was very large and will be held long enough to earn significant interest for the client, then you’d put it in a separate non-IOLTA trust account for that client’s benefit. In other words, IOLTA is for client funds that cannot earn net interest for the client beyond the costs of administering a separate account.
Michigan’s ethics rules leave this determination to the lawyer’s good-faith judgment, considering factors like the amount, expected duration, and interest rates. (It’s wise to periodically review if circumstances change, in case you need to move funds to a separate account per MRPC 1.15(e).)
Bottom line: An IOLTA account is a must for Michigan firms handling any client money. It keeps client funds segregated and safe, and by design it forwards any interest to the state’s charitable fund rather than to the law firm. It’s a win-win: you stay ethical and compliant, and the community benefits. Just remember – the interest isn’t yours or the client’s; only the principal belongs to the client. Your job is to safeguard that principal until it’s properly disbursed.
Michigan’s Trust Accounting Rules and Requirements
Michigan has specific rules governing client trust accounts, primarily Rule 1.15 of the Michigan Rules of Professional Conduct (MRPC) (titled Safekeeping Property) and Rule 1.15A (the Trust Account Overdraft Notification rule). These rules, established by the Michigan Supreme Court, set the standards for how lawyers must handle client and third-party funds. Here’s a breakdown of the key Michigan-specific regulations and what they mean for your firm:
All Client Funds Go Into Trust
MRPC 1.15 requires that any funds belonging to a client (or third party, like a client’s medical lienholder) must be deposited into a trust account, separate from the lawyer’s own money. In practice, this means before you earn a fee or before you disburse settlement money, it should be sitting in a designated trust account. In Michigan, client funds generally should be in an IOLTA account or a non-IOLTA client trust account – but never in your general office operating account.
No Commingling of Funds
You cannot mix client money with your law firm’s money. Michigan explicitly prohibits lawyers from “commingling” client funds with their own (). The only exception is that you may deposit a small amount of your own funds to cover bank service charges if necessary (typically just enough to pay monthly fees).
You also shouldn’t use one client’s funds to pay for another client’s expenses. Each client’s money is held for that client’s matter only. Tip: Many firms maintain a zero-balance policy – aside from minimal bank fee funds, if it’s not client or third-party money, it doesn’t belong in the trust account. This means you cannot leave a personal “buffer” in the account as a cushion against overdrafts.
While having a buffer might feel safer, it’s considered commingling (mixing your funds with client funds) and is not allowed. If an unexpected bank fee or overdraft would put the account in the red, you must address it by depositing your own funds only as needed to cover the charge – not by keeping extra personal money in trust in advance.
Segregate Each Client’s Funds in Records
It’s okay to pool multiple clients’ funds in one IOLTA account, but you must track each client’s money separately in your books. For every client that has money in trust, you should maintain a ledger listing all deposits, withdrawals, and the current balance for that client. At any given moment, the total of all client sub-balances should equal the overall bank balance of the trust account.
If Client A has $5,000 in trust and Client B has $3,000, your IOLTA’s bank balance should be $8,000 (ignoring any bank funds for fees). Meticulous recordkeeping isn’t just good practice – it’s an ethics rule. Michigan requires lawyers to preserve complete records of trust account funds and other property for five years after the representation ends. Failing to keep or produce detailed records is itself a rule violation. Be prepared to show ledger cards, deposit slips, canceled checks, and monthly reconciliations if asked in an audit or ethics investigation.
Use Approved Financial Institutions
In Michigan, you can’t just use any bank for your trust account. MRPC 1.15A (Trust Account Overdraft Notification, “TAON”) requires that client trust accounts (including IOLTA) be held only at approved financial institutions. Banks must apply to the State Bar of Michigan for approval, agreeing to report any trust account overdrafts. In other words, your bank is actually a partner in compliance – if a trust check bounces or the account is overdrawn, the bank will send an alert to the Attorney Grievance Commission (AGC). (More on overdraft consequences shortly.)
The State Bar maintains a list of approved institutions on its website, and lawyers must ensure their trust bank is on that list. Fortunately, many banks and credit unions in Michigan are approved IOLTA depositories. When you open a new IOLTA, you’ll fill out a Notice to Eligible Financial Institution form (available from the State Bar or MSBF) that essentially flags the account as an IOLTA and subjects it to the overdraft notification agreement.
Label the Account Properly
Michigan also requires that your trust account’s name clearly identifies it as a trust account. For example, your account name might be “Smith & Jones PLLC Client Trust Account” or “Law Office of Jane Doe IOLTA Trust Account.” If your account checks or statements only showed your firm name without “trust” or “IOLTA,” that’s a problem.
The bank can assist in ensuring the titling is correct. In fact, Michigan’s rule 1.15A and related guidelines say the account title must include the word “Trust” or “Escrow” (unless it’s an IOLTA which is already designated via the notice form). This labeling helps prevent confusion (for instance, so nobody mistakes the trust account for your general account) and is another transparency measure if an audit occurs.
When to Use IOLTA vs. Separate Accounts
As noted, Michigan expects you to use an IOLTA account for funds that are small in amount or will be held only briefly. If you’re holding a significant sum for a longer period and it could earn net interest for the client, you should set up a separate non-IOLTA trust account for that client (sometimes called an “interest-bearing trust account” or an “individual client trust account”). MRPC 1.15 and the State Bar’s guidance lay out factors to decide this, including: the amount, duration, interest rate, and likely bank fees.
The rule of thumb: if the client would earn more than $0 after fees, you have a duty to go with a separate account for that client. If there would be no net gain, use IOLTA. Michigan ethics authorities also note that your good-faith decision on this is not subject to discipline so long as you followed the criteria in the rule. Just revisit the decision if circumstances change (e.g. a short-term matter is now going to hold funds for a year).
Withdrawing Fees – Only When Earned
Another important aspect of trust accounting is knowing when you can take money out for your fees. If a client pays you in advance (e.g. a retainer or flat fee for future services), those funds are not yours yet – they are unearned and belong to the client until you do the work. Michigan requires that advance fees stay in the trust account until earned, unless there’s a written agreement clearly treating the fee as nonrefundable and in compliance with ethics rules. In practical terms, for most scenarios: deposit the advance in trust, do the work or reach the milestone, then invoice the client.
After you bill for the work (and per your engagement agreement the fee is now earned), you can transfer that amount from the trust account to your firm’s operating account as your earned fee. Never pull money from trust just because it’s there – you need to have earned it or have the client’s authorization (like a signed settlement distribution sheet) for each withdrawal.
Real-world example: A lawyer who takes a $5,000 advance fee and immediately spends it before doing the work is effectively “borrowing” the client’s money – a huge ethics no-no. If the work isn’t done or the client requests a refund, there may be no money left to return. Michigan ethics opinions confirm that unearned flat fees must be kept in trust and only transferred out as you earn them, absent a special agreement that meets all ethical requirements.
Prompt Notification and Delivery
MRPC 1.15 also says that when you receive client funds or property, you must promptly notify the client (or whoever has an interest in the funds) and promptly pay or deliver funds that the client or third party is entitled to receive. For instance, if you receive a settlement check, you should deposit it in trust, notify your client, and disburse the client’s share (and any third-party liens) as soon as reasonably possible after it clears, according to the settlement statement.
You shouldn’t hold on to client money any longer than necessary. Delaying rightful payments or failing to inform clients of funds received is a serious violation. In short: be responsive and expedient when handling someone else’s money.
Overdraft Alerts and Misconduct Reporting
Michigan’s overdraft notification rule (1.15A) means if you ever bounce a check or overdraw your trust account, your bank will send a notice to the Attorney Grievance Commission. This will almost certainly trigger an inquiry or investigation into your trust account management. Even if the overdraft was an innocent mistake, you’ll need to explain it to the AGC. (They do allow you a chance to clarify what happened – but it’s not a conversation you want to have.)
It’s crucial to understand that any shortage in the trust account is treated very seriously. Using client money improperly is considered misappropriation, which in Michigan is a per se ethics offense. In fact, even if an overdraft protection transfer covers a check, the bank is still obligated to report that the account didn’t have sufficient funds in the first place. This means you can’t hide a mistake by relying on overdraft protection or transferring money in later – the violation (the moment the account went below what it should hold) will be reported.
The safest course is to never let your trust account dip below the total amount you’re supposed to be safeguarding. If you do get an overdraft notice, you should immediately figure out which client’s funds were short and rectify the situation — and be prepared to demonstrate the error was an anomaly. Multiple overdraft notices or a pattern of poor management will put your license in jeopardy.
As you can see, Michigan’s trust accounting rules are all about protecting clients’ money. The State Bar of Michigan provides resources like IOLTA FAQs and even seminars on trust accounting compliance to help lawyers understand these obligations. It may feel like a lot of rules, but they boil down to a few core principles: keep client funds separate, document everything, and don’t touch the money until you’re supposed to.
Consequences of Trust Account Mismanagement
Mismanaging a trust account isn’t just an “oops, I’ll do better next time” situation. For lawyers, it can be career-ending. The Michigan Attorney Grievance Commission and Attorney Discipline Board treat trust account violations very gravely. Here are some potential consequences if you don’t follow the rules.
Ethics Disciplinary Action
If you mishandle client funds, you will likely face an ethics complaint. This could come to light via a client grievance, a random audit, or the bank’s overdraft notice. Penalties for trust accounting violations range from reprimands to license suspension or even disbarment, depending on the severity. It’s not uncommon for lawyers to be disbarred for egregious misuse of client funds (especially intentional misappropriation).
In less severe cases (like negligent recordkeeping or isolated mistakes), shorter suspensions or probation with monitoring might be applied – but you are always at risk of losing your license if you play fast and loose with client money. Remember that statistic: nearly **50% of all Michigan disciplinary cases in a recent year involved trust account rule breaches. It’s one of the top reasons lawyers get sanctioned. In other words, the odds of getting caught eventually are high if your practices are sloppy.
Financial Liability
If client funds are lost or misused, you’ll have to make the client whole. That could mean paying back money out of your own pocket. In some cases, the Client Protection Fund (a State Bar fund that reimburses clients for attorney theft) might compensate the client – but then the Bar will come after you for reimbursement, and you’ll still face discipline.
Also, consider the potential for civil liability: a client could sue you for breach of fiduciary duty or malpractice if you mishandle their money. Your malpractice insurance might not cover intentional wrongdoing like theft or fraud, so you could be personally on the hook.
Criminal Charges
In extreme cases, especially where lawyers intentionally steal or embezzle client funds, criminal charges can be filed. There have been instances of attorneys in various states being prosecuted for felony theft for dipping into trust accounts. While this is (thankfully) not the norm, it underscores how trust account misuse is not just an “internal” ethics matter – it’s seen as theft of someone else’s money.
Even a temporary “borrowing” of client funds (robbing Peter to pay Paul) is viewed as conversion. Michigan law enforcement can and will get involved if the circumstances warrant. At the very least, the AGC might refer a particularly bad case to the authorities.
Damage to Reputation and Career
Apart from formal discipline or legal consequences, think about your professional reputation. Trust account issues can become public via the discipline reports. If your law license is suspended or you’re disciplined for trust violations, existing clients will find out and you may have to notify them, and potential future clients may steer clear. It’s very hard to rebuild trust (no pun intended) once it’s broken. Even if you survive a minor infraction, colleagues and referral sources may lose confidence in you. For small firms that rely on word-of-mouth, this can be devastating.
Stress and Disruption
An often overlooked consequence is the sheer stress and time sink of dealing with an investigation. When you receive an overdraft inquiry or a client complaint about funds, you’ll spend dozens of hours digging through records, working with counsel, and addressing the issue. It’s distracting and nerve-wracking. If you’ve ever had that stomach-dropping moment of realizing a trust mistake, you know it can consume your mind. Far better to avoid that scenario altogether through diligent compliance.
In summary, the stakes are extremely high. As one LeanLaw article put it, taking shortcuts with trust funds can land you in “legal purgatory or worse, lose your law license”. The Michigan AGC has little tolerance for excuses like “I was ignorant of the rules” or “I was too busy.” Indeed, lack of knowledge or delegation of responsibility is not a defense – every lawyer in the firm is accountable if trust money is mishandled, even partners who weren’t directly involved.
The safest approach is to treat every client dollar as sacrosanct. As the saying goes, “not your money, not your rules.” You must follow the fiduciary rules to the letter. The good news is that by being careful and using modern tools, it’s entirely possible to stay out of trouble. That brings us to…
Best Practices for Trust Accounting Compliance in Michigan
How can your law firm avoid mistakes and ensure you’re compliant with Michigan’s trust accounting rules? Here are some best practices and practical tips, especially tailored for small and mid-sized firms:
Educate Your Team
First and foremost, make sure everyone who handles client funds (including partners, associates, bookkeepers, and itsy-bitsy law firm dogs 🐶 – okay maybe not the dog) understands the basics of trust accounting. Share this guide, the State Bar’s guidelines brochure, and even consider having staff attend a trust accounting CLE. Common mistakes happen when someone simply doesn’t know the rule.
For example, a well-meaning receptionist might deposit a retainer check into the operating account if they weren’t trained that it must go to IOLTA. Make trust accounting a part of your standard operating procedures and training for new hires.
Use Separate Accounts (Trust vs. Operating)
This sounds obvious, but it’s worth reinforcing: keep a totally separate bank account for client funds. Never deposit client payments meant for fees or costs into your business account. Your trust account should be completely distinct – ideally at the same bank for convenience, but with a different account number and clearly labeled.
Many firms use different colored checks for trust vs. operating accounts to avoid confusion (e.g. trust checks might be green while operating checks are blue】. If you print checks, consider bold labels like “CLIENT TRUST ACCOUNT” on them. If you do electronic payments, nickname the accounts in your online banking (for example, “Law Firm Trust – IOLTA (Do NOT Touch)” as the account name that shows up online). Visual cues can prevent the common error of accidentally drawing from the wrong accoun】.
Implement Tight Recordkeeping
Maintain a ledger for each client or matter with funds in trust. Every deposit or withdrawal should be attributed to a specific client and have a description (e.g., “10/01/2025 – Deposit, Client Smith retainer $2,000; 10/30/2025 – Payment of invoice #1234 for Client Smith $1,500; Balance $500”). Use accounting software or even a dedicated spreadsheet – whatever works for you – but keep it religiously.
Keep supporting documents for every transaction: deposit slips, copies of checks, wire confirmations, signed settlement statements, etc. Michigan requires five-year retention of these record】, but frankly, holding onto them longer (digitally) won’t hurt. It’s wise to also retain bank statements and even images of canceled checks, which many banks provide in statements or online. The goal is to have a complete paper trail that proves you handled every penny correctly.
Perform Monthly Three-Way Reconciliation
This is a gold-standard practice that many state bars (and the ABA) strongly recommend. A three-way reconciliation means at the end of each month you reconcile (1) the trust account bank statement balance, (2) the total of your client ledgers, and (3) your checkbook register or trust ledger balance in the accounting system, making sure all three numbers match. If they don’t, find out why immediately. For example, maybe a transaction was recorded in one ledger but not another, or there’s bank error or a math mistake.
Regular reconciliation is your early warning system for any issues. It’s much better to catch and correct a $100 discrepancy now than to have an auditor find it six months later. Many jurisdictions consider monthly reconciliation a required part of maintaining “complete records.” Even if Michigan’s rule doesn’t explicitly mandate monthly reconciliations, the AGC will expect to see it as evidence of proper oversight if you’re ever investigated. Mark a recurring task on your calendar for the last day of the month (or first week of the new month) to reconcile the trust account.
Never Disburse Trust Funds You Don’t Have
Sounds obvious, but this is a frequent pitfall. If a client’s check hasn’t cleared the bank yet, don’t write checks against it. Wait until funds are actually available (remember the phrase “good funds” – treat all deposits as uncleared until the bank confirms). Also, if Client A only has $500 left in trust, you cannot pay a $600 bill for them – not even with the intention of replenishing later.
That $100 would be coming from other clients’ money, creating a shortfall. One helpful habit is to always check the client’s trust balance before approving any disbursement. Good software can flag if you attempt to go into a negative balance for a client (more on software help below).
Promptly Remove Earned Fees (But Not Before)
When you’ve earned money and billed the client, transfer it out of trust promptly. Leaving earned fees sitting in trust for an extended time is actually not good either – it means you’re holding funds that no longer belong to the client. Ideally, once the client has been billed and informed (and any required waiting period or consent is given), you should pay yourself by moving those funds to your operating account.
Some jurisdictions require you to withdraw fees reasonably promptly to avoid commingling (because once it’s earned, it’s yours – keeping it in trust commingles client and lawyer funds). So set a routine, say, once a month or after each billing cycle: reconcile invoices and transfer earned amounts. Just never pull money before it’s earned. A prudent practice is to get written acknowledgment (even an email) from the client for each invoice that you will be paying yourself from their trust balance, or include a clause in your fee agreement that you will do so. Transparency is key.
Address Errors or Overdrafts Immediately
If, despite your best efforts, you make a mistake – say you charge a check to the wrong account or mathematical error causes an overdraft – don’t hide it. Inform your firm’s partners or office manager, and correct the mistake as soon as possible. This may involve moving funds to cover a shortfall (remember, from your own pocket, not from another client) and then documenting what happened.
It can be very beneficial to self-report to the AGC before they find out in some situations, or at least to be fully prepared to show you caught and fixed the issue. The AGC tends to discipline more leniently when a lawyer is forthright and corrective, versus when a cover-up or pattern of neglect is present. That said, always consult an ethics lawyer if a significant breach occurs to get guidance on next steps.
Leverage Checklists and Forms
The State Bar of Michigan has helpful trust accounting checklists and forms (for example, an Attorney Trust Account Checklist). Using a standard checklist for opening a new trust account or handling a client settlement can ensure you don’t miss a step (like filing the bank notice form, getting all signatures, etc.). Likewise, have a process for closing a trust account (ensuring no client funds remain, all interest is remitted, and the account is properly closed with the bank and reported to MSBF).
Be Extra Cautious with Withdrawals
Many firms institute a policy that two people review or sign off on trust transactions above a certain amount. For instance, you might require two signatures on any trust check over $5,000. In a small firm, that could simply mean one attorney and one staff member both double-check the payee, amount, and client ledger before money leaves the account.
This redundancy can catch mistakes (like paying the wrong client or overdrawing) before they happen. If you’re solo, obviously you can’t get a second signature, but you can still slow down and double-check yourself. Some attorneys even have an arrangement to have their bookkeeper or a contract CFO do a monthly review of the trust activity for extra peace of mind.
Watch Out for Scams
Unfortunately, lawyers have been targets of various trust account scams (e.g. fake client overpayment scams, fraudulent checks that eventually bounce after you’ve wired out funds, etc.). Always be skeptical if you get an unexpected large check to deposit with instructions to quickly wire funds out. The State Bar has warnings about scams where fraudsters try to trick lawyers into disbursing from trust on bad fund.
Verify funds and clearance on any unusual transactions, and remember that until your bank officially clears a check (which can take days or even weeks for foreign or cashier’s checks), you are on the hook if you disburse money. When in doubt, talk to your banker for confirmation.
Utilize Technology and Trust Accounting Software
In 2025, you don’t have to do all of this with pen and paper. There are legal-specific accounting software solutions (like LeanLaw, Clio, QuickBooks with a legal plug-in, etc.) that are designed to help with trust accounting. A good system will automatically keep client ledgers, flag potential errors, and make reconciliation easier. Some even integrate with your practice management and billing, so that when you invoice a client and apply trust funds to a bill, it handles the accounting entries for you. LeanLaw, for instance, integrates deeply with QuickBooks Online to sync your trust account transactions in real-time.
This means when a trust deposit or payment happens, the software updates everywhere – reducing the chance of omissions or duplicate data entry. Using software isn’t a substitute for understanding the rules, but it greatly reduces the mental load of compliance. Many programs can produce three-way reconciliation reports with just a few clicks, and they can generate client trust statements that you can share with clients for transparency. We’ll discuss more about LeanLaw’s specific features for Michigan trust accounting in the next section.
By following these best practices, you’ll create a strong internal control system for your trust account. The goal is to make proper trust accounting a routine habit in your firm’s workflow, rather than a scramble at the end of the quarter or (worse) when a bar complaint arrives. Many small firm lawyers successfully manage trust accounts for decades without a single violation – it’s very doable with diligence and the right tools.
Protect Your Clients, Protect Your Firm
Michigan’s IOLTA and trust accounting rules can seem daunting at first, but with knowledge and the right tools, compliance is entirely achievable. Think of trust accounting as a structured process: open the right accounts at the right bank, follow the rules for every deposit and withdrawal, keep good records, and cross-check your work regularly. Always remember that you’re a fiduciary for your client’s funds – in plain terms, you’re the temporary caretaker of money that isn’t yours. If you always act with that in mind, you’ll naturally handle those funds with the care and separation the rules require.
For small and mid-sized firms, the stakes are high, but so are the rewards for doing it right. Proper trust management protects your clients, keeps you in good standing with the bar, and frankly it can even be a selling point to clients that your firm is trustworthy and financially responsible. No client wants to worry about their lawyer mishandling their settlement or retainer. By implementing solid trust accounting practices (and perhaps mentioning in your engagement letter how you handle client funds in compliance with IOLTA), you build client confidence.
Lastly, don’t hesitate to leverage resources. The State Bar of Michigan’s ethics helpline (877-558-4760) can answer questions about trust account situations. The Michigan Bar Journal and MSBF publish updates and guides. And legal tech like LeanLaw is there to shoulder the operational burden. In fact, using LeanLaw’s trust accounting software can turn a once-intimidating chore into a routine task, ensuring that your Michigan IOLTA account is always balanced and compliant.
In summary: Keep client money safe and separate, dot your i’s and cross your t’s in the records, follow Michigan’s specific rules, and use modern tools to help. With this approach, even a small firm with no full-time accountant can master trust accounting. The peace of mind you’ll get – knowing that your client funds are handled correctly and your firm is on solid ethical ground – is well worth the effort. Trust accounting is one area where an ounce of prevention is worth a pound of cure. So set up that IOLTA, follow the guidelines, and let LeanLaw and good habits do the heavy lifting. Your future self (and the Attorney Grievance Commission) will thank you!
