Key Takeaways:
- Maryland’s strict trust accounting rules protect client funds and mandate IOLTA accounts for nominal or short-term client monies, with severe penalties (including disbarment) for misuse.
- IOLTA (Interest on Lawyers’ Trust Accounts) in Maryland pools small client funds in a designated trust account; any interest generated is sent to the Maryland Legal Services Corporation (MLSC) to fund legal aid, which has received over $354 million from IOLTA to date.
- Compliance essentials: Maryland law firms must keep client money separate from firm funds (no commingling), maintain detailed records and monthly reconciliations, use approved banks for trust accounts, and file annual IOLTA reports. Adopting legal billing and trust accounting software (like LeanLaw) can help automate these processes and avoid common pitfalls.
Trust accounting is one of the most critical compliance areas for Maryland law firms. Lawyers in Maryland are required to handle client funds according to strict rules set by the Maryland Rules of Professional Conduct and court rules, particularly when using IOLTA trust accounts. Failure to comply can lead to severe consequences – mishandling client trust money is one of the primary reasons Maryland attorneys face serious discipline. In fact, the Maryland Court of Appeals has repeatedly disbarred attorneys for trust account violations such as commingling funds, inadequate records, or prohibited transactions. For small and mid-sized firms, understanding IOLTA and trust accounting obligations is essential to safeguard clients’ money (and your law license) while maintaining an efficient practice.
This guide will explain what IOLTA is and how it works in Maryland, outline Maryland-specific trust accounting rules and requirements, highlight common compliance pitfalls (and how to avoid them), and share best practices – including tools that can simplify trust accounting. The goal is to provide a clear, approachable roadmap to staying compliant with Maryland’s trust account rules and the IOLTA program as administered by MLSC. By following these guidelines, your firm can protect client funds, stay on the right side of bar regulators, and manage trust accounts with confidence.
What Is IOLTA?
IOLTA stands for Interest on Lawyers’ Trust Accounts. It refers to pooled client trust accounts where any interest earned on the funds is not kept by the lawyer or client, but is instead used for the public good. Under Maryland law, attorneys in private practice must place all eligible client trust funds into an attorney trust account. In many cases, it would be impractical to open a separate interest-bearing account for every client or small amount – that’s where IOLTA comes in. Maryland’s IOLTA program allows lawyers to pool multiple clients’ short-term or nominal funds in one interest-bearing trust account; the interest accrued is automatically forwarded to the Maryland Legal Services Corporation, a nonprofit established by the state to fund civil legal aid for low-income Marylanders.
In other words, IOLTA accounts enable even tiny or temporary client deposits to collectively generate interest for charity. For example, a client’s advance fee of a few thousand dollars held briefly would go into your IOLTA account, and the interest (perhaps only a few dollars) is swept to MLSC. Since its inception in 1982, Maryland’s IOLTA program has channeled over $354 million into grants for legal services, assisting in more than 3.7 million legal matters for Maryland families – a significant public benefit created from the interest on otherwise idle funds.
Maryland’s IOLTA program is mandatory for attorneys who handle client money, with a narrow exception: if you rarely hold client funds or the average balance of your trust account is consistently under $3,500, you may be eligible for a waiver from MLSC. Attorneys who obtain an IOLTA exemption must still maintain a trust account (for client funds) but as a non-interest-bearing account. Outside of such waivers, any client funds that are “nominal in amount or expected to be held short-term” must be placed in an IOLTA trust account so that the interest can benefit the MLSC fund, per Maryland Rule 19-409.
Conversely, if you are entrusted with a large sum of money for a single client that could earn net interest for the client over time, you should generally open a separate interest-bearing trust account for that client (so the client, not MLSC, receives the interest). Maryland’s rules essentially require lawyers to use good-faith judgment to determine whether client funds are appropriate for the pooled IOLTA (small/short-term funds) or warrant a separate interest-bearing escrow account for that client’s benefit. In either case, client funds must never go into your firm’s operating or personal accounts.
It’s important to note that IOLTA accounts must be set up properly. You must use a financial institution approved by the Client Protection Fund/MLSC – banks in Maryland must sign an agreement with the state to participate in IOLTA (ensuring they pay interest to MLSC and report any overdrafts). When opening the account, make sure to title it as an attorney trust account (acceptable titles under Rule 19-406 include “Attorney Trust Account,” “Attorney Escrow Account,” or “Client Funds Account”).
In fact, Maryland specifically requires those designations – do not name the account just “IOLTA” or use only your firm name. The account title must clearly indicate it’s a trust account and include the attorney/firm name, so that it’s distinguishable as holding client funds. Once the IOLTA account is active, the bank will handle sending interest earnings to MLSC. Your job as the attorney is to ensure you deposit all qualifying client funds into the trust account, keep meticulous records, and follow the rules on how those funds are managed. We will now break down the Maryland-specific trust accounting rules that law firms need to follow.
Maryland-Specific Trust Accounting Rules
Maryland’s trust accounting requirements are codified in the Maryland Attorneys’ Rules (Title 19, Chapter 400) and closely mirror the ethical duties in Rule 1.15 of the Maryland Rules of Professional Conduct (Safekeeping Property). These rules lay out exactly how lawyers must handle client and third-party funds. Below are the key Maryland trust accounting rules and obligations that small and mid-sized firms should understand:
All Client Funds Go Into a Trust Account (No Commingling)
Client money cannot be mixed with the lawyer’s own funds. Whenever you receive money that belongs to a client (or third party) – such as a retainer, settlement proceeds, advance for costs, etc. – it must be deposited into a designated attorney trust account, not your operating account. Maryland Rule 19-404 requires that all funds received in a fiduciary capacity be placed in an attorney trust account (unless they are payment for fees already earned or reimbursement of expenses the firm already advanced on behalf of the client). In short, if the client hasn’t yet “earned” the benefit of the funds or you haven’t earned your fee, the money belongs in trust.
Commingling – the mixing of client funds with the lawyer’s personal or business funds – is strictly prohibited in Maryland. You should never deposit client payments meant for future services into your firm’s general account, and likewise you cannot pay personal or firm bills directly out of a client trust account. The only sliver of leeway is that Maryland (like most states) allows a lawyer to keep a small amount of the lawyer’s own funds in the trust account solely to cover bank service charges or fees. In practice, this means you might maintain a cushion of, say, $100 of firm money in the IOLTA to avoid overdrafts from bank fees – but any such amount must be truly nominal and only for bank charges.
Maryland Rule 19-408 explicitly permits either that nominal deposit or an arrangement to have the bank fees charged to your business account. Other than that narrow exception, no “float” or extra firm money can sit in trust. Similarly, if some funds in trust partly belong to the client and partly to the firm (for example, a settlement check that includes the lawyer’s contingent fee and the client’s net recovery), you may temporarily hold the combined amount in trust, but you must withdraw the firm’s portion promptly once it’s earned and no longer in dispute. Keeping earned fees in the trust account longer than necessary is actually considered a violation in Maryland – having too much of your own money in trust is as improper as having too little.
How to avoid commingling: Maintain at least two separate bank accounts for your practice – one dedicated Trust Account for client funds, and one Operating Account for the firm’s funds – and never mix the two. Label them clearly and train your staff that retainers, settlement checks, and any unearned client funds always go into the trust account first.
Do not withdraw money from the trust account except to disburse to a client or a third party on the client’s behalf, or to transfer earned fees to your firm (after you have properly billed the client). By consistently segregating funds, you will fulfill your fiduciary duty and greatly reduce the risk of an ethical violation. Remember the stakes: the Maryland Court of Appeals does not tolerate lawyers failing to keep client money separate – even unintentional commingling can lead to discipline.
IOLTA Account Requirements (Pooled vs. Separate Trust Accounts)
Maryland requires attorneys to use an IOLTA account for client funds that are “nominal or short-term,” rather than leaving those funds in a non-interest account. Practically, this means most routine client deposits will go into your pooled IOLTA trust account. For example, an advance fee retainer of $2,000 or a settlement of $10,000 waiting to be distributed would typically be considered suitable for IOLTA – these funds aren’t likely to earn significant interest for the client once you account for bank fees and the short duration. By pooling such funds from many clients, the IOLTA account can generate interest that the bank remits to MLSC to support legal aid.
On the other hand, if a client entrusts you with a substantial amount of money for a long period, you should consider setting up a separate trust account for that client. Maryland’s rules (by implication of Rule 19-409 and related provisions) intend that clients do not lose out on interest that could be meaningful. For instance, if you’re holding $200,000 for a client’s estate for a year, that could yield appreciable interest – in that case, it would be appropriate (and ethically required) to place those funds in a dedicated interest-bearing escrow account for the client’s benefit (with the interest going to the client).
The decision of IOLTA vs. separate account hinges on whether the funds could earn net interest for the client: consider the amount, expected duration, and the bank’s interest rates versus fees. Maryland attorneys must exercise good faith judgment on this. The default is IOLTA for small or short-term funds, and a separate account if the circumstances justify it.
Use an approved bank: When opening any attorney trust account (whether IOLTA or a separate interest-bearing account), Maryland Rule 19-403 requires using a financial institution that has been approved by the Attorney Grievance Commission (through the Client Protection Fund’s program). Approved banks have signed agreements to report any bounced trust checks and to send IOLTA interest to MLSC.
Most major banks in Maryland participate – MLSC provides a list of eligible IOLTA banks. Be sure to verify your bank is on that list or obtain the necessary agreement. Additionally, as noted, the account’s title must clearly identify it as an attorney trust account (e.g. “Smith & Jones LLC Attorney Trust Account”). This is not only a rule requirement but also helps prevent confusion (e.g., the bank or your staff will immediately know the nature of the funds). Maryland does not require using the acronym “IOLTA” in the account name – in fact, simply calling it “IOLTA Account” is insufficient under Rule 19-406 if it doesn’t also say “Attorney Trust Account” or similar.
In summary: choose an approved depository, and name the account correctly. Once set up, deposit all qualifying client funds into the IOLTA (or appropriate trust account) promptly upon receipt. Never leave client checks sitting around – Maryland Rule 19-404 mandates timely deposit of trust funds. By getting the account structure right and following deposit rules, you lay the groundwork for compliance from the start.
Required Trust Records and Bookkeeping
Maryland attorneys must maintain detailed accounting records for all client trust funds. Proper recordkeeping is at the heart of trust account compliance. Maryland Rule 19-407 spells out the records you need to create and keep, including: a checkbook register or journal for the trust account, individual client ledgers, and documentation for each transaction. For every deposit into trust, you should record the date, amount, the client matter, and the purpose of the funds (e.g. “Advance fee from Client A” or “Settlement proceeds for Client B”).
For every disbursement or transfer out of the trust, record the date, amount, payee, client matter, and reason (e.g. “Payment to Medical Lien for Client B” or “Transfer of earned fees for Client A, Invoice #1234”). These entries should be made contemporaneously with the transaction (at the time of deposit or withdrawal) to ensure accuracy.
In addition to the chronological journal of transactions, you must maintain a separate ledger for each client or matter for whom you hold funds. Each client ledger shows all amounts you’ve received and disbursed for that particular client, along with the current balance remaining in trust for them. It’s critical that at any given moment, you can look at your records and know exactly how much money you are holding for each client, and why.
Maryland lawyers have gotten into trouble by failing to keep individual ledgers – without them, it’s too easy to lose track and inadvertently use one client’s money for another’s obligations. The sum of all individual client ledger balances should always equal the overall balance in the trust account (this is the fundamental double-check in trust accounting).
Maryland also requires that you keep copies of certain source documents: for example, retain bank statements, canceled checks, deposit slips, wire transfer confirmations, and client instructions or settlement statements. Rule 19-407(a) requires retention of all records related to trust funds, which typically includes these supporting documents. Keeping electronic copies is fine (and often easier for searching later), as long as they are readily accessible.
The Maryland Rules mandate that all these trust accounting records be preserved for five years after the termination of representation or the closing of the account. This record retention period is slightly shorter than some states (Florida is six years, for instance), but five years is substantial – make sure you have an organized system (physical or digital) to archive old trust records in case of an audit or client inquiry down the line.
Tip: Implement a consistent bookkeeping process. Many small firms benefit from using legal-specific accounting software or features (for example, QuickBooks with a trust accounting add-on, or LeanLaw’s trust accounting tools) to automatically track these details. The key is that for every client deposit and withdrawal, you document who, what, when, and why. By diligently maintaining your trust journal and individual ledgers, you will always know “whose money is whose,” and you’ll be prepared to answer any questions in the event of an audit. Meticulous records are not only required by rule – they are your best defense to demonstrate that you have handled client funds properly.
Monthly Reconciliation of the Trust Account
Maryland requires a monthly reconciliation of your trust account, without exception. This means that at least every thirty days you must verify that your trust account records align with the bank’s records. In practice, a three-way reconciliation is the gold standard each month: compare (1) the balance per the bank statement, (2) the balance per your own trust checkbook register, and (3) the sum of all client ledger balances. All three should be identical. If there are any discrepancies (such as an outstanding check that hasn’t cleared, or a bank service charge you haven’t recorded yet), you need to identify and resolve them.
Performing a monthly reconciliation involves reviewing the bank statement when it arrives (or online), checking off each transaction against your internal ledger, and ensuring no mismatch. Maryland Rule 19-407(b) explicitly mandates monthly reconciliations of attorney trust accounts, including a reconciliation of each client ledger balance with the overall account balance. This is not just a best practice – it’s an enforceable rule.
Failing to reconcile is one of the easiest ways to get into trouble because errors will compound unnoticed. For example, if you accidentally transposed digits and recorded a $1,000 deposit as $100 in a client ledger, you might think you have $900 less for that client than you actually do. If you never reconcile, such an error could later result in you disbursing funds for another client that you shouldn’t have (believing the money was there when it wasn’t, or vice versa).
By reconciling monthly, you create an “early warning system” to catch and correct mistakes. Even small firms with relatively few transactions must do this every month. Document the reconciliation: many firms create a simple worksheet or use software that generates a reconciliation report.
This report should list the opening balance, all deposits, all disbursements, and the closing balance for the month, and confirm that matches the bank. It’s wise to have the responsible attorney or firm owner review and sign off on the monthly reconciliation as a further internal control (and proof of compliance). In the event of a bar audit, being able to produce monthly reconciliation reports signed and dated is extremely helpful to show you’ve been on top of the trust account.
Maryland regulators expect timely reconciliation. In fact, failure to reconcile is often discovered when a problem arises – for instance, if an overdraft occurs on a trust account and the bank notifies Bar Counsel (as required), one of the first questions will be whether the attorney was performing monthly reconciliations. Not reconciling is a violation in itself and will aggravate any underlying issue. The takeaway: set a recurring task (e.g., the first week of each month) to reconcile last month’s trust activity. This discipline will keep your records accurate and instill confidence that every client’s funds are accounted for down to the penny.
Record Retention and Annual IOLTA Reporting
Maryland attorneys must retain all trust account records for at least five years after the conclusion of the client matter or the last transaction relating to the funds. This five-year retention requirement includes the journals, client ledgers, bank statements, canceled checks, and reconciliation reports discussed above. It’s a good idea to have a backup (such as scanned copies or secure cloud storage) for these records, so that even if paper files are lost or a computer crashes, you have the archives. The Attorney Grievance Commission (AGC) or Maryland Bar auditors can request to review your trust records, especially if there’s a disciplinary complaint or a random audit program. Knowing you have five years of data at your fingertips provides peace of mind and enables you to cooperate fully with any inquiries.
In addition to record retention, Maryland imposes an annual reporting requirement related to IOLTA participation. Under Maryland Rule 19-409, every attorney admitted in Maryland must file an annual IOLTA compliance report. This is usually done through the Attorney Information System (AIS) online portal. By September 10 each year, you must report whether you had any client trust accounts during the reporting period that are subject to IOLTA, and provide the account details if so. If you did not have any trust account (for example, you didn’t hold any client funds that year, or you qualified for a waiver), you still must report that fact.
The reporting is essentially a certification of your compliance or exemption status. Failure to file the annual IOLTA report on time can result in decertification – meaning you would be administratively suspended from practicing law in Maryland. This is a serious consequence for simply failing to submit a form, so it’s critical not to overlook the IOLTA report. The Maryland courts send reminder notices, but ultimately it’s the attorney’s responsibility to remember this yearly obligation. Mark your calendar for early September each year to complete the IOLTA report (which asks for information like the bank name and account number of your trust account, or a statement that you have none). It only takes a few minutes, but it’s mandatory.
Additionally, when you renew your law license or fill out your annual compliance filings, you may also be asked to certify that you understand and follow the trust account rules. Maryland’s approach to compliance is proactive: they want to ensure every lawyer either has their IOLTA account in place or has a valid exemption.
By retaining your records and handling the annual report, you demonstrate a pattern of compliance. Remember that Maryland’s disciplinary enforcement is robust – even a missed report or minor recordkeeping lapse can draw scrutiny. Keeping good records for five years and meeting reporting deadlines are relatively simple tasks that go a long way toward staying in the Bar’s good graces.
In summary, Maryland’s trust accounting rules require you to segregate client funds in an appropriate trust account, keep careful records of every transaction, reconcile the account monthly, retain records for five years, and annually certify your compliance. By adhering to these rules, you fulfill your fiduciary duty to clients and protect yourself from disciplinary troubles. Next, we’ll discuss some common pitfalls that often trip up lawyers in trust accounting, and how your firm can avoid them.
Common Pitfalls and How to Avoid Them
Even with the rules in hand, law firms sometimes make mistakes in managing trust accounts. Below are some of the most common trust accounting pitfalls for Maryland law firms (including solos and small practices) and tips on how to avoid them:
Commingling Client Funds with Firm Funds
One of the gravest errors is mixing client money with the law firm’s own money. As discussed earlier, Maryland forbids commingling – yet it remains a common pitfall, often by accident. This can happen if an attorney deposits a client retainer into the firm’s operating account by mistake, or if the firm pays for business expenses directly out of the trust account. Another scenario is letting earned fees sit in the trust account for too long (commingling by over-retention of firm funds in trust). Commingling can also occur when an attorney thinks they’re being safe by leaving a cushion of extra money in trust “just in case” – in reality, that cushion is the lawyer’s own money improperly parked in the client account. Any mingling of funds blurs the line of ownership and violates your duty to keep client property separate.
Why it’s a problem: Commingling is viewed by the Bar as a gateway to misappropriation. If you mix funds, even innocently, it becomes very easy (and tempting in a cash flow crunch) to use client money for firm needs. Maryland regulators want a bright line: client money is sacrosanct and untouchable for anything but the client’s matter.
How to avoid it: Set up strong procedures for deposits and disbursements. For every check or electronic payment that comes into the firm, have a rule that it gets reviewed and explicitly coded to either Operating or Trust before it’s deposited. Many firms stamp checks with “For Deposit Only – Trust Account” versus “Operating Account” upon receipt to avoid confusion. Likewise, never pay law firm expenses (rent, payroll, etc.) directly from a trust account.
If you need to pay yourself fees that have been earned, first generate an invoice or billing record for the client, then transfer the fee from trust to your operating account in the exact amount of the invoice – this creates a clear paper trail that the funds were earned and removed appropriately. Maryland also allows keeping a nominal amount in trust for bank fees, but track that amount and ensure it’s truly for fees (and adjust as needed if bank fees change). If you accidentally deposit a client’s funds into the wrong account (it happens – e.g., you or staff confuse two bank accounts), correct it immediately: move the funds to the proper trust account and document the error and correction.
Similarly, if you discover that earned fees are still sitting in trust from months ago, withdraw them (with documentation) and don’t let it recur. Maintaining the mindset that client money is not your money until it is formally earned and removed will help you stay vigilant. Many firms find it helpful to have separate personnel or at least a second pair of eyes double-check trust transactions, because it’s harder to spot your own mistake. The bottom line: discipline yourself to never dip into client funds for any purpose other than that client’s matter. Commingling is an ethics red line, and avoiding it is foundational to trust accounting integrity.
Inadequate Record-Keeping
Trust accounting violations often stem from poor record-keeping. Common mistakes include not maintaining individual client ledgers, failing to record transactions promptly, or not keeping copies of key documents like canceled checks and deposit slips. If your recordkeeping is sloppy, a cascade of problems can follow: you might lose track of whose funds are whose, run a negative balance for a client without realizing it, or be unable to answer questions about a discrepancy. In Maryland, detailed records are not optional – they are required by rule (Rule 19-407) and they protect you by creating an audit trail. Yet busy attorneys sometimes treat trust recordkeeping as a low priority, updating logs infrequently or relying on memory. This is a recipe for disaster.
Example pitfall: An attorney might deposit a settlement and distribute funds but fail to update the ledger for each disbursement. Months later, when the client inquires or an audit occurs, the records are incomplete or reconstructed from memory – potentially missing transactions or containing errors. Or a lawyer might simply trust that if the bank account isn’t overdrawn, everything is fine, without actually tracking each client’s balance. These scenarios have led to disciplinary cases where lawyers could not produce required records or account for client funds.
How to avoid it: Implement a systematic recordkeeping process and stick to it religiously. Every time there is activity in the trust account, record it the same day (or at least within a day or two). Whether you use software or a manual spreadsheet, enter the details: date, amount, client, purpose, and resulting balance for that client. Keep individual client ledger cards or digital ledgers and update them with each transaction.
Maintain a central receipts and disbursements journal for the whole account as well. Many firms utilize accounting software that will automatically update client ledgers when you enter a trust transaction – this can significantly reduce the chance of omission. In addition, retain all supporting documents: scan checks and save PDFs of wire confirmations. If you receive cash (which is rare and not recommended for trust funds), issue a receipt and log it.
Organize the records either by month or by client, and back them up. During your monthly reconciliation, also review the records for any odd entries or things you might have missed. Ask questions like: “Do the client ledgers explain every penny in the account? Is there any client with a negative balance (which should never happen) or a balance that seems too high/has been idle too long?”
Proactively maintaining complete records ensures that if you are ever audited by Bar Counsel or asked by a client, you can swiftly show exactly what happened with the money. It also keeps you in compliance with the rule that mandates record creation and retention. Remember, if it isn’t documented, it didn’t happen – from the perspective of an auditor, lack of records is as bad as mishandling funds. Protect yourself by keeping your trust accounting books as diligently as you track your firm’s own finances (if not more so).
Failing to Reconcile the Account Monthly
Another very common pitfall is not performing regular reconciliations of the trust account. When lawyers don’t reconcile monthly, small errors can snowball into big problems. Maryland requires monthly reconciliation by rule, but in practice some attorneys procrastinate or think their volume is low so they can reconcile “later.” The danger is that without reconciliation you may not notice: a math mistake in your ledger, a bank error, a check that cleared for the wrong amount, or even theft from the account. Over time, the discrepancy between what you think should be in trust and what the bank shows can grow large – potentially leading to an overdraft or misappropriation.
Why it matters: Reconciling is the only way to confirm that your internal records match reality. If you skip a month, and something was off, skipping more months will compound the confusion. By the time you realize something is wrong, it may be too late to pinpoint when or why it happened. Moreover, from a compliance standpoint, failing to reconcile is itself a rule violation. It’s also one of the first things Bar Counsel will ask for if a trust issue arises – “show us your last several reconciliation reports.” Not having them is a red flag.
How to avoid it: Treat the monthly reconciliation as a non-negotiable task, just like filing a tax return. Many lawyers calendar a recurring meeting with themselves (or their bookkeeper) at the beginning of each month to reconcile the previous month’s trust activity. Use a checklist: obtain the bank statement (either wait for the mailed one or print it from online banking on the first of the month), compare every transaction to your ledger entries, list any outstanding checks or deposits in transit, and verify the final balances align.
If you identify any discrepancy, investigate immediately. Sometimes it’s simple (e.g., a $15 bank fee hit the account that you didn’t record – so record it and consider keeping a bit more cushion or have fees charged to operating). Other times it could be more serious (e.g., a check was recorded as $1,000 but the bank cleared $1,100 – perhaps a data entry mistake or bank error). Resolve it and document the resolution.
Once everything matches, document the reconciliation: for example, you can create a short summary that says “As of May 31, 2025: Bank balance $50,000; total of client ledgers $50,000; outstanding check #102 for $500. Reconciled by [Name] on June 5, 2025.” Save that report. If you use accounting software like QuickBooks, use its reconciliation module and save a PDF of the reconciliation report each month. Consider having a second person review it – even if you’re solo, you might have an external accountant glance at the reconciliation to double-check. This extra step can catch issues like transactions that were accidentally omitted.
Remember, Maryland bar authorities emphasize regular reconciliation as crucial to trust compliance. If an attorney is disciplined for trust mishandling, often the narrative will note that they failed to reconcile for X months. Don’t be that attorney. Timely reconciliation is your best friend: it keeps your trust account accurate and demonstrates your diligence in safeguarding client funds.
Improper or Early Disbursement of Funds
Some trust accounting troubles arise from disbursing client funds incorrectly or prematurely. A classic (and egregious) example is when a lawyer “borrows” from one client’s trust funds to pay another client’s expenses, intending to replace it later. This is essentially using Client A’s money for Client B’s benefit – a serious violation and considered misappropriation of client funds. Another improper disbursement is withdrawing your legal fee from the trust account before you’ve actually earned it or invoiced the client. For instance, taking out a full flat fee upon receipt, even though you haven’t done the work yet, or paying yourself in advance of sending the bill for hourly work. These scenarios amount to using client money without authorization – effectively treating trust funds as an interest-free loan or advance for the firm. Maryland strictly forbids such practices; you should only remove funds that belong to you after they are earned and the client is notified via an invoice or billing statement.
Why it’s dangerous: Using one client’s money to cover another’s creates a shortfall in the first client’s ledger – if any issue arises (or if multiple such borrowings occur), you may not have enough to pay back, and it’s indistinguishable from theft in the eyes of the Bar. Disbursing fees too early is essentially taking money for work you haven’t done – again, a form of misappropriation if the client were to demand a refund at that point. Many disbarment cases involve lawyers who dipped into trust accounts to solve short-term cash flow issues or who paid themselves prematurely. The intent doesn’t matter; it’s the action that counts. The Maryland Court of Appeals has zero tolerance for intentional misappropriation – even a brief “borrowing” can lead to disbarment if discovered. Even negligent misappropriation (due to sloppy practices) can result in heavy sanctions.
How to avoid it: Institute strict controls on trust withdrawals. First, never withdraw funds for a client in excess of what that particular client has in trust. This sounds obvious, but in a pooled account you must be careful – always check the client’s individual ledger balance before approving any disbursement. If Client B’s balance is insufficient to cover a payout (say you need to pay a filing fee but their retainer is low), do not “temporarily” use another client’s funds.
Instead, ask Client B to replenish the trust account or advance the cost from your operating account if you choose (and then bill the client). Do not rob Peter to pay Paul. Second, do not pay yourself from the trust account until the fee is earned and documented. In practice, this means you should issue an invoice or settlement statement to the client indicating you’ve earned $X from their trust balance (for example, after completing the work or at the conclusion of a contingency case).
Only then transfer that $X to your firm’s account. Maryland rules effectively require that unearned fees stay in trust until earned (unless otherwise agreed as a true retainer). If you have a written agreement that allows you to take fees at certain milestones, adhere to those terms exactly. A good habit is to always create an invoice or written notification before touching client funds for fees. Additionally, consider internal checks: for example, require that any trust check or electronic transfer above a certain amount needs two signatures or approvals. Many firms set a threshold (e.g., any trust disbursement over $5,000 requires a second partner’s sign-off).
In a small firm, if you’re solo, this could mean you as the attorney must approve any staff-prepared disbursement or you involve an external bookkeeper to verify figures. This reduces the chance of one person (or you on a bad day) moving money improperly. Also, when you do write… a trust check or transfer, include clear documentation (e.g. a memo line or cover note stating the client name and purpose, like “Client X – settlement disbursement”) for every disbursement. By adhering to these practices, you can prevent the temptation or accidental misuse of client funds. Always remember: “borrowing” from a client trust account – even briefly – is strictly forbidden and often leads to disbarment if discovered. Only disburse what you’re entitled to, when you’re entitled to it.
Lack of Oversight or Segregation of Duties
In some law offices, especially small firms, one person handles all aspects of the trust account – receiving funds, making deposits, writing checks, recording transactions, and reconciling. While this one-person control might be efficient, it’s dangerous because there’s no independent oversight; errors or even intentional misuse can go unchecked. Many trust fund scandals have occurred when a lawyer or employee had sole control and others assumed everything was fine. Without internal controls, a mistake or misappropriation might not be caught until it’s too late (for example, when a client complains or an audit occurs).
How to avoid it: Wherever possible, segregate duties related to the trust account. In an ideal scenario, different individuals should handle 1) authorization of disbursements, 2) the actual movement of money (e.g. writing checks or initiating wires), 3) recordkeeping (entering the transaction in the ledger), and 4) reconciliation. In a small firm you may not have enough staff to completely separate all roles, but you can still implement checks and balances.
For example, if a bookkeeper enters trust transactions and prepares the monthly reconciliation, a partner or the firm owner should review the ledger reports and bank statement each month and sign off on the reconciliation. Even if you are a solo practitioner, you can have an outside accountant or a trusted colleague periodically review your trust records for an extra set of eyes. Some firms adopt a policy that any trust check above a certain amount (say $1,000) requires a second signature or at least written approval by another attorney – this can deter fraud and help catch mistakes. You might also consider scheduling an annual audit of your trust account by a CPA or certified bookkeeper to ensure everything is in order (Bar auditors love to see this proactivity).
The key principle is that no single person should be the only one with knowledge and control over the trust funds. By spreading those tasks among two or more people (or instituting a rigorous review process if you’re solo), you greatly reduce the risk of errors or malfeasance. In short, build oversight into your trust accounting workflow – it will protect you, your firm, and your clients.
(Other pitfalls for larger firms can include managing too many separate trust accounts or bank jurisdictions, but for most small and mid-sized Maryland firms, the above are the major areas to watch.)
Having looked at the common pitfalls, let’s turn to some best practices and tools that can help your firm stay in compliance and make trust accounting easier.
Best Practices and Tools to Simplify Trust Accounting
Maintaining compliance with Maryland’s trust accounting rules may seem daunting, but it can be made routine with the right practices and technology. Here are some best practices for Maryland law firms to consider:
- Develop Standard Operating Procedures: Create a written procedure for handling client funds at your firm. This should cover steps from the moment you receive a check or payment (e.g., who endorses and deposits it, into which account) to how you approve disbursements and conduct monthly reconciliations. Training all attorneys and staff on these procedures is crucial – everyone should understand the do’s and don’ts of trust funds. A checklist for opening a new client matter (does it require a trust deposit? did we get the retainer and deposit it?) and closing a matter (have all funds been disbursed? final reconciliation done?) can be very helpful. Establishing a culture of compliance starts with clear processes.
- Leverage Technology (Legal Tech Solutions): Small and mid-sized firms need not manage trust accounting manually on paper ledgers. Modern legal tech tools can shoulder much of the burden by automating records and calculations. For example, dedicated trust accounting software (like LeanLaw) that integrates with QuickBooks Online can automate many trust accounting tasks. When you receive a client payment, you can enter it into the software and it will automatically credit the correct client ledger and update the trust account balance – no double entry. When you write a check from the trust account, the software deducts it from that client’s balance and can even warn you if you attempt to overdraw a client’s funds. LeanLaw’s trust accounting integration is one example: it provides a user-friendly interface for lawyers to record trust transactions while ensuring the underlying accounting (in QuickBooks) is done correctly and in compliance. The result is that your trust ledgers and the bank balance stay in sync in real time, greatly reducing the risk of human error. Technology can also generate reports with a click – for instance, monthly three-way reconciliation reports and client balance summaries – saving you time and providing documentation for your records. In short, consider investing in legal billing and trust accounting software to streamline your workflow. (When evaluating software, look for features geared toward IOLTA compliance, such as three-way reconciliation, client ledger management, and permission controls. Many general accounting programs lack these legal-specific features, which is why an add-on like LeanLaw or a legal practice management platform is valuable.)
- Hire Professional Help if Needed: If numbers aren’t your strong suit or you simply lack time, don’t hesitate to involve a bookkeeper or accountant with law firm accounting experience. You still must review and supervise, but a professional can take charge of the day-to-day recordkeeping and reconciliation, ensuring nothing slips through the cracks. The cost of a part-time bookkeeper is negligible compared to the cost of a trust account mistake. As one Maryland ethics commentator put it, the price of an accountant is a fraction of what you’d lose if your law license were suspended due to trust mismanagement. If you bring in outside help, make sure they are familiar with Maryland’s specific trust requirements (for example, maintaining separate client ledgers and not commingling funds) – you may even provide them with a copy of the relevant rules. And remember, the attorney remains responsible for the trust account, even if someone else does the legwork. So supervise your staff or accountant: review the records they prepare, ask questions about any discrepancies, and stay involved. Combining professional bookkeeping help with your oversight is often an ideal solution for small firms.
- Implement Internal Audits and Reviews: In addition to the formal monthly reconciliations, it’s a good practice to periodically conduct a mini-audit of your trust records. For example, quarterly or annually, take a fresh look: pull a couple of client files at random and trace the flow of funds from start to finish (intake retainer to final disbursement) to confirm everything was handled correctly. Verify that your actual bank statements match the recorded balances on those dates. This self-audit can catch any lingering issues (like a client ledger that wasn’t closed out). It also prepares you in case the Attorney Grievance Commission ever performs a random audit or if a complaint arises – you will have confidence that your house is in order. Some firms have a policy that another attorney in the firm (who is not primarily in charge of the trust account) performs an independent review of the trust bank statement and reconciliation report each month. This ties back to oversight but is worth emphasizing as a best practice.
- Stay Educated and Updated: Make sure you stay current on Maryland’s trust accounting rules. The basics haven’t changed much in recent years, but there can be updates (for instance, adjustments to IOLTA interest remittance rules or reporting procedures). The Maryland State Bar and MLSC often have guidelines, FAQs, and CLE seminars on trust account management. Take advantage of those resources – for example, MLSC’s website provides information on approved banks and FAQs for attorneys, and the MSBA periodically offers CLE courses on IOLTA management. New attorneys in Maryland are required to take a professionalism course, but even seasoned lawyers should periodically refresh their understanding of Rule 19-301.15 and Chapter 400 rules. An hour spent reading the rules and relevant commentary is an excellent investment to avoid problems. Additionally, if your firm expands or your practice changes (say you start handling more personal injury settlements with large sums), revisit whether your trust procedures need adjustment (like setting up separate interest-bearing accounts).
By following these best practices – establishing sound procedures, utilizing technology and professional help, and keeping a watchful eye on your trust account – you can make trust accounting a smooth, routine part of your practice. Compliance will be much easier, freeing you to focus on your clients’ cases rather than worrying about a knock on the door from Bar Counsel. As one expert noted, with the right tools and habits in place, trust accounting becomes a straightforward routine rather than a constant source of worry.
Finally, let’s address some frequently asked questions that Maryland law firms often have about IOLTA and trust accounting:
FAQ: Maryland Trust Accounting and IOLTA
Q: When do I need to use an IOLTA account versus a separate trust account for a client?
A: You should deposit all client funds into a trust account, but the type of account depends on the funds’ amount and duration. Maryland’s default is to use an IOLTA account for any client funds that are nominal in amount or will be held short-term. This covers most routine retainers, advance fee deposits, and settlement proceeds awaiting distribution – all those go into your pooled IOLTA (interest goes to MLSC).
If, however, you receive a large sum of money or will be holding client funds for a long time, determine if those funds could earn net interest for the client. For example, if you’re holding a $500,000 escrow for a year, that interest is significant – in that case you should open a separate interest-bearing trust account for that client (often called an “escrow” or “separate trust account”) so that the client, not MLSC, gets the interest.
Maryland’s rules require this judgment call: use IOLTA by default, but use a separate account when it’s practical for the client’s benefit. In practice, if you’re unsure, consider factors like the amount, expected duration, and bank fees. When in doubt, err on the side of benefiting the client or seek guidance from the Bar. (Note: if you have a separate account for a client, you still must handle it with all the same recordkeeping and safeguards as an IOLTA account.)
Q: Are there any exceptions or waivers to maintaining an IOLTA account in Maryland?
A: Yes. Maryland law recognizes that a very small practice or certain practices might rarely hold client funds. If you do handle client money at all, you are required to have a trust account, but in limited cases you can get a waiver exempting you from using an interest-bearing IOLTA account.
The general guideline (set by MLSC) is if the average monthly balance of your trust account is below $3,500, you may apply for a waiver of IOLTA participation. Essentially, if the amount of client funds you hold is so low that the interest earned would be negligible (and likely eaten up by bank fees), MLSC can authorize you to keep those funds in a non-interest-bearing trust account. To use this waiver, you must certify your eligibility (usually as part of the annual IOLTA report).
Remember, this is not a waiver of having a trust account altogether – it’s only about whether the account has to be an interest-bearing IOLTA. If you have no client funds at all (e.g., you never touch client money in your practice area), you don’t need an IOLTA account – but you still must file the annual report stating you had none. Most small firms will need an IOLTA, as the threshold for waiver is fairly low. When in doubt, assume you need one and set it up.
Q: Can I keep any of my own firm’s money in the client trust account?
A: Generally, no – commingling is not allowed, meaning you cannot mix your money with client money in the trust account. The only exceptions are very limited. Maryland permits you to keep a nominal amount of firm funds in the trust account solely to cover bank service charges or fees (for example, to avoid the account going negative when the bank’s monthly maintenance fee hits). Often this is on the order of $100 or a few hundred dollars at most. Additionally, if a deposit you receive contains funds partly belonging to the client and partly to you, you can temporarily keep the whole amount in trust – but you must withdraw your portion promptly once it’s earned or no longer in dispute.
For instance, if you deposit a settlement and it includes your contingent fee, you should transfer your fee to your operating account as soon as you’ve satisfied any conditions (like court approval if required) and prepared the closing statement. You cannot leave excess firm money (“float”) in trust just to pad the balance, and you certainly cannot deposit personal or firm funds into trust for any reason other than the narrow ones stated. Every dollar in the trust account should be there for a client matter, except a minimal bank-fee cushion. Violating this rule is commingling and can lead to disciplinary action. In short: other than a tiny amount for bank fees, keep your money out of the client trust account, and keep client money out of your business account.
Q: What records am I required to keep for my trust account, and for how long?
A: Maryland attorneys must maintain quite detailed records. You need to keep:
- A ledger (accounting journal) for the trust account as a whole, showing every deposit and disbursement in chronological order with dates, amounts, payees, client identification, and purpose of each transaction.
- An individual ledger for each client whose funds you hold, showing all transactions (in and out) for that client and the current balance for that client. This ensures you always know exactly how much of the total trust balance belongs to each client.
- Bank statements, canceled checks, and deposit slips for the trust account. Essentially, any document from the bank or related to a transaction should be retained.
- Reconciliation reports or records of your monthly three-way reconciliations (bank balance vs. your ledger vs. client ledgers). While not explicitly listed in the rule text, having these is part of showing you complied with the monthly reconciliation requirement.
Maryland’s Rule 19-407 and related rules require creation of these records and that they be preserved for five years after the end of the representation. So, for each trust account you maintain, you’ll need to archive the above records for five years from the date you close the account or the related client matter concludes. It’s wise to organize records by year and client. Many firms scan and keep digital copies, which is fine as long as they can be printed if needed. In summary, maintain a detailed paper trail for every penny in and out of the trust account, and hold onto those records for 5+ years. If you ever face an audit or a client question, these records are your proof of proper handling.
Q: How often do I need to reconcile my trust account, and what does reconciliation involve?
A: You must reconcile the trust account every month (Rule 19-407(b) makes this a requirement). A reconciliation means you compare your internal records with the bank’s records to make sure everything matches. Specifically, each month you should:
- Obtain the bank statement for the trust account for that month’s end.
- Ensure every transaction on the bank statement is recorded in your ledger (and in the correct client ledger). Mark them off.
- List any outstanding checks or deposits that haven’t yet hit the bank (for example, a check you wrote on May 30 that the bank didn’t pay until June 2 will not show on May’s statement).
- Calculate the adjusted bank balance (bank balance minus any outstanding checks, plus any deposits in transit).
- Compare that adjusted bank balance to the balance according to your records. Your trust ledger’s ending balance (and the sum of all client sub-balances) should equal the adjusted bank balance.
If they don’t match, you have a discrepancy that needs investigation. Common reasons might be a transaction recorded in the wrong amount, a bank fee or interest credit you didn’t record, or a math error. Reconcile any differences promptly. Document the reconciliation (many attorneys will sign and date a reconciliation worksheet or use a software-generated report). The process is very similar to balancing a personal checkbook, but with the additional step of verifying the total of client ledgers. By reconciling monthly, you catch errors early and ensure that your books are in order. Maryland expects you to be able to produce reconciliation records if asked. Even if there was no activity in a given month, it’s good practice to note that you checked the balances. Monthly reconciliation is a cornerstone of trust accounting – skipping it even for a month is dangerous and a rule violation. So schedule it and treat it as sacred as a court deadline.
Q: What is the annual IOLTA report I have to file, and what happens if I miss it?
A: The annual IOLTA report (sometimes called the IOLTA Compliance Report) is a mandatory filing every Maryland attorney must complete by September 10 each year. In this report, you disclose whether you have any trust accounts that should be in the IOLTA program, and if so, provide the account information (bank name and account number) or if you’re exempt (no client funds or have a waiver), you report that. This is done online through the Maryland Attorney Information System.
The requirement comes from Maryland Rule 19-409. If you miss the deadline or fail to file the report, you can be decertified, which means you are not authorized to practice law until you cure the issue. Decertification is an administrative suspension; it’s public and can be embarrassing (and disruptive, as you’d have to wind down practice until fixed). Fortunately, the fix is usually to file the report and pay a fee, but prevention is best. The Court of Appeals takes compliance reporting seriously – dozens of lawyers are decertified each year for failing to file their IOLTA or pro bono reports on time.
So, mark your calendar and submit the report promptly each year (it typically becomes available mid-summer for filing, and reminders are emailed). The report itself is straightforward: you either list your IOLTA account(s) or affirm you have none/waiver. Note that this is separate from any CLE or membership renewal; it’s its own requirement. In summary: don’t forget the IOLTA report – missing it can interrupt your ability to practice. If you realize you missed the deadline, address it immediately by contacting the Client Protection Fund/MLSC or checking the courts’ compliance website for instructions to get reinstated.
Q: What are the potential penalties for trust accounting violations in Maryland?
A: The consequences can be severe. Maryland’s Attorney Grievance Commission and Court of Appeals view mishandling of client funds as one of the gravest ethics violations. Even unintentional mistakes (like poor recordkeeping or negligent commingling) can lead to sanctions such as reprimands or suspensions.
Serious violations – especially any form of misappropriation (using client money for something it shouldn’t be) – often result in disbarment. In fact, misuse of trust accounts is a leading cause of disbarments in Maryland. For example, lawyers have been disbarred for commingling funds, failing to keep records and then having shortages in the account. The Court tends to impose the harshest penalty (disbarment) if it finds that an attorney intentionally took client funds or acted with dishonesty.
Even short of that, an attorney who bounces a trust account check will automatically trigger an investigation (the bank notifies Bar Counsel), and that can lead to disciplinary action if any rule violations are found. Lesser infractions, like not reconciling or failing to maintain ledgers, might result in a reprimand or required remedial training – but they also put your license at risk if not corrected. Additionally, there’s the harm to your reputation: clients can file civil claims, and a disciplinary record is public. Bottom line: the Maryland Bar will not cut slack when it comes to safeguarding client money.
The best “penalty” is none at all – by diligently following the rules, you won’t have to find out what discipline would apply. If you do make a mistake, often the best course is to self-report or correct it immediately and transparently. The AGC does consider context – a one-time bookkeeping error that you fixed and reported is far different from a pattern of neglect. But you should strive to avoid violations entirely. The stakes (your license and livelihood) are too high. As the saying goes, an ounce of prevention is worth a pound of cure in trust accounting.
By understanding Maryland’s IOLTA program and trust accounting rules and implementing solid practices, small and mid-sized law firms can stay fully compliant while efficiently managing client funds. The rules may be detailed, but they boil down to acting as a trustworthy fiduciary: keep client money separate, account for every cent, and double-check your work regularly.
Maryland provides resources and a framework to help you do this, and with a bit of organization – and perhaps the assistance of specialized software like LeanLaw – you can turn trust accounting from a headache into just another routine part of running a successful law practice. Following the guidance above will not only protect your clients, but also protect you and your firm for the long run.
