Multi-State Trust Accounting Rules: What Changes When Your Firm Crosses State Lines

A firm adds a partner licensed in a neighboring state, opens a small office across the border, and within a month the firm administrator is holding a retainer check and a question nobody has answered yet: which trust account does this go in, and whose rules decide?

That question is the core of multi-state trust accounting rules, and software can’t answer it. Deciding which state’s rule applies to a given trust account is a call for the firm’s ethics counsel or the relevant state bar. What the firm can control is whether its records are complete enough that, once the answer is known, any state’s auditor can follow every dollar.

Below are the questions administrators bring to that conversation, with what the ABA Model Rules say and where states depart from them. Every state adopts its own version of the Model Rules, so treat this as orientation, not legal advice, and check your own jurisdictions’ rules before acting. (For the baseline every state builds on, see our overview of the core rules for trust accounting.)

Which state’s rules govern a trust account?

The starting point is ABA Model Rule 8.5, Disciplinary Authority; Choice of Law. Paragraph (b) splits conduct into two buckets:

• Conduct connected to a matter pending before a tribunal falls under the rules of the jurisdiction where the tribunal sits, unless the tribunal’s rules provide otherwise.
• Any other conduct falls under the rules of the jurisdiction where the lawyer’s conduct occurred or, if the predominant effect of the conduct is in a different jurisdiction, the rules of that jurisdiction.

The rule also includes a safe harbor: a lawyer is not subject to discipline if the conduct conforms to the rules of a jurisdiction where the lawyer reasonably believes the predominant effect will occur. (North Carolina’s adopted version, on the North Carolina State Bar’s site, tracks this language.)

“Predominant effect” is a judgment, and the ABA has written about how to make it. In ABA Formal Opinion 504, the Standing Committee on Ethics and Professional Responsibility lists factors such as where the client is located, where a transaction occurs, which jurisdiction’s substantive law applies, and where the lawyer’s principal office is.

For an administrator, the practical step is to write down which state’s rules the firm has decided govern each trust account, who made that call, and when. That note is what you’ll hand an auditor or a new bookkeeper.

Can one IOLTA account serve clients in two states?

An IOLTA (Interest on Lawyers’ Trust Accounts) account is the pooled trust account for client funds too small or too short-term to earn net interest for the client. The temptation at a growing firm is to run every client through one account. The Model Rule doesn’t make that the default.

ABA Model Rule 1.15(a) says funds are kept in a separate account maintained in the state where the lawyer’s office is situated, or elsewhere with the consent of the client or third person. States can tighten that. New York’s Rule 1.15(b)(1) requires the funds to be held in a banking institution within New York State, and permits an out-of-state bank only with the prior written approval of the person the funds belong to (and a bank that meets New York’s reporting requirements).

So the careful answer is: maybe, under some states’ rules and with the right consent, and only after counsel confirms it for each state involved. Keeping a trust account in each state where the firm has an office gives an auditor less to untangle, because the account’s location and the governing rule then point to the same state.

How do multi-state trust accounting rules differ by state?

Even where the choice-of-law answer is settled, the rules that follow it vary. Four categories are worth checking first.

Record-retention periods

Model Rule 1.15(a) says complete records of trust funds are preserved for five years after the representation ends, but the ABA puts “five years” in brackets, a signal that each state picks its own number. Some states pick a longer one. New York’s Rule 1.15(d) requires bookkeeping records to be kept for seven years. Florida’s Rule 5-1.2 (in Chapter 5 of the Rules Regulating The Florida Bar) requires six years. A firm that applies one retention policy across offices should set it to the longest period that applies.

IOLTA participation

IOLTA programs are run jurisdiction by jurisdiction, and they aren’t built the same way. The ABA’s Status of IOLTA Programs page sorts them into three types: mandatory (every lawyer who maintains client trust accounts participates), opt-out (lawyers participate unless they affirmatively choose not to), and voluntary (lawyers must affirmatively decide to participate). Florida’s Rule 5-1.1(g) is a mandatory example: qualifying funds must go into an IOLTA account unless they can earn income for the client.

Overdraft and dishonored-check notice

Some states require the bank to report trust account problems to the bar. Florida’s Rule 5-1.2(d)(4) requires the lawyer to authorize the bank to notify the bar’s staff counsel if the account is overdrawn or a trust check is dishonored for insufficient funds, and Rule 5-1.1(k) prohibits overdraft protection on any account holding trust funds. In a state with notice requirements, a bank error or a mistimed transfer can reach the bar before the firm notices it.

Electronic transfers, cash, and cards

States differ on how money can leave trust. New York’s Rule 1.15(e) says withdrawals go only to a named payee and never to cash, by check or, with the prior written approval of the party entitled to the funds, by bank transfer. Florida’s Rule 5-1.2(e) limits authorized electronic transfers from trust to listed categories, such as payments to clients, properly incurred expenses, and earned fees not in dispute, and requires records showing who authorized each transfer and when. Before the firm sets up a new payment method on a trust account, check each state’s rule on it.

Records that make any state’s audit answerable

None of the differences above changes what a defensible trust file looks like. Every state wants to see the same underlying evidence, even if it asks for it on a different schedule or keeps it for a different number of years:

• A ledger for each client showing every deposit, transfer, and disbursement, with its date, purpose, and matter. Our guide to client ledgers and bar compliance walks through what belongs on one.
• A regular reconciliation of the bank statement, the trust account register, and the sum of the client ledgers, so the three tie out.
• Reports you can produce on request, by account and by client. Our post on the reports trust account compliance requires covers the common set.
• The written note on which state’s rules govern each account.

This is where the system choice matters. LeanLaw keeps a trust sub-ledger for each client and handles trust transfers automatically, and it’s built on QuickBooks Online as the financial source of truth, so QuickBooks Online is required. Reconciliation, including three-way reconciliation, runs in QuickBooks Online, which keeps the bank-to-books comparison in your accounting system of record. You can see how LeanLaw handles trust accounting for the details.

For a managing partner, this is a risk question. Crossing a state line multiplies the rules a firm answers to, and the exposure sits in the gaps between offices: a retention policy set to the shorter period, a transfer method one state allows and another doesn’t, an account opened before anyone asked counsel which rule governs it. A firm that has settled the governing-rule question with counsel, written it down, and kept per-client records clean can answer a request from any of its states with the same file.