Commingling trust funds means mixing your own money with money you hold for others in the same account. It happens in two directions: depositing firm or personal funds into trust, and leaving funds that have become yours, such as earned fees, sitting there. A small cushion for bank charges is the usual exception. A monthly reconciliation shows commingling early.
What counts as commingling trust funds?
Commingling trust funds is any mixing of money that belongs to the account holder with money held for clients, tenants, buyers or other beneficiaries. The rule is about ownership, not intent. Firm money deposited to help a client is commingling, and so is firm money left in trust after it was earned.
The State Bar of California's 2023 Handbook on Client Trust Accounting sets out both directions for lawyers. A lawyer may not deposit money belonging to the lawyer or firm into a client trust account, apart from a small amount for bank charges. A lawyer also may not keep firm money in the account, which means fees must be taken out as they are earned. The handbook adds a point many small firms get wrong: keeping extra firm money in trust "just in case" does not protect clients. It is an additional violation.
The same idea runs through other kinds of trust money:
- Real estate brokers. The California Department of Real Estate's list of common audit violations names depositing trust funds into the broker's general business account as a common cause of commingling, alongside holding too much broker money in trust.
- Title and settlement agents. The ALTA Best Practices framework, version 5.0, expects escrow funds to be kept separately and not commingled with the company's operating account or any individual's personal account.
Commingling also runs the other way. Client money deposited to the firm's operating account is mixed with firm money just as surely, and it is at greater risk there, because operating funds get spent.
The bank-charge cushion: how much firm money a trust account may hold
The bank-charge cushion is a small amount of the account holder's own money left in trust so that bank fees never come out of a client's balance. For California lawyers the limit is an amount "reasonably sufficient to pay bank charges." California brokers work to a fixed figure: no more than 200 dollars of broker funds in trust.
California's rule 1.15(c), quoted in full in the handbook, allows two exceptions to the ban on firm money in trust. The first is funds reasonably sufficient to pay bank charges. The second covers money that belongs partly to the client and partly to the lawyer, such as a settlement check that includes the lawyer's fee, until the lawyer's share is fixed and can be withdrawn.
"Reasonably sufficient" is a test of fees, not of comfort: a cushion of a few months' charges is easy to defend, and a cushion of thousands of dollars is not. How to size the cushion, record it on its own bank charges ledger, or avoid it by having fees charged to operating is covered in whether a lawyer can keep a cushion in the IOLTA account for bank fees.
The broker's figure is different in kind. The DRE guidance describes the monthly trust reconciliation as a check that there is no unidentified overage or broker money above 200 dollars in the trust account. A broker who applies the lawyer's "reasonably sufficient" standard, or a lawyer who assumes a 200-dollar allowance, is reading the wrong rule. Check the rule that governs your licence and your state.
Earned fees left in trust, the commingling that builds up quietly
Earned fees left in trust are a form of commingling trust funds that builds up without anyone deciding on it, because nobody deposits them on purpose. A retainer is earned over months, invoices go out, and the money stays put. Once the fee is earned and undisputed, it belongs to the firm and should be moved to operating promptly.
California's rule says the firm's portion must be withdrawn "at the earliest reasonable time" after its interest becomes fixed. The handbook suggests building that into a routine, such as withdrawing earned fees when the monthly reconciliation is done. A simple practice works well: each month, compare billed and unpaid invoices for trust clients to their trust balances, and transfer what has been earned, with each transfer tied to an invoice number on the client ledger.
When the client disputes the fee
A disputed fee follows a different rule. Under California's rule 1.15(c)(2), if a client disputes the lawyer's right to a portion of trust funds, the disputed portion stays in trust until the dispute is finally resolved. Leaving that portion in trust is not commingling. Taking it out would be worse. The undisputed portion still has to move.
Mark disputed amounts clearly on the client ledger, with the date the dispute was raised. When a bar auditor sees a firm-owned balance sitting in trust, the first question is why, and a dated note of the dispute is the answer. What a state bar trust account audit requests covers the rest of what an auditor asks for.
Is commingling trust funds the same as misappropriation?
Commingling trust funds is not the same as misappropriation, but it is often how misappropriation starts. Commingling means firm money and client money sit in the same account. Misappropriation means client money is used for something other than its owner's purpose, whether or not anyone meant to take it.
A State Bar formal opinion reproduced in the handbook notes that misappropriation can happen without any intent to convert client funds. The path from one to the other is short. Once firm money is in trust, it becomes hard to tell whose money paid which check. A lawyer who believes a cushion of 3,000.00 is "the firm's" may write a check against it, only to find the cushion was really an unrecorded client receipt. A firm that leaves earned fees in trust may later pay an operating bill from trust, telling itself the fees were earned anyway. Either way, a client's money has been spent.
That is why reviewers treat commingling seriously even when no client lost a cent. A trust account that holds only trust money, plus a recorded cushion, is one where every dollar can be traced to an owner. An account with an unknown amount of firm money in it cannot be audited cleanly at all.
How does a trust reconciliation reveal commingling before an auditor does?
A trust reconciliation reveals commingling when the adjusted bank balance is higher than the total of the client ledgers. The excess is money that no client owns. It may be a cushion that grew, earned fees never withdrawn, an unapplied receipt, or firm money deposited by mistake. The listing makes it visible every month.
In a three-way reconciliation, the bank, the journal and the ledgers should all equal one figure. Read that comparison with commingling in mind:
- Bank and journal agree, ledgers total less. The account holds money no ledger claims. Find out whose it is before doing anything else. Some of it may belong to a client whose receipt was never posted, and how to research unidentified trust funds covers that search.
- The cushion line has grown. If the bank charges ledger shows more than a few months of fees, something other than fee money was posted there.
- Client ledgers show credits labelled "fees" that were never transferred. These are earned fees in trust, waiting to move.
- Operating deposits on the trust statement. Read the statement's deposit lines for payers who pay the firm's own invoices, such as a client paying a bill for past work.
Example situations and their fixes
The table below gives example situations. They are illustrative, not legal advice for any state.
| Example situation | Commingling? | Fix | Record to keep |
|---|---|---|---|
| Cushion of a few months' bank fees, on its own ledger | No, if the rule allows a cushion | None | Bank charges ledger |
| Invoice paid by the client in March, fee still in trust in June | Yes | Transfer the earned fee to operating | Invoice number on the client ledger and transfer |
| Fee disputed by the client in writing | No | Hold the disputed part until resolved | Dated note of the dispute |
| Client's check for a past invoice deposited to trust | Yes | Transfer to operating once the check clears | Deposit record and transfer |
| Settlement check with costs, client share and fee | No, while the fee share is not yet fixed | Withdraw the fee once it is fixed | Settlement statement |
| Client funds deposited to operating | Yes, in the other direction | Move them to trust at once | Both bank statements and the correction entry |
Accidental commingling from overdraft lines, mixed checks and wrong-account deposits
Accidental commingling happens when firm money reaches the trust account through a bank feature or a clerical slip, without anyone deciding to put it there. Overdraft protection that adds a fixed sum, a client check that pays both a bill and a retainer, and a deposit keyed to the wrong account are the usual routes.
Overdraft protection that overshoots
The California handbook discusses overdraft protection on trust accounts. It says a feature that covers exactly the overdraft does not create a commingling problem. A feature that deposits a set amount, such as 200 dollars to cover a 155-dollar overdraft, leaves a residue that belongs to the lawyer, and that residue is commingling. The handbook is also clear that overdraft protection is no substitute for never overdrawing trust. What happens after a trust account overdraft covers the notice and the explanation that follow.
One check for two purposes
A client sometimes sends one check that pays last month's invoice and adds to the retainer. Deposit it to trust, where the unearned part must go, then transfer the earned part to operating after the check clears. Record both steps against the same client ledger. Depositing the whole check to operating instead would put client money in the firm's account.
A deposit keyed to the wrong account
A teller or a mobile deposit can credit a firm payment to trust, or a trust receipt to operating. The bank may then reverse the deposit and repost it. The trust statement will show a credit and an equal debit, sometimes in different months. Treat the pair as a correction, record the reason in the trust file, and confirm that the money ended up in the right account. How to handle a reversed bank transaction on a reconciliation explains matching the two lines.
These events are easy to miss when the trust statement arrives as a PDF and nobody reads every deposit line. PreciseBankFlow reads each line of the trust and operating statements, proves each statement foots, and lists duplicates and unexplained differences as exceptions for someone to review. Who owns each dollar stays a judgment for the person signing the reconciliation. Get started to request early access.