Guides · Trust accounting

How retainers work in an IOLTA trust account

A retainer paid in advance is the client's money, not the firm's, until the firm has earned it by doing the work. That is why it is deposited into the firm's IOLTA trust account rather than its operating account, why it sits on a ledger in the client's name, and why the firm may only move it out — to itself, against an invoice for work done, or back to the client — with a record of each step. Get the sequence right and a retainer is routine bookkeeping. Get it wrong and it is commingling or conversion, the two findings that end careers.

The lifecycle

1. Deposit. The client's check, wire or card payment goes into the trust account, and a deposit is recorded on that client's ledger for the full amount, dated the day it arrived. If a card processor takes its fee out of the deposit, the ledger is short by the fee and the client has been charged for the firm's cost; a processor used for trust must settle the full amount and take its fee from operating.

2. Work and invoice. The firm records time, flat fees and expenses on the matter as usual and issues an invoice. Nothing has moved yet: the invoice is a statement of what has been earned, and the retainer is still the client's.

3. Fee transfer. With the invoice issued (and, depending on the jurisdiction and the engagement letter, after the client has had notice), the earned amount is transferred from the client's trust ledger to the firm's operating account and recorded as a payment on the invoice. Two things happen at once and must be recorded together: the ledger goes down, the invoice's paid amount goes up. Only the earned amount moves, and never more than the ledger holds.

4. Move the money. Recording the transfer and making it at the bank are different acts. Until the bank transfer is made, the funds are still physically in trust while the books say they have left — a reconciling difference every month until it is cleared, and, if left long enough, the firm's own money sitting in the client trust account.

5. Replenish or refund. An evergreen retainer is topped up by the client when it falls below an agreed floor, which is another deposit. When the matter ends, whatever remains is the client's and is refunded from trust; it never becomes the firm's by default.

Rules that follow from "it is the client's money"

• One ledger per client, so it is always known whose money is whose. Separate ledgers per matter when funds must not mix between a client's matters.
• A ledger never goes below zero. A negative client ledger means another client's money has been spent.
• Entries are never edited or deleted. A mistake is corrected by a reversing entry, leaving both visible.
• Every movement records who did it, when, for which client and matter, and against which invoice if any.
• The account reconciles three ways every month: bank statement, book balance, sum of client ledgers.

The mistakes that become complaints

Depositing a retainer into operating "for now". Transferring fees before the invoice exists. Transferring a round number rather than the invoiced amount. Paying a filing fee for client A from the account when only client B's funds are in it. Letting bank fees hit the trust account. Keeping the ledger in a spreadsheet that anyone can overwrite. Each is common, and each is visible the moment a three-way reconciliation is done properly.

How ModusBill does it

In ModusBill a retainer lives on the client's trust ledger from the day it is deposited. Applying it to an invoice is one action that debits the ledger and records the payment together, refuses any amount the ledger does not hold, and stamps the entry with the invoice it paid. The fee transfer then appears on the trust dashboard as money waiting to be moved at the bank until someone records that it was, so the reconciling difference is always in view. Voiding the invoice reverses the transfer and returns the funds to the exact ledger they came from. Every entry is append-only and the client's ledger statement can be printed on demand.