How to Fix a Commingled Trust Account

A commingled trust account is one where firm money and client money have ended up mixed together, usually because earned fees were left sitting in trust, operating expenses were paid out of the wrong account, or a deposit landed in trust that never belonged there. Fixing it is a bookkeeping reconstruction, not a transfer. You identify every dollar by owner, correct the records first, document what happened, and only then move money.

If you have just realized your trust account has firm money in it, the instinct is almost always the same: move it out today and get clean. I understand the impulse. I would still ask you to wait a few days. In my experience cleaning up trust accounts, a rushed transfer is the single most common way a fixable bookkeeping problem turns into a much harder one, because now there is a second unexplained movement sitting on top of the first.

The good news is that an overage caught early is one of the more straightforward problems in trust account bookkeeping. Here is how the work actually goes.

What commingling usually looks like in real books

Commingling is rarely one dramatic event. It is almost always an accumulation. When I open a set of books and find firm and client funds mixed, it is usually some combination of these.

Earned fees that were never transferred out after an invoice was paid, so months of firm revenue are sitting in trust.
A cushion the firm deliberately left in trust to keep the account from going negative on bank fees.
Bank charges, wire fees, or credit card processing fees that came directly out of the trust account instead of operating.
An operating expense paid from the trust account because someone grabbed the wrong card or the wrong checkbook.
A settlement or retainer deposit that was partly earned on arrival and got deposited whole, with nothing splitting it afterward.
Interest posted to the account and never handled according to the program rules.
A client refund or disbursement sent from operating instead of trust, which leaves the trust balance overstated for that matter.

None of those require bad intent. Most of them require a busy month and no monthly reconciliation. That is the actual root cause in nearly every file I clean up.

Why moving the money first makes the fix harder

A trust account has to be able to answer one question at any moment: whose money is this, and how much of it belongs to each person. That answer lives in the individual client ledgers, not in the bank balance.

If you sweep an amount out of trust before you have rebuilt those ledgers, you have guessed. Maybe the guess is close. But now the record shows a transfer with no supporting detail behind it, and if anyone ever asks you to explain the account, you are explaining two events instead of one. You also risk pulling out money that was actually a client's, which turns an overage into a shortage. A shortage is a much worse position than an overage, and it is the situation I write about in what to do when your IOLTA account is short.

So the order matters. Records first. Money second. Every time.

How to fix a commingled trust account, step by step

Step 1: Freeze the pattern before you fix the history

Stop the bleeding first. Move card processing fees and bank fees off the trust account. Make sure firm expenses are coming out of operating only. Tell whoever touches the accounts that no transfers out of trust happen until the cleanup is finished. This takes an afternoon and it stops the problem from growing while you work backward.

Step 2: Find the last date everything genuinely agreed

Work backward to the most recent month where the trust bank balance, your trust ledger, and the sum of all client ledgers actually matched. That date is your anchor. Do not assume it. Prove it. Sometimes the anchor is two months back and sometimes it is two years back, and knowing which one you are dealing with changes the size of the job entirely.

Step 3: Rebuild every client ledger forward from the anchor

From the anchor date forward, assign every single transaction to a client or matter. Deposits, disbursements, transfers, fees, refunds, interest. This is the slow part and it is where the answers live. When you are done you will have a per-matter balance for every client whose funds you hold, which is the whole point of client ledger management in the first place.

Step 4: Total the ledgers and compare to the bank

Add up all the client ledgers. Compare that total to the trust bank balance as of the same date. The difference is your commingled amount, and now it is a specific number with a story behind it rather than a vague sense that something is off.

If the bank balance is higher than the ledger total, you are holding an overage, which usually means firm money. If the bank balance is lower, you are short, and that is a different and more urgent situation.

Step 5: Trace the overage to its source transactions

Do not just label the difference "firm funds" and move on. Go find it. In practice the overage usually breaks down into a handful of identifiable pieces: three invoices where the earned fee was never swept, a deliberate cushion someone deposited in a prior year, and a few hundred dollars of fees the bank pulled from the wrong account. Each piece should get named, dated, and tied to a document.

The pieces you cannot trace are the ones to slow down on. Unidentified funds in a trust account are handled differently in different jurisdictions, and how you treat them is a question for your state bar or your own counsel, not for your bookkeeper.

Step 6: Correct the records, then move the money

With the ledgers rebuilt and the overage broken into identified pieces, you can transfer out the amounts that are clearly firm funds, one transfer per identified reason rather than one lump sum. Each transfer gets a memo tying it to the specific invoices or fees it represents. Anything still unidentified stays in the account until you have direction on it.

Step 7: Reconcile forward, month by month, to today

Rather than jumping from your anchor date to the present, reconcile each month in sequence. It takes longer and it is the only method that isolates exactly when something went wrong. A three-way reconciliation done monthly is what keeps the account from drifting again, and it is what you would want to be able to hand over if anyone ever asks.

What to document while you work

The documentation is the deliverable, not a byproduct. By the end you should have a written record showing:

The anchor date and evidence that the three numbers agreed on it.
A complete client ledger for every matter holding funds.
The total commingled amount, broken into identified components with dates and causes.
A copy of the invoice, fee notice, or statement supporting each correcting transfer.
A reconciliation for every month from the anchor forward.
A written monthly process going forward, naming who does it and by what date.

Firms sometimes skip the documentation because the numbers are right now and that feels like enough. It is not. Six months from now, the only thing that distinguishes a corrected account from a suspicious one is the paper trail explaining the correction.

Where the bookkeeping stops

I want to be plain about the boundary, because it matters here more than on almost any other topic.

I am a bookkeeper and business consultant. I am not an attorney. Everything above is the bookkeeping side: reconstruction, reconciliation, ledgers, and documentation. Whether your particular situation triggers a reporting obligation, how your state's rules apply to your specific facts, what to do with funds you cannot identify, and what to say to anyone about it are legal and ethics questions. Those belong to your state bar, its ethics hotline, or your own counsel. Your jurisdiction's IOLTA program, listed in the ABA's directory of IOLTA programs, is the right starting point for the rules that actually govern you.

What I can tell you is that having accurate numbers in hand before you make those calls puts you in a far better position than making them from a guess.

When to bring in help

You can do this yourself if the drift is short and your matter count is small. Bring in someone when any of these are true: the anchor date is more than a few months back, the account has been through a software migration, a bookkeeper left mid-stream, you are short rather than over, or a review is coming and you are not confident in what you would hand over. That is exactly the work a trust account cleanup is built to do.

It is also worth stepping back and asking why the drift happened, because the answer is usually that nobody owned the monthly close. That is a staffing and process question as much as a bookkeeping one, and it is the same conversation behind what a firm should actually spend on bookkeeping over at Rebel Patriot Business Services, our parent company. Paying too little for someone who never touches the trust ledger is how most of these files start.

Frequently asked questions

What counts as commingling in a trust account?

In bookkeeping terms, commingling is any situation where firm funds and client funds sit in the same account without the records clearly separating them. The most common versions are earned fees left in trust after invoicing and firm expenses or bank fees paid out of the trust account. How your jurisdiction defines and treats it is a legal question for your state bar.

Can I just transfer the firm money out and be done?

You can move it, but doing it before the client ledgers are rebuilt means you are guessing at the amount. If the guess is high you create a shortage, which is a worse position than the one you started in. Rebuild the ledgers, identify the overage by source, then transfer with documentation tying each movement to a specific invoice or fee.

How long does it take to clean up a commingled trust account?

It depends almost entirely on how far back the last reliable balance sits and how many matters are involved. A firm a few months behind with a dozen active matters can be sorted in days. A firm two years behind with hundreds of matters and a software change in the middle is a project measured in weeks.

What if I cannot identify where some of the money came from?

Leave it in the account and stop there. Unidentified funds are handled differently depending on jurisdiction, and the decision is a legal and ethics call rather than a bookkeeping one. Document what you know about the amount and take the question to your state bar or your own counsel.

How do I keep it from happening again?

Run a full three-way reconciliation every month, keep a current ledger for every matter, sweep earned fees on a set schedule right after invoicing, and make sure no fees of any kind are hitting the trust account. Assign one named person and one date each month. Trust accounts drift when nobody owns the close, so if you want to talk through what that routine should look like for your firm, reach out to us.

Get Expert Support for Your Trust Accounting

Don't leave your IOLTA compliance to chance. Contact Rebel Patriot Business Services today for tailored solutions that ensure your trust accounts are managed with precision and care.

By Nettie Roos, founder of Rescue My IOLTA. Nettie is an executive consultant with a fractional CFO certification and a strong bookkeeping background, providing trust account management, fractional CFO services, bookkeeping and executive coaching for law firms, and part of Rebel Patriot Business Services. She is not an attorney.

Disclaimer: Rescue My IOLTA provides bookkeeping and trust account support, not legal advice. For legal or ethics questions specific to your firm, consult your state bar or your own counsel.

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