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Closing a Trust Account: Steps for Compliance & Avoiding Penalties 🚨
Closing a trust account isn’t as simple as withdrawing the balance and shutting it down. Attorneys must follow strict compliance rules to ensure no client funds are lost, all obligations are met, and the account is properly closed with the bar and financial institutions.
One mistake? You could face bar discipline, financial penalties, or even legal liability.
This guide covers:
When and why a trust account needs to be closed The step-by-step process to close it properly How to ensure compliance with state rulesLet’s go through how to shut down a trust account the right way—without putting your law license at risk.
When Should You Close a Trust Account?
A trust account should only be closed when ALL client funds have been properly disbursed, and no further deposits or transactions are needed. Common reasons include:
- Firm is closing or merging – If your law firm is shutting down, selling, or merging, trust accounts must be closed or transferred appropriately.
- Switching financial institutions – If you’re moving your trust account to a new bank, you must ensure proper record transfers and final reconciliation.
- No longer handling client trust funds – If your practice changes and you no longer need an IOLTA or trust account, you must formally close it with your bar association.
Do NOT close an account if there are pending transactions or unresolved client funds. You must account for every dollar before shutting it down. Step-by-Step Process for Closing a Trust Account Properly
Step 1: Identify All Outstanding Balances & Transactions
Before closing a trust account, you must:
- Reconcile the account – Ensure your bank statement, trust ledger, and client ledgers all match.
- Check for outstanding checks – Follow up on any uncashed checks and document them.
- Identify any remaining client funds – Notify clients about any balances they still have.
DO NOT assume leftover funds belong to the firm. Unclaimed client funds may need to be escheated to the state (see Step 5).Step 2: Notify Clients & Return Any Remaining Funds
If there are client funds remaining, you must:
- Provide a final statement – Send clients a detailed accounting of their trust balance.
- Return funds with proper documentation – Issue checks or request wire transfer instructions.
- Obtain signed acknowledgments – Have clients confirm receipt of their funds.
Risk: If you fail to return client money, it could result in bar complaints or legal action.Step 3: Handle Unclaimed Funds (Avoiding Escheatment Violations)
What if you can’t locate a client or they don’t cash their check?
- Follow your state’s abandoned funds procedure – Many states require attorneys to hold unclaimed funds for a specific period before turning them over to the state’s unclaimed property division.
- Document all attempts to contact the client – Keep records of letters, emails, and phone calls.
- File the proper escheatment paperwork if required.
Check your state bar rules for specific escheatment timelines and reporting procedures.Step 4: Notify the Bar & Follow State Closure Procedures
Most state bars require attorneys to formally close their trust accounts by:
- Submitting a final trust account reconciliation report
- Providing proof that all funds were distributed properly
- Certifying that no client funds remain
Check your state bar’s requirements—some jurisdictions require written notice and final bank statements.Step 5: Notify the Bank & Obtain Final Records
After ensuring all funds are accounted for, you must:
- Inform the bank in writing that you are closing the trust account.
- Request final bank statements and transaction history.
- Confirm the account is fully closed and inactive (to prevent unauthorized activity).
Risk: If you close an account prematurely and a transaction is processed afterward, you could be held personally liable for lost funds or bounced checks.Step 6: Retain Trust Account Records for the Required Period
Even after closing the account, you must retain all trust account records for the time required by your jurisdiction.
Standard record retention periods:
- Most states require 5-7 years of trust account records.
- Some states (e.g., California) require longer retention for client records.
Best Practice: Store records securely in both digital and physical formats in case of future audits or client disputes.
Common Trust Account Closure Mistakes That Lead to Trouble
Closing the account before final reconciliation
If your client ledgers don’t match the bank statement, you’re leaving funds unaccounted for.
Fix: Perform a full three-way reconciliation before closing.
Failing to return unclaimed client funds
Leftover money does NOT belong to your firm—it must be returned or turned over to the state.
Fix: Follow escheatment laws for unclaimed trust funds.
Not keeping required trust account records
Bar auditors can still request trust records even years after you close the account.
Fix: Retain all financial records for at least 5-7 years.
Closing a Trust Account? Get Expert Help to Stay Compliant!
Shutting down a trust account is not a simple process—missing just one step can result in bar audits, financial penalties, or legal risks.
At Prestige Accounting & Consulting, we specialize in:
Trust account reconciliations & final closures Ensuring all client funds are properly accounted for Guiding law firms through the state bar’s closure requirements Recordkeeping & compliance for long-term protectionDon’t risk compliance violations—let’s close your trust account the RIGHT way. Book a consultation today & ensure a smooth, risk-free trust account closure! 
