General

California Trust Accounting 101: A Complete Guide with Requirements

Over the past few decades, estate values and inheritances in the U.S. have more than doubled, and this upward trend shows no signs of slowing down. In fact, over the next 30 years, American retirees are projected to pass on more than $36 trillion in wealth to their families, friends, charitable organizations, and other beneficiaries, according to a 2021 estate planning report by SeniorLiving. As estates grow larger, the average age of those receiving inheritances has also increased.

With this growing transfer of wealth, managing and accounting for trusts has become more important than ever. In California, where legal and financial standards are strict, it requires close attention to detail and adherence to specific legal requirements. Whether you're a trustee or an attorney, this guide will walk you through the basics and requirements of trust accounting in California to help you navigate trust accounts effectively.

What is Trust Accounting?

Trust accounting is the process of tracking and reporting all financial activities related to client funds held in trust. These funds are kept in a special bank account that is separate from your business or personal accounts and must remain fully traceable. The funds are reserved for a specific purpose in the client’s case and cannot be accessed before that purpose is fulfilled.

In simpler terms, trust accounting involves maintaining a financial record that clearly shows where every dollar in the trust came from and how it is used.

Defining Client Trust Account

A client trust account is a special bank account where a lawyer holds funds on behalf of clients. This account is kept separate from the law firm’s operating funds and cannot be used to pay firm expenses or fees, unless the funds have already been earned and properly transferred.

There are two common types of trust accounts:

A pooled trust account combines funds from multiple clients into one account. Each client’s portion is carefully tracked in separate records, but the money is physically kept together.
A separate trust account is an individual account set up for one client only. It keeps that client’s funds entirely apart from others.

This segregation of funds is fundamental to trust accounting and is required by California law. Under Rule 1.15 of the California Rules of Professional Conduct, attorneys must hold client funds in a trust account that is separate from personal and business accounts.

These accounts must be maintained at financial institutions that are insured by the FDIC or a similar entity and must be clearly labeled as “trust account” or with words of similar import.

California Attorney Trust Accounting Requirements (State Bar of California)

This section is based on Rule 1.15 of the California Rules of Professional Conduct and guidance from the State Bar’s Trust Accounting Handbook.

View the full rule here: Safekeeping Funds and Property of Clients and Other Persons

Separate Account - Rule 1.15(a): Funds held by a lawyer or law firm for the benefit of a client must be deposited in one or more identifiable bank accounts labeled “Trust Account” or words of similar import.

Location of Account - Rule 1.15(a): Trust accounts must be maintained in California, unless the client provides written consent to maintain the account in another jurisdiction with a substantial relationship to the client or the client's business.

Flat Fee Exception - Rule 1.15(b): Flat fees paid in advance may go into a lawyer’s operating account if: (1) the client is informed of their right to a trust deposit and refunds, and (2) for fees over $1,000, the agreement and disclosures are in a signed writing.

No Commingling - Rule 1.15(c): A lawyer’s funds may not be commingled with client funds, except in two cases: to cover bank charges, and for funds partly belonging to both, which must be withdrawn promptly once the lawyer’s share is fixed.

Disputed Funds - Rule 1.15(c)(2): If a client disputes the lawyer's right to receive a portion of trust funds, the disputed portion shall not be withdrawn until the dispute is finally resolved.

Client Notification - Rule 1.15(d)(1): Absent good cause, a lawyer must notify a client within 14 days of the receipt of funds, securities, or other property in which the client has an interest.

Safekeeping Property - Rule 1.15(d)(2): A lawyer must identify and label securities and properties promptly upon receipt and store it securely as soon as practicable.

Record Maintenance - Rule 1.15(d)(3): A lawyer must maintain complete records of all client funds, securities, and other property received.

Accounting to Client - Rule 1.15(d)(4): A lawyer must promptly account in writing to the client for whom the lawyer holds funds or property.

5-Year Record Retention - Rule 1.15(d)(5): Records of all funds and property held must be preserved for at least five years after final appropriate distribution.

Audit Compliance - Rule 1.15(d)(6): A lawyer must comply with any Rules of Procedure of the State Bar audit orders.

Prompt Distribution - Rule 1.15(d)(7): A lawyer must promptly distribute all undisputed client funds or property.

45-Day Distribution - Rule 1.15(f): A lawyer failing to distribute undisputed funds within 45 days, without good cause, creates a presumption of violation.

Requirements for California Trustee Accounting (California Probate Code)

California law requires trustees to maintain accurate financial records. These responsibilities are governed primarily by the California Probate Code. Failure to comply can result in legal liability or removal as trustee.

View the full code here: Division 6 - Wills and Intestate Succession [6100 - 6806]

Annual Accounting - California Probate Code §16062

Unless waived by the trust document or all beneficiaries, a trustee must provide an accounting at least annually, when a change of trustee occurs, and at the termination of the trust.

Trust Accounting Content - California Probate Code §16063

An accounting should cover the last fiscal year of the trust or the period since the trustee’s last report. A statement of account for trust funds must include:

A statement of all receipts and disbursements of principal and income.
A statement of the assets and liabilities of the trust.
A statement of trustee’s compensation details.
Information on hired agents, their roles, relationship to the trustee, and fees paid.
A statement that the recipient of the account may petition the court for review and the acts of the trustee within three years.
A statement that claims against the trustee for breach of fiduciary duty cannot be made more than three years after the account is received.

Trust Notification Duties - California Probate Code §16061

Trustees have a legal obligation to keep beneficiaries reasonably informed about the trust and its administration. This includes:

Provide a full copy of the irrevocable trust to beneficiaries or heirs upon request.
Notify beneficiaries and heirs within 60 days when a trust becomes irrevocable or trustee changes.
Include trustee and settlor details, trust location, and right to request full trust terms in the notice.
Deliver notification by mail or other approved method to the last known address.
Include warning that trust contests must be filed within 120 days of notice or 60 days after receiving trust terms.

Who Prepares a Trust Account?

A trustee is often responsible for preparing trust accountings and is expected to act in the best interest of the client they represent. However, given the complexity of trust accounting requirements in California, many individuals seek professional assistance with this task.

You might choose to work with:

Bookkeepers specializing in trust accounting
Certified Public Accountants
Trust administration attorneys
Trust accounting specialists

Even when you delegate preparation to professionals, remember that as a trustee, you remain accountable for the accuracy and compliance of the trust accounting. It’s essential to work with qualified professionals who understand California’s specific requirements.

Types of Trust Accounts

There are different types of trust accounts used in California, each designed to meet specific requirements and considerations, particularly when it comes to permitted investments and distribution rules.

Some of the most common types are:

Revocable Living Trust: Also known as a “living trust,” this holds assets that the trustor can change or revoke during their lifetime. It allows the trustor to update their estate plan as needed, manage their assets easily, and avoid the probate process after death.
Irrevocable Trust: Once created, this account cannot be changed or terminated without the beneficiary’s permission. Irrevocable trusts provide greater protection from creditors and estate taxes because the trustor gives up control of the assets.
Interest on Lawyer Trust Accounts (IOLTA): An account used by attorneys to hold client funds separately from their own money. It commonly contains retainers or settlement funds, and any interest earned typically supports legal aid programs.
Special Needs Trust: This type of account is designed to hold money for beneficiaries with disabilities without affecting their eligibility for government benefits. It covers expenses not paid for by public programs, helping maintain the beneficiary's quality of life.‍
Charitable Trust: This is an account created to manage and distribute funds for charitable purposes. They allow donors to support nonprofit organizations or causes they care about, often with added tax benefits.

Benefits of Trust Accounting

Trust accounting is more than just legal obligation and bookkeeping. It also offers practical advantages.

Organized and Clear Financial Records. Trust accounting keeps all financial activities in one place, making it easier to track where the money is going, monitor the trust’s performance, and stay up to date.
Legal Compliance: It helps ensure you meet state laws and fiduciary duties, protecting you from legal risks or claims of mismanagement.
Transparent Client Relationships. By providing regular, easy-to-understand financial reports, you give beneficiaries confidence in how the trust is being managed. This transparency builds trust and shows that you’re acting in their best interests.
Dispute Prevention. Clear and consistent accounting records reduce the chances of confusion. When beneficiaries can see how funds are handled and decisions are made, it lowers the risk of legal disputes.
Tax Compliance. It supports accurate tax reporting by documenting all transactions properly, making it easier to file tax returns and avoid penalties.‍
Informed Decision-Making. When trustees have access to complete financial data, they can make smarter, more confident decisions.

Benefits of trust accounting in California

Common Mistakes in Trust Accounting

Commingling Funds

Mixing trust funds with personal or business funds is a serious violation and can lead to legal consequences.

Best Practice: Always keep a separate trust account for client funds and never use it for personal or business expenses.

Delaying Transfers of Earned Fees

Holding onto earned fees in a trust account for too long can create accounting confusion and raise ethical concerns.

Best Practice: Once fees are calculated and invoiced, promptly transfer them to your operating account with proper documentation.

Inadequate Documentation

Failing to maintain detailed records of every transaction affecting the trust can lead to errors and disputes.

Best Practice: Document every transaction with date, amount, purpose, and parties involved. Keep receipts, invoices, and written explanations for unusual transactions. Consider using trust accounting software that maintains an audit trail and generates compliant reports.

Format Errors

California Probate Code sections 1060-1064 specify exact format requirements for trust accountings. Even if you provide an accurate record, but don't conform to the required format, it can lead to rejected accountings and court challenges.

Best Practice: Follow standard trust accounting formats or use accounting templates specifically designed for California trust accountings.

Incomplete or Missing ledgers

Missing client-specific ledgers makes it difficult to track balances and properly manage funds.

Best Practice: Maintain individual ledgers for each client or beneficiary and update them with every transaction.

Neglecting Tax Implications

Trust transactions often have tax consequences that must be properly tracked and reported. Ignoring it can lead to costly penalties or missed deductions.

Best Practice: Track all taxable events and consult a tax professional to ensure accurate reporting.

Failing to Keep Records

Some trustees discard or lose supporting documentation before the statute of limitations expires. Poor recordkeeping can result in noncompliance, disputes, or inability to defend actions if audited.

Best Practice: Implement a record retention system with digital and physical backups that store all trust records securely for at least five years after trust termination.

FAQs in Trust Accounting

Does a trustee have to provide an accounting?

Yes, California Probate Code §16062 generally requires trustees to provide accountings to beneficiaries at least annually unless this requirement is explicitly waived in the trust document. Additionally, trustees must provide accountings upon reasonable request by beneficiaries, when a trustee changes, or when the trust terminates.

How do I find a trust account bookkeeper near me?

To find a qualified trust account bookkeeper, start by asking for recommendations from family, friends, or colleagues. You can also check with your local bar association for a list of estate planning professionals. Another option is to explore virtual platforms like Legal Soft, where you can directly consult with bookkeepers who have the experience you need.