Trust Accounting November 10, 2026 9 min read
Escrow Account vs Trust Account: What's the Difference for Law Firms?
Last updated: November 2026
Written by Ramit Kaur · Head of Marketing, LawAccounting
For most law firms, an escrow account and a trust account are the same thing: a separate bank account that holds money belonging to clients or third parties, never the firm. New York even uses "Attorney Escrow Account" as one of the official names for a lawyer's trust account.
The difference shows up when a lawyer acts as an escrow agent. That means holding money for two sides of a deal, such as a buyer and a seller, and releasing it only when agreed conditions are met. The account may look the same at the bank, but the lawyer's duties are different.
This guide explains what each term means, how they compare, which account to use for retainers, settlements and closings, who gets the interest, and the rules that apply to both.
What Is a Trust Account for a Law Firm?
A law firm trust account is a bank account that holds money the firm is keeping for someone else. That includes client retainers, settlement funds, and money held for third parties. The money belongs to the client or third party until it's earned or paid out. It can't be mixed with the firm's own money, which is called commingling.
ABA Model Rule 1.15 sets the basic rules. Funds must be "kept in a separate account maintained in the state where the lawyer's office is situated," and complete records must be kept for five years after the representation ends.
IOLTA vs. individual interest-bearing trust account
Law firm trust accounts come in two types:
- IOLTA account (Interest on Lawyers' Trust Accounts): A pooled account for client funds that are small or held for a short time. The interest goes to the state's IOLTA program to fund civil legal aid. New York calls this an IOLA account.
- Individual interest-bearing trust account: A separate account for one client's funds when the amount is large enough, or held long enough, to earn real interest for that client. The interest belongs to the client.
Most firms have one IOLTA account and open individual accounts only when needed. Rules vary by state, so check your state's requirements. Our guide to IOLTA rules by state covers the differences.
What Is an Escrow Account for a Law Firm?
"Escrow account" can mean three different things for a law firm. This is the main source of confusion, and the reason explanations online often don't match.
1. "Attorney escrow account" as another name for a trust account
In some states, escrow account is simply the name for the client trust account. New York's Rule 1.15(b)(2) requires the account to be titled "Attorney Special Account," "Attorney Trust Account" or "Attorney Escrow Account." A New York lawyer's "escrow account" is their trust account, with the same rules.
2. A lawyer acting as escrow agent
A lawyer can also hold money as a neutral escrow agent for two or more parties. Common examples:
- Earnest money in a real estate purchase
- Holdback funds in a business sale
- Settlement money held until a release is signed
- Deposits held until a contract condition is met
Here the lawyer isn't just holding the client's money. They're holding money that two sides both have a claim to, under a written escrow agreement. The lawyer has to follow that agreement exactly and treat both parties fairly, even if only one of them is the lawyer's client. The money still goes into a trust account and follows Rule 1.15.
3. A third-party escrow account
Sometimes the money isn't held by the law firm at all. A title company, bank or escrow company holds it. In that case, the funds aren't in the firm's trust account, and the firm's trust accounting rules don't apply to them. The firm should still keep copies of the escrow instructions and closing statements in the client file.
Escrow Account vs Trust Account: Key Differences
When "escrow account" means a lawyer acting as escrow agent, here's how it compares with a standard client trust account:
| Client trust account | Escrow (lawyer as escrow agent) | |
|---|---|---|
| Whose money it is | The client's, or a third party's tied to the matter | Held for two or more parties until conditions are met |
| Who the lawyer owes duties to | Mainly the client | Every party to the escrow agreement |
| What controls release | The client's instructions and the fee agreement | The written escrow agreement |
| Typical funds | Retainers, settlements, cost advances | Earnest money, deal holdbacks, conditional payments |
| Where the money is held | IOLTA or individual trust account | IOLTA, or a separate interest-bearing account for large or long-term amounts |
| Who gets the interest | The IOLTA program, or the client if it's an individual account | The IOLTA program, or as the escrow agreement says |
| Rules that apply | ABA Rule 1.15 and state trust rules | Rule 1.15, state trust rules and the escrow agreement |
Is an Escrow Account the Same as a Trust Account?
Usually, yes. For most law firms, escrow money is deposited into the firm's trust account and follows the same rules. The difference is in the lawyer's role. When a lawyer acts as escrow agent, they owe duties to every party in the deal and must release the money exactly as the escrow agreement says.
When Should a Law Firm Use an Escrow Account?
Here's where common types of money usually go:
- Advance retainer: Trust account (IOLTA unless the amount is large or held a long time). Move it to operating only as you earn it.
- Personal injury settlement: Trust account until it clears, then pay the fee, costs, liens and the client.
- Real estate earnest money: Trust account, held as escrow agent under the purchase contract.
- Business sale holdback: A separate interest-bearing trust account if it's large or will be held for months, under an escrow agreement.
- Disputed funds: Trust account, kept there until the dispute is resolved.
- Earned fees and firm expenses: Operating account, never trust.
Who Gets the Interest on Escrow and Trust Accounts?
The law firm never keeps the interest on client or escrow money. It goes to one of two places:
- IOLTA account: The interest goes to the state IOLTA program for legal aid.
- Individual interest-bearing account: The interest goes to the client, or to whichever party the escrow agreement names. The account is usually opened under that party's tax ID, not the firm's, so the interest is reported to the right person.
Whether to use IOLTA or a separate account depends on how much money it is and how long you'll hold it. If the interest would be more than the cost of opening and running a separate account, use a separate account. Our article on who gets the interest on a law firm trust account explains this in more detail.
Rules for Law Firm Escrow and Trust Accounts
ABA Model Rule 1.15 applies whether the money is called trust or escrow. The main requirements:
- Keep it separate. Client and third-party funds go in a separate account, never mixed with firm money.
- Only use firm money for bank fees. A lawyer can deposit their own funds "for the sole purpose of paying bank service charges on that account."
- Withdraw advance fees only when earned. Advance fees and expenses stay in trust until they're earned or the expense is incurred.
- Notify, pay and account promptly. When money comes in for a client or third party, the lawyer must "promptly notify" them, pay out what they're owed, and give a full accounting if asked.
- Keep records. The ABA model rule says five years after the representation ends. Some states require longer. New York requires seven years.
What should a law firm do with disputed funds?
If two people claim the same money, the lawyer must keep the disputed part in trust "until the dispute is resolved." The undisputed part should be paid out promptly. This comes up often in escrow work. A buyer and seller who disagree over earnest money is a common example. A good escrow agreement says what happens if the parties disagree, such as joint written instructions or a court order.
How often should you reconcile trust and escrow accounts?
At least monthly. A three-way reconciliation compares the bank statement, the trust account register and the individual client ledgers. All three must match. Escrow funds should have their own client ledger so they show up separately. See our guide to three-way reconciliation for a trust account.
What Should an Escrow Agreement Include?
When a lawyer acts as escrow agent, the escrow agreement controls the money. It should state:
- Who the parties are and that the lawyer is acting as escrow agent
- The amount and where it will be held, including whether in IOLTA or a separate interest-bearing account
- The exact conditions for releasing the money
- Who gets the interest, if any, and whose tax ID is used
- What happens if the parties disagree, such as joint instructions or a court order
- That the lawyer can deposit the funds with a court if a dispute can't be resolved
- Any fee for acting as escrow agent
Real Estate Escrow Risks: Wire Fraud and Uncleared Funds
Real estate escrow is a common target for fraud. According to the FBI's 2024 Internet Crime Report:
- 9,359 real estate fraud complaints, with losses of $173,586,820
- Business email compromise, where criminals pose as a known contact to redirect payments, caused $2,770,151,146 in losses across 21,442 complaints
Law firms holding escrow funds should:
- Confirm all wire instructions by phone, using a number already on file, never one from the email
- Not send money until incoming funds have fully cleared, not just been posted as available
- Be suspicious of last-minute changes to payment details
Paying out money that hasn't cleared means using other clients' money in the trust account. That's a trust shortage, even if it's fixed later.
Keep Escrow and Trust Funds Clear
Escrow and trust money only stays compliant if every dollar is recorded to the right client and matter, and reconciled every month. LawAccounting keeps trust and operating accounting in one system, with a ledger for each client and matter, so escrow funds, settlements and retainers are tracked separately from the firm's own money.
Frequently Asked Questions About Escrow and Trust Accounts
Is an escrow account the same as a trust account?
For most law firms, yes. Both hold money that belongs to clients or third parties, and both follow the same trust accounting rules. The difference is when a lawyer acts as escrow agent for two parties, which brings duties to both sides under an escrow agreement.
What is an attorney escrow account?
An attorney escrow account is a bank account a lawyer uses to hold money belonging to clients or third parties. In New York, "Attorney Escrow Account" is one of three official names a lawyer's trust account can use.
Is an IOLTA account an escrow account?
An IOLTA account is a type of trust account that pools small or short-term client funds, with interest going to legal aid. Escrow funds are often held in IOLTA if the amount is small or will be held briefly.
Who keeps the interest on a law firm escrow account?
Never the law firm. In an IOLTA account, interest goes to the state IOLTA program. In an individual interest-bearing account, it goes to the client or to the party the escrow agreement names.
Can a lawyer hold real estate closing funds in a trust account?
Yes. Earnest money and closing funds are usually held in the firm's trust account. They must be recorded on the client's ledger and paid out only after the funds have cleared and closing conditions are met.
What should a law firm do with disputed escrow funds?
Keep the disputed amount in the trust account until the dispute is resolved, and promptly pay out any part that isn't disputed. The escrow agreement should say how disputes are handled.
How long must a law firm keep trust and escrow records?
ABA Model Rule 1.15 recommends five years after the representation ends. Some states require longer. New York requires seven years.
Can a lawyer pay firm expenses from an escrow account?
No. Escrow and trust funds can only be used for the client or third party they belong to. Paying firm expenses from them is misappropriation. The only firm money allowed in the account is enough to cover bank fees.