Short reads for the people who sign the checks.

Every state bar that regulates trust accounts asks the same underlying question: does the money you're holding for clients actually exist, all of it, all the time? A three-way reconciliation is how you prove the answer is yes — by tying together three numbers that should, every month, be exactly equal.

The three numbers

The bank balance is what the statement says is in the account. The book balance is what your general ledger says the trust liability is — every dollar you've recorded as received or disbursed on behalf of clients. The client ledger total is the sum of every individual client's sub-ledger balance, the running total your billing system tracks matter by matter. Reconcile the bank to the book first, the way you would any account, adjusting for checks that haven't cleared and deposits still in transit. Then reconcile the book to the sum of client ledgers. If all three agree, the account is clean. If they don't, the gap has to be explained before the month closes — not carried forward as a mystery.

The four exceptions examiners look for first

Most audits move quickly through a clean binder and slow down at exactly four patterns. A negative client balance — one matter's sub-ledger dipping below zero — means you disbursed money on behalf of a client that another client's money actually covered; it's the single most common finding and the fastest to trigger scrutiny. Dormant or stale funds, sitting untouched for a year or more with no matter activity, raise the question of whether the client can still be located and whether the funds are due to be escheated to the state. Disbursements against uncleared deposits — paying out before a client's check has actually cleared the bank — can turn into a real shortage if that deposit later bounces. And commingling, earned fees or firm funds left sitting in the trust account past the point they should have been transferred to operating, blurs a line bar rules treat as absolute.

"An examiner doesn't need eighteen months of perfect books. They need eighteen months of the same process, applied the same way, with every exception explained in writing at the time it happened."Adaeze Okafor, CPA · Director of Trust Accounting & Compliance

What "done monthly" actually looks like

A defensible reconciliation isn't just three numbers matching — it's a dated worksheet, signed off, with any variance explained the same month it appeared, filed where the next reviewer (or the next examiner) can find it without asking. Firms that build this into the close calendar, rather than treating it as a year-end scramble, are the ones whose audits take ninety minutes instead of two weeks.

Most partner compensation disputes we're called into aren't really about the formula. They're about a draw that was set against a best-case quarter, and a firm that had to choose between an awkward conversation in month two and a much worse one in month six. The fix isn't a better formula — it's a system built to flex.

Set draws against a run-rate, not a peak

A monthly draw should reflect roughly 70–80% of a partner's realistic, trailing-twelve-month collected compensation — not their best quarter annualized, and not last year's bonus-adjusted total. Firms that set draws against a strong Q4 routinely find themselves clawing back in Q2, which is a far harder conversation than starting conservative and adjusting up. Realistic run-rate draws mean smaller true-ups in either direction, and smaller true-ups are the ones partners barely notice.

Build in a holdback, and explain it once

A 15–20% holdback of projected compensation, released at the semi-annual or annual true-up, does two things at once: it protects the firm's cash position against a slow collection quarter, and it gives you room to true up downward without ever reducing a partner's actual monthly deposit. The mechanism only works if it's explained clearly once, in writing, before the first holdback is taken — partners who understand a holdback as "yours, held" trust it; partners who discover it as a surprise line item treat it as a pay cut.

Make the true-up formula boring on purpose

The best compensation formulas we see are the ones nobody argues about, because the inputs are objective and published: originations, hours worked and collected, realization by matter, and a fixed committee-scored component for practice development and firm citizenship. Whatever weights you choose, publish them, apply them consistently, and run the calculation the same week every quarter. A formula partners can reproduce themselves on the back of an envelope is a formula they'll trust in a bad quarter — one that feels like a black box invites suspicion exactly when trust matters most.

When a quarter really is bad, say so early

If collections are meaningfully behind plan by month two of a quarter, tell the partnership before the true-up, not at it. A short written update — collections are running 12% behind plan, here's why, here's what it means for the upcoming true-up — turns a surprise into a shared problem. Partners forgive bad quarters. They don't forgive finding out about one from their bank deposit.

A W-2 employee has taxes withheld from every paycheck; an equity partner has a K-1 and a due date. Without a deliberate quarterly rhythm, the first real signal a partner gets about their tax position is often the return itself — long after any planning window has closed.

Start with the safe harbor, not the guess

The IRS won't assess an underpayment penalty if a partner pays in, over the year, at least 100% of last year's total tax liability — or 110% if their prior-year adjusted gross income was above $150,000. That's the safe harbor, and its entire value is that it doesn't depend on correctly predicting this year's income. A partner having a record year can still avoid penalties by paying against last year's smaller number and settling the balance with the return; a partner having a soft year isn't forced to overpay quarter by quarter waiting for certainty.

Composite returns and PTE elections change the math

Firms with partners living in multiple states face a second layer: each state where the firm has nexus may require its own estimated payments, unless the firm files a composite return on behalf of nonresident partners for that state. Many states also offer a pass-through entity (PTE) tax election, letting the firm pay state tax at the entity level — which, for partners who itemize, converts a limited individual SALT deduction into a fully deductible firm expense. The election typically has to be made and often funded before a fixed date each year, and once made is not always revocable, so it belongs on the same calendar as the estimates themselves, not decided at filing time.

The habit that prevents the surprise

Recalculate each partner's estimate after the Q2 true-up, using year-to-date collections rather than the January projection. A firm having a materially better or worse year than planned will know by June — which is exactly when there's still time to adjust the September and January payments, instead of discovering the gap in April with nothing left to do about it.