| (866) 878-6798 | Schedule A Demo |

10 Dos & Don’ts of Legal Trust Accounting

Since attorneys often handle client trust accounts, legal trust accounting must be fully understood and properly implemented. Unfortunately, many firms lack the expertise and tools necessary, and a large percentage of disbarments and disciplinary actions arise out of client trust fund mismanagement. While this may sound disheartening, there are steps you can take now to make sure you and your firm are protected.

In this post, we’ll be covering ten do’s and don’ts of trust accounting, and with the key concepts of trust accounting plus a few practical tips in mind, you can rest assured that your trust accounting practices remain compliant.

#1: DO know your local compliance requirements

Since states have their own compliance requirements for items like handling unclaimed funds and operating versus trust retainers, you must be aware of and follow your particular jurisdiction’s rules and regulations.

#2: DO understand which funds go where

Specifically, this involves funds that belong in a trust and those that do not.

  • Funds that do belong in a trust include:
    • Settlement funds (personal injury, real estate settlements, etc.)
    • Unearned Income (aka “Fee & Cost Advances” or “Retainers”)
    • Judgment funds
    • Third-party funds
  • Funds that do not belong in a trust include:
    • Personal funds
    • Earned income
    • Payroll
    • Any funds for which you are not the Fiduciary Trustee

#3: DO have a distinct separation between operating and trust balances

Depending on your jurisdiction, you may be handling clients’ funds in an operating account, trust account, or both. It is imperative that the firm’s operating costs are not mixed in, so it is best practice to always keep operating and trust balances separate.

#4: DO track individual ledgers

When it comes to managing client funds, every last penny must be accounted for and attached to the appropriate client and matter. Regardless of the type of account, a firm uses to manage its client retainers, failing to properly account for retainer deposits can result in bookkeeping nightmares and ethics violations. Additionally, each matter should have its own ledger that contains its respective balance and transactions, and the client should always be aware of what is currently available in their retainer.

#5: DO maintain evergreen retainers

Even if your practice is entirely retainer-based, it is important to remember that retainers deplete, which can leave your firm in the lurch. Instead of risking this situation, establish a system that tracks an allowable minimum balance. Once that number is reached, immediately seek replenishment, so that you are never left without a balance. There are many tools which can assist with this including email reminders.

#6: DON’T commingle funds

This practice goes hand-in-hand with tracking individual ledgers. Ensure that you are always aware of a matter’s balance as well as any associated transactions that may affect that matter’s balance.

#7: DON’T overdraft on a ledger

It is very easy to overdraft on a ledger if you haven’t made it a habit to maintain proper records. In the event of an overdraft, funds become commingled, which is a significant compliance issue. To avoid this, make use of tools that offer safeguards against overdrafts, including third-party checks and invoice payments.

#8: DON’T assume all merchant providers know how to handle retainers

Merchant providers differ both in terms of their capabilities and processes. As you research options, be sure to ask the important questions prior to doing business. In addition to clarifying whether trust funds are received by credit card in the office or online, you’ll also want to seek answers to the following:

  • Do they support operating and trust accounts?
    • Credit cards are not just for invoices anymore; you may want to accept trust retainers as well.
  • How are processing fees handles?
    • If your firm plans to process trust transactions, choose a merchant that knows how to work with trust accounts and only deducts fees from the connected operating account in order to avoid compliance issues.
  • Does the service integrate with your billing program?
    • While credit card payments are an added convenience for your clients, you want to streamline the process on the backend as much as possible. This includes accounting for the earned income from these payments as well as batching various client payments that may be in one deposit.

#9: DON’T slack on reconciling

It is important to always reconcile your bank accounts to catch any mistakes that may have occurred. Although a good practice with any account, since a trust account involves client funds, reconciling is a requirement. In addition to monthly reconciliation statements, functions like statement imports or feeds allow for more frequent reconciliation by showing in real-time which funds have cleared and where there might be an error.

#10: DON’T forget to maintain proper reports

While proper accounting practices are essential, the reports that support it are equally important. When handling trust accounts, firms should behave as if an audit is always around the corner. The following reports are vital for proper trust account management, and if conducted regularly, will significantly improve a firm’s recordkeeping and compliance practices:

  • Bank Ledger
  • Receipts Journal
  • Disbursements Book
  • Client Ledger Balances
  • Individual Client Trust Ledger
  • Bank Reconciliations
  • Three-Way Reconciliation

Though trust accounting is complicated, it doesn’t need to be confusing or stressful, and there are tools available to help your firm make sense of it all and stay compliant. For full details on each tip discussed here plus additional guidelines, watch our webinar, The Dos and Don’ts of Handling Client Funds.

Erica Birstler

Erica Birstler is the Director of Strategic Communications at CosmoLex -- developers of a fully-integrated, cloud-based legal practice management, billing & trust accounting system specifically designed for solo and small law firms. Erica's degree is in Business Administration and she has over 6 years of experience in the legal software industry, catering to the specialized technology needs of small to mid-sized law firms. Erica has given numerous presentations across the country on legal technologies such as law practice technology management, cloud computing, and legal billing & trust accounting compliance.