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The Do’s and Don’ts of Legal Trust Account Management

When it comes to managing your clients’ accounts, “trust” is the operative word. At the point in which you take responsibility for such important funds, it is critical that your firm has the right processes and practices in place to ensure safe keeping. Here, we’ll be covering the “do’s and don’ts” of handling client trust funds across the billing, business accounting, and trust accounting aspects of your firm.

As the acting trustee, your primary obligation is to protect your clients’ assets prior to their distribution to the designated beneficiaries. Because of this, it is important to first recognize the difference between a trust fund and other types of client funds, and more specifically, from operating retainer. This distinction is discussed below along with other tips to help make sure your firm is handling client trust accounts with the utmost care.

DO understand which funds go where. By this, we mean funds that belong in a trust (i.e. retainers and settlements), and funds that do not belong in a trust (namely, those used to pay the office’s operating expenses and any realized income). As above mentioned, while money in a trust account may be in your possession, it does not become part of the firm’s available resources until the necessary tasks have been completed and properly billed for.

DO have a separation between trust and operating accounts. (Notice a trend yet?) It’s not enough to simply acknowledge the difference between the two; in order to fully protect both the firm and client’s best interests, keep funds used to pay expenses and attorney’s fees separate from earned income and attorney’s operating costs.

DO track individual ledgers. Each matter should have its own individual ledger containing its respective balance and transactions. It’s not enough to simply track funds by client, as you may be working on multiple matters for one client at any given time. Also, you should always have a way to share with your client their retainer’s status and the amount of funds which are currently available.

DON’T commingle funds. While it may sound simple, too many law firms take this for granted. Not only does this put both your firm and your client at risk, it’s illegal.

DON’T overdraft ledgers. A ledger shows the amount of client funds a particular matter has, so disbursements and invoice payments shouldn’t affect any balance other than that of the related matter. Have a system in place that simply shows the balances of each of your accounts and has built-in protections against overdrafting.

DO maintain evergreen retainers. Even if your practice is 100% retainer-based, understand that retainers can and do deplete. In a worst case scenario, your firm could be left with zero funds, potentially bringing all work to a screeching halt. Modern systems can not only track when retainers are getting low, they can assist further by sending automatic reminders to your clients when minimum thresholds are not met.

DON’T assume all merchant providers know how to handle retainer payments by credit card. To help navigate this area, be sure to ask the following questions prior to credit card processing:

  • Does the merchant provider support operating and trust accounts? This will make it easier to keep the two separate, especially when dealing with multiple payments from a single deposit.
  • How are processing fees handled?
  • Does the service integrate directly with your billing program?

DO reconcile regularly. This means on a formal, monthly basis (at least), you should be locking your books and reviewing bank statements alongside a reconciled report. Remember, compliance is a nondelegable responsibility. So, while you may have others gather this information for you, it is up to you to sign-off on it.
If possible, utilize tools that sync directly to your bank and reconcile your accounts on a more frequent basis (i.e. daily).DO maintain proper reports. Regardless of what is required by your jurisdiction, the following reports are vital in demonstrating that your trust accounts are being maintained properly:

  1. Bank Ledger
  2. Receipts Journal
  3. Disbursements Book
  4. Client Ledger Balances
  5. Individual Cliet Trust Ledger
  6. Bank Reconciliations
  7. Three Way Reconciliation

DO invest in technology. We know every firm has a lot to keep track of, so it’s essential that small and large practices alike take proactive steps to bridge the gap between accounting and billing. By using a legal-specific solution, you can rest assured nothing will slip through the cracks and instead, you can provide clients with the trusted counsel they seek and deserve.

Want to Learn More?
Want more information on managing client trust accounts? Register for our live webinar, Handle With Care: Managing Client Trust Accounts.

Rick Kabra

Dr. Rick Kabra is CEO of CosmoLex Cloud, creator of cutting-edge technology solutions to help solo and small law firms law firms. Rick has a Ph.D. in Electrical Engineering from NJIT and has over 10 years of experience in the legal software industry catering to the specialized technology needs of small to mid-sized law firms. Rick has given numerous seminars and published articles on legal technologies such as law practice technology management, cloud computing, and legal billing, business & trust accounting compliance.