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Trust Fund Accounting Compliance: Find Out If Your Firm Is At Risk

Lawyers and attorneys everywhere know what Trust Accounting can mean to their firm and livelihood. It isn’t the most exciting part of practicing law, but that doesn’t mean that it is a minor aspect of managing a practice either.

Appropriately managing and maintaining client trust accounts can be the difference between a thriving practice and your practice ceasing to exist. If that sounds frightening, it’s because it is. The mismanagement of client trust accounts can result in compliance issues, ethics violations and in the most extreme situations, disbarment.

Here is a helpful list of things your firm needs to understand and be aware of to remain compliant with trust accounting regulations.

You Must Earn Money Before It’s Yours

It’s common place for attorneys to be in possession of funds that aren’t theirs. Clients will pay attorneys through retainers and trust accounts quite often. Trust funds are liability accounts. This means that none of this money can be considered the firm’s until it has been earned by the firm after carrying out the agreed upon work.

Avoid Negative Retainer Balances

If your firm wishes to remain compliant with trust accounting regulations it is important that you make sure your clients never reach a negative balance in their account. It is strictly prohibited to use one client’s funds for the fees of other clients. In the event you allow one of your clients to reach a negative balance, it is your responsibility to correct the balance. Many successful firms avoid negative balances for their clients by sending out low balance reminders (also known as evergreen retainers). This helps to ensure that your clients have the funds they need in place and your firm remains compliant. Legal-specific trust accounting software can help automate this process and protect your firm from overdrafting accounts erroneously.

To Commingle or Not to Commingle… Never Commingle

How many successful firms serve a single client? Probably not too many. For a firm to be successful it is likely that they serve many different clients. Unfortunately, the more clients a firm has the more difficult their trust accounting can become. Law firms manage a single trust account. That single account contains the funds of multiple clients. Here’s the kicker, inside of that single trust account, your firm needs to know each client’s individual balance. Your firm needs to be able to display that balance along with all activity associated with the client’s funds on a client transaction report at a moment’s notice when requested by an auditor.

Put the Right Funds in Trust Accounts

A quick way to throw your firm’s trust accounting into a tailspin is to deposit the wrong type of funds. Your firm should only be depositing funds associated with real estate settlements, judgments, collections, unearned retainers or advances. When firms deposit personal funds, income that has already been earned, or payroll funds they are depositing the WRONG type of funds into a trust account. This can lead to serious penalties and compliance issues, all because the funds were mistakenly put into the wrong type of account.

Leave Nothing Behind!

If a client trust fund has $3,437.86 in it, your firm needs to use $3,437.86. Nothing can be left over. All the funds from a client must be paid out before your relationship comes to an end.

Trust accounting can be one of the single most challenging aspects of managing a legal practice. With all the legal specific regulations associated with it, it can also be one of the most nerve-racking to manage. We all know it’s true and I’ve said it many times, most lawyers aren’t accountants and very few accountants have the legal-specific knowledge needed to successfully manage a firm’s trust accounting. But it’s the lawyers, like yourself, who must stay on top of this very important matter.

Take Our Trust Fund Compliance Quiz

Curious to see how much you know about trust accounting compliance? Take our quiz to find out where your firm’s trust accounting might be at risk of falling out of compliance. If you complete the quiz and are looking for more information on legal trust accounting, you’ll be able to download our full whitepaper “How Should Law Firms Manage Client Funds.”

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.