If you are a lawyer, manage a law firm, or handle an attorney’s accounting it is imperative that you know how to manage trust accounts. If you don’t know how to manage trust accounts and you are working inside of legal accounting- read this post and familiarize yourself with these important components of trust accounting. Not having a good understanding of trust accounting will result in mistakes, errors, ethics violations, and potentially even disbarment.
Understand Which Funds Belong In Client Trust Funds
When it comes to client trust funds, not just any fund can be deposited into them. It is extremely important that you make sure deposits into client trust funds are limited to a few select funds. Only funds associated with real estate transactions, personal injury settlements, settlements and judgments, collections, and finally unearned retainers or advances for casework that has yet to be completed.
Some common funds that many attorneys mistakenly try to deposit into trust funds include; personal funds, earned income, and funds associated with payroll.
A great way to avoid making deposits into trust funds that your firm legally can’t make is enlisting the help of practice management software like CosmoLex that has trust accounting safeguards in place.
Separation of Client Funds
I hope for your firm’s sake you are working with more than one client. While it is almost necessary to have multiple clients at the same time to run a successful practice, it can create confusion when it comes to trust accounting.
Funds from multiple clients are kept in a single trust account held by your firm. While all of these funds are held in a single account you need to know each client’s balance and be able to generate a client transaction report, showing all activity associated with the client’s funds.
Always Maintain A Positive Balance For Your Clients
It is important that all of your clients never reach a negative balance. This is important because you can’t use another client’s funds to cover one the fees of a client who has reached a negative balance. If a client does reach a negative balance you’ll be forced to use personal funds and this too can result in penalties for your firm during an audit.
A great way to avoid this problem altogether is by sending automated low retainer reminders to clients once their balances reach a certain threshold.
Make Sure All Funds Both In & Out Balance
When it comes to client trust funds there can’t be anything left over. All the funds you receive from a client need to be paid out.
None of That Money Is Yours Until You Earn It
Trust funds are liability accounts. This means that while you may have your client’s money in your possession, you can’t consider it yours until you have completed the necessary work. If any of the funds your client has deposited into the trust account go unearned you must return them to your client.