Back to Basics: Legal Trust Accounting

Back to Basics: Legal Trust Accounting

Lawyers manage client funds through special banking accounts called trust accounts. The process of monitoring and maintaining these accounts is called legal trust accounting 

Most commonly, trust accounts are used to pay for legal services, but they may also temporarily hold settlement money or other client-owned funds. In addition to keeping client funds separate from operational funds, trust accounts serve to safeguard client funds from intentional or accidental misappropriation.  

Why do lawyers need to understand legal trust accounting?

As an attorney, “accountant” may not have been a task you wanted in your job description. Nonetheless, attorneys have the fiduciary responsibility to protect and manage their clients’ funds—and what a responsibility it is. 

A variety of local and national regulations govern client trust accounts. The purpose of these rules is to protect clients’ confidentiality and personal information. This is, of course, a goal most attorneys are happy to work toward.  

Still, many attorneys find that following trust accounting regulations is a daunting process. There are numerous rules for reporting, tracking, and transferring client funds. Even a single lapse in following these rules can result in serious consequences, including ethics violations and even disbarment.  

Unsurprisingly, this could hurt your firm’s reputation and make it difficult to secure new clients.  

But understanding trust accounting isn’t just about avoiding reputational damage. When you have a firm grasp on trust accounting practices, you can better explain them to your clients, who usually want to know how their money is being handled. This knowledge builds trust and helps your clients feel more secure in their professional relationships with you.   

Best practices for compliant trust accounting at your firm 

The serious consequences of improper trust accounting make it seem intimidating, but keeping your firm compliant—and client funds organized—is easy with some simple best practices. 

Educate legal staff on trust accounting guidelines 

Your firm needs an internal policy for managing client funds. All employees at your firm should be familiar with trust accounting basics—including accountants, bookkeepers, paralegals, attorneys, and managing partners.  

As you assemble your firm’s policy, ask yourself which details may be relevant to include. Here are some suggestions to use as a starting point:  

  • What trust accounting is and why it matters  
  • The local and national regulations that apply to trust accounting at your firm  
  • How to explain the process of trust accounting to curious clients  
  • Processes for three-way reconciliation 
  • What steps to take if a check doesn’t clear  
  • How to process online payments, such as credit card payments, compliantly  
  • How long to wait to move client funds from a trust fund to the firm’s operational account after depositing a client check  

Protect clients’ personal financial information like your own 

You wouldn’t leave your social security or bank account number lying around, would you?  

In today’s world, a lot more goes into keeping clients’ personal and banking information private than putting important documents into a locked file cabinet. Legal trust accounting software‘s built-in privacy features can add an extra layer of security. For example, some trust accounting software includes user-based permissions, a feature that only allows staff access to sensitive information on a need-to-know basis.  

Be forthcoming with your clients  

At intake, give your clients a written trust accounting agreement. Provide a detailed explanation as to how their money will be deposited and distributed, as well as who will have access to it.  

To ensure that clients truly understand the function and purpose of their trust accounts, consider reviewing this document with them in person before they sign. 

Don’t forget to explain how clients can access their client portal to check on their accounts and encourage them to do so. This builds trust and empowers your clients to become involved in the task of monitoring and protecting their funds. It’s a great way to ensure that any error or violation can be recognized and remedied quickly. 

Only spend client trust funds as agreed  

Never use client funds for operational funds.  

Even if you intend to replace the funds as soon as possible, borrowing money from a client’s trust account is more than a violation of trust—it’s illegal. Plus, the national and local bar association could conduct an audit of your trust account reports at any time.  

Any discrepancies (or obvious misappropriation of client funds) could lead to dire consequences for your entire law firm.  

Conduct regular reviews, reconciliations, and replenishments  

ABA trust accounting rules prohibit overdraft on client trust accounts. In reality, it is all too easy to make this mistake if a client’s trust fund isn’t replenished in a timely manner. Protect your bottom line and remain compliant by keeping a close watch on your clients’ trust accounting balances. 

Accounting software designed for law firms can track trust balances 24/7 and send alerts when they drop below a certain threshold. This way, you can collect low balances and apply them to the client’s account prior to the trust fund balance becoming zero. In addition to improving your firm’s financial health, this approach also circumvents the need to place legal matters on pause until the client can deposit funds.  

It’s also vital to conduct regular three-way trust account reconciliations. As a trust administrator, you are required to perform this balance (typically) every 30-60 days, depending on your state regulations. These reconciliations can be difficult to do manually, which is why many law firms turn to legal trust accounting software like CosmoLex to handle three-way reconciliation reports for them. 

Avoid commingling funds  

The tenet of good trust accounting is to keep client funds and operational funds separate. Commingling of funds can lead to penalties from the American Bar Association or the Law Societies, even if accidental. Keep money that belongs to clients and money that belongs to your firm separate at all times.  

Be wary of other forms of commingling, as well. Client trust funds shouldn’t be used to pay for charges that are your firm’s responsibility, like credit card processing fees. Banks aren’t always aware of this rule, so take great care to ensure that every transaction—large or small—is taken from the proper account.  

Take advantage of the leading legal accounting technology  

It’s possible to conduct all of the reporting and bookkeeping associated with trust accounting on your own, but it isn’t easy. Accounting software designed to meet the specialized needs of law firms saves time and reduces the likelihood of math and banking errors.  

With CosmoLex, all of your law firm’s business accounting and trust accounting needs are handled automatically and in real-time. You can feel confident that client funds are well protected, tracked, and organized with robust reporting features and built-in safeguards that keep your firm compliant.  

Ready to stop stressing about trust accounting for good?  

See how CosmoLex’s trust accounting features integrate with your firm’s legal billing and payment process to streamline your firm’s financials.  

Schedule your free demo today.  



Ready to make the switch?

Start a 10-day Free Trial of CosmoLex

Try For Free

See CosmoLex in action!

Schedule a Personalized Demo Now

Try For Free