Do You Know The Difference Between Operating And Trust Accounts?

Trust Accounting

Almost all law offices, even solo practices, should have two bank accounts: an operating account and a trust account, also known as an IOLTA account. Roughly speaking the difference is that operating funds are your money; trust funds are not. Trust funds are monies you are holding for someone else. Managing both types of accounts is complicated without a billing package like CosmoLex, which includes integrated trust accounting software. Let’s look at some examples.

Court Filing Fees – The client pays you $150 for the court filing fee. This money should go into the trust account. You do not own this money. You are merely the conduit between the client and the court. You might say, “As long as the fee gets paid, what does it matter?” Simply put, if you “borrow” client funds even temporarily, then you are committing an ethics violation. By depositing in your operating account you cannot guarantee the money won’t be used for some other purpose.

Flat Legal Fees – You charge a flat $1000 to file a bankruptcy. Where this money goes depends on what that fee includes. If you charge $1000 plus court costs, and the $1000 will not be used to pay any matter expenses, then it should go into the operating fund. However if the $1000 includes a filing fee or other expense, then it needs to go into the trust fund. You can than transfer the portion of the payment that is your fee into the operating fund while keeping filing fees and other expenses in the trust.

Security Retainers – You charge hourly rates but ask for a $1000 retainer. You will pull your payments from the retainer and refund the balance to the client. This should go into your trust account. As you earn expenses and bill the client, you can transfer money to the operating fund. So if you bill $200 in hourly fees, you can pay that by transferring $200 from the trust to the operating fund, leaving $800 in trust.

As you can see trust fund management can get complicated. If your law office billing program can’t differentiate between trust accounts and operating accounts then you will inevitably get into trouble. You can’t depend on your memory or hastily scribbled notes to keep track of what money is your and what belongs to clients.

Don’t make these mistakes. Sign up for CosmoLex, the only cloud-based law firm management software that includes all necessary trust account administration functions.


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