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

In the world of legal services, trust accounting is a complex and frequently misunderstood practice that can be tricky to navigate successfully. Fail to adhere to the rules and requirements, and you could damage client relationships, incur fines and penalties, or even face disbarment.  

On the other hand, cumbersome processes can also create inefficient, productivity-draining workflows. 

The struggle can be avoided, though. In this article, we’ll delve into the do’s and don’ts of trust accounting to provide legal professionals with valuable insights into the best ways to handle trust accounting and some pitfalls you can avoid.

Understanding trust accounts 

Trust accounts serve as reservoirs for client funds, specifically retainer fees. Clients pay retainers upfront as a show of commitment and the financial ability to retain legal services.  

It’s important to note that since lawyers have a fiduciary duty to act in their client’s best interests, these funds can’t be treated as regular income. Instead, they must be held in trust until the law firm earns them by delivering (and invoicing for) the agreed-upon services. 

The do’s of trust accounting 

Whether you’re setting up a trust account for the first time or simply refreshing your practices, make sure you tick these boxes. 

DO: Maintain clear separation 

The cardinal rule of trust accounting is to ensure a strict separation between client funds and law firm operating funds.  

It’s critical that you never commingle these two types of funds. You can avoid commingling by maintaining separate accounts for each trust account to keep client funds untouched until your firm earns them. 

DO: Keep accurate records 

Accurate record-keeping is another critical component of trust accounting. Make sure you document every transaction meticulously, including: 

• Deposits 
• Disbursements 
• Legal fees 

Keeping your records accurate and up-to-date not only ensures trust account compliance but also provides a clear audit trail should the need for one arise. 

DO: Reconcile frequently 

Another excellent practice to help keep your accounting practices on the straight and narrow is consistent reconciliation. 

By performing regular reconciliation of your trust accounts, you’ll ensure that account balances match recorded amounts, which helps catch discrepancies early and allow you to rectify any mistakes promptly. In most states, bar associations require law firms to do a three-way reconciliation for trust accounts on a monthly or quarterly basis. 

DO: Use (legal-specific) technology to automate processes 

With an administrative process like trust accounting, accuracy is key, and while you can use spreadsheets and calculators to get the job done, relying on outdated processes leaves room for input errors and eats into valuable billable time. 

It’s worth considering an investment in legal-specific accounting software that’s designed to help with this process. A great solution will come with built-in features that provide accurate recordkeeping, automatic reconciliations, and comprehensive trust reports. 

DO: Audit regularly 

Law firms regularly evaluate a variety of points of operational concern, from employee productivity and workflows to financial data and client retention rates. It’s critical to include trust accounting in this list. 

Regular trust accounting audits help you proactively identify and address issues, but  importantly, they also help prepare your practice for potential external audits.  

DO: Keep written agreements 

Keep all copies of all written agreements with your clients.  

By outlining the terms and conditions, conditions of legal services provided, and the intended use of retainer funds, you can set client expectations and prevent any misunderstandings or disputes that could arise. 

The don’ts of trust accounting 

These trust accounting mistakes can jeopardize your law firm’s finances and reputation. Make all efforts to avoid them.   

DON’T: Commingle money 

Not commingling client funds with a law firm’s operating funds should be a no-brainer, but every year, plenty of firms make this mistake that can have serious consequences for their firms. 

Under no circumstances should funds be withdrawn from a trust account before they are earned. This includes fees, expenses, and any other charges that may come. In short, trust funds belong to the client until services are provided and billed. 

DON’T: Make unauthorized withdrawals 

Another big no-no in trust accounting is unauthorized withdrawals. Funds—including fees, expenses, and other charges—should only be withdrawn from an account after they’ve been earned.   

Trust funds belong to the client until services are provided and the client is billed. 

DON’T: Use trust funds for operating expenses 

Trust funds are meant exclusively for client-related expenses. Using these funds to cover operational expenses is not only unethical but also illegal and could lead to serious long-term repercussions for your firm. 

DON’T: Overbill clients 

To avoid client disputes, it’s critical to ensure that you never overbill them. To avoid losing client trust or dealing with disputes that could affect your firm, take the time to ensure that all services rendered are accurately documented and billed accordingly. 

DON’T: Let your recordkeeping slip 

Letting your recordkeeping practices fall by the wayside can lead to serious issues like confusion, errors, and compliance issues. It’s essential to maintain comprehensive records of all your transactions, no matter how small. 

How the right technology can help with trust accounting 

Legal trust accounting software can help you to ensure you’re checking the To “Do’s” boxes while avoiding the “Don’ts.” The right software solution allows you to manage all of your firm’s trust bookkeeping in real time.  

Here are just a few of the things the best trust accounting software can do for you: 

• Print disbursement checks 
• Track and disburse third-party lien claims 
• Import electronic bank statements and auto-reconcile your books  
• Generate three-way reconciliation reports with the click of a button 
• Create a comprehensive set of trust recordkeeping reports 
• Effectively manage individual client ledgers 
• Prevent typical trust accounting mistakes like commingling or ledger overdrafts 
• Online payments for individual or bulk invoices using trust funds   
• Automatic trust-to-general transfers 

Streamline your trust accounting with CosmoLex 

If you’re wondering how to streamline your law firm’s trust accounting processes and simultaneously stay compliant while doing less heavy lifting, CosmoLex is the answer.  

From managing client ledgers and processing online payments for individual or bulk invoices, to generating three-way reconciliation reports and printing disbursement checks, CosmoLex has the tools your firm needs. CosmoLex tools take the guesswork out of trust accounting while also offering a comprehensive suite of legal practice management software solutions. 

Ready to make the switch? Start a 10-day free trial of CosmoLex or schedule a personalized demo today!