Trust Accounting Basics for Estate Planning Law Firms

When someone chooses your law firm to handle their estate, they’re trusting you with far more than just their money. They’re also relying on you to help protect their assets, make sure your loved ones are provided for and guarantee that their legacy is carried out according to their wishes.

And because trust accounts play a major role in estate planning law, it’s important to set up trust accounting processes that can mitigate compliance risks.

Keep reading to learn more about ways your estate planning law firm can manage your clients’ trust accounts—and maintain their trust—efficiently and compliantly.

What are trust accounts?

The first and most important point here is that trust accounting is different from regular business accounting.

Trust accounting is the process of keeping detailed records to track the income and expenses of client funds that are being held in a trust account. Attorneys are obligated to act in a fiduciary capacity over trust accounts, and as such, they are obligated to act in the trust account holder’s best interests. These accounts are specific to each client, and they are kept entirely separate from your law firm’s operating funds.

Trust accounting rules aren’t just suggestions, however. They’re legal requirements for attorneys. You’ll know this from your bar association’s rules of professional conduct.

Though the exact requirements can vary from one jurisdiction to another, law firms must follow two specific rules in order to manage the funds properly:

Trust funds can never, under any circumstances, be commingled or mixed with a firm’s own funds. They must always be kept separate. In other words, trust funds can’t be used to pay attorneys and legal staff, vendors, or for any operational costs.

All law firms are required to maintain detailed and accurate records that show when and where money comes in and out of the trust account.

It’s also important to emphasize that only the client’s money be used to cover their own matters. Attorneys can never use another client’s trust funds to cover expenses for another client.

Risks of mismanaging trust accounts

While these rules may seem simple enough, you shouldn’t underestimate the challenge of managing a trust and the importance of doing it right. Estate planning law firms that fail to maintain compliance face many risks.

Perhaps one of the most intimidating risks is the possibility of losing your license to practice law. Any error, no matter how small, can lead to serious consequences for solo practices and estate planning law firms.

Not only can failing to keep accurate trust accounting records get your firm in trouble with your bar association (and the IRS, for that matter), but it can also cause confusion with your ledgers and trouble with workflows and billing silos. Poor trust accounting practices can also lead to loss of trust with clients—even lawsuits—and lasting reputational damage.

Finally, estate planning trust accounts also pose a greater moral and ethical risk. When you’re working with trust accounts for estate planning clients, funds in a trust account represent your client’s hard-earned legacy. They are putting their faith in you to ensure that those funds are handled according to their wishes, and it’s essential to honor them.

Three tips for estate planning law firms handling client trust accounts

You don’t have to let trust accounting intimidate you—there are several things estate planning firms can do to ensure compliant management of client funds.

1. Have a separate account for each trust

This may seem like an easy task to accomplish, considering that separate accounts are one of the core tenants of trust account management. However, far too many attorneys choose to forego separate trust accounts—despite the fact that this is a requirement in many jurisdictions.

The best way to avoid any possible disbarment or lawsuits is to make sure that you set up a new trust account for each client or matter.

When you do so, it’s crucial that you ask the financial institution to deliver statements for each account at the end of your reporting period—or better yet, use legal practice management software to help you run comprehensive trust reports! Not only will this help you to ensure that the balances reconcile, but it will also help you maintain compliance.

2. Verify your client trust accounts regularly

Reconciliations shouldn’t happen just once a year. They should be a regular part of your law firm operations. It’s advised that estate planning law firms check the balances of each client trust account at the end of each month.

The most accurate way to verify the balances is by doing three-way reconciliation. What does this entail?

Three-way reconciliation involves comparing an adjusted bank balance to the balance that you show in your books. These numbers should also be compared to the client trust ledger to make sure that all three match. (This may sound like a lot of work, but you can automate it using legal practice management software, which makes the process more efficient and accurate.)

3. Don’t touch money you haven’t earned

Another important tip to remember is to leave a trust account alone if you haven’t earned the money.

You should never view your trust accounts as a firm asset because, simply put, trusts are not your law firm’s money. You’ve simply been trusted to manage the funds on behalf of your client, so they should be regarded as other current liabilities instead.

To keep these funds protected, you should have strict protocols for handling both withdrawals and deposits, and there should be a paper trail anytime money is moved.

Bonus tip: use legal practice management software to manage your trust accounts

CosmoLex’s trust accounting software ensures that your estate planning law firm can consistently manage trust accounts in a compliant, efficient manner.

With built-in trust accounting, audit-ready reconciliations, and comprehensive trust reports, you can stay on top of your trust accounting, fulfill your fiduciary duty to your clients, and avoid compliance issues—easily and automatically.

Find out more about how CosmoLex can help estate planning law firms with trust accounting

As an all-in-one legal practice management software, CosmoLex has all of the trust accounting features your estate planning firm needs, and more.

See for yourself how CosmoLex is changing the way estate planning law firms handle their trusts. Try it for free or schedule a demo today!