A large percentage of disbarments and disciplinary actions arise out of client trust fund mismanagement. With the key concepts of trust accounting in mind and a few practical tips that you can put into practice immediately, you’ll be in compliance and be prepared even for a random audit.
Which Funds Belong in Client Trust Accounts?
In general, deposit only these client funds into a trust account:
Personal injury settlements
Other settlements or judgments
Retainers and advances for fees until actually earned
Which funds do not belong in a trust account?
Earned fees when the client pays
Operating or other business funds
Remember, any funds for which you have fiduciary responsibility should always be held in separate properly entitled accounts.
All Client Funds Must Be Kept Separate
Client A’s money has nothing to do with Client B’s money. Even when you keep funds in a pooled client trust bank account, each client’s funds are completely separate entities which means a separate balance and transaction report for each client must be maintained at ALL times.
Your Client Ledger Must Never Have a Negative Balance
If there is an instance where you unintentionally spend more than a client has on deposit, the overdraft amount must be paid back from your personal funds.
Verify Funds before Disbursement
Don’t disburse until the deposited funds have cleared the trust account. Be diligent, but don’t let a client rush you. After you have written the trust check(s), take a moment to add them up and reconcile the client’s account.
Match your Books with Bank Statements
You must keep a record showing that you reconciled or balanced each trust bank account every month. The balance in the bank must agree with the total of the client balance listed on your books. Most trust account mistakes are identified during reconciliation. Firms that do not reconcile monthly are waiting for disaster to strike.
Enter The Digital Age
Manual trust management is simply not good enough anymore. Arm yourself with specialized IOLTA software, preferably a package that is integrated with your time and billing software so they can work together. Many firms prefer cloud-based trust accounting software because of more flexible access and easier backups.
Keep Paper Records In Addition To Bank Statements
Even if you use trust accounting software, you might want to establish a good audit (paper) trail. In addition to the bank account statement and any canceled checks, keep a monthly folder with the following:
Copies/stubs of all checks deposited to or written on the account
Copies of all deposit slips (copies you made – don’t rely on the bank)
A copy of your receipts and disbursements journal (or reports from your trust software) showing the account transactions for the month
Know Your State’s Trust Account Requirements
Each state has its own set of rules and regulations for client trust account management. Always keep a current Rule Book in your office and consult it as your first source of information.
Don’t lose sleep over trust fund accounting. Follow these simple rules and you’ll always be prepared for an audit.