When can flat fees that haven’t been earned be taken out of a trust account?

When it comes to trust accounts, a single slip-up can get you disbarred, and yet misunderstandings abound. In a trust account, a lawyer holds the money in trust for a client – which means the money belongs to the client.

You can’t take the money out until you’ve earned it. And when you do withdraw funds from a trust account, they must first be deposited into your firm’s operating account before being used to pay bills, staff payroll, etc.

But things get murky around flat fees because different states have different regulations.

Do flat fees go into a trust account?

Historically, flat fees didn’t go into a trust account – because they were considered non-refundable therefore already the lawyer’s money. But now some states – like California – require flat fees to be deposited into a trust account.^[1]

Flat fees deposited into a trust account can typically be earned in stages. This means that the lawyer and client agree ahead of time (in writing) on what those stages will be. After the completion of each stage, the lawyer can withdraw an agreed-upon amount of the flat fee and deposit it into the firm’s operation account.^[2] Once all the stages are completed, the flat fee will be used up.

You can’t withdraw money you haven’t earned

If you do deposit a flat fee into a trust account and agree to staged withdrawals – whether because of state regulations or other reasons – you must stick with that approach.

Even if you need the money for payroll now and you know that the current stage will be completed in just a few days, you still can’t withdraw a single cent from the trust account.

It’s not your money yet, and legally, that would be considered stealing.

Many states conduct random audits of trust accounts. Any discrepancies can lead to an attorney getting disbarred. Withdrawing money early isn’t worth the risk. And even if the discrepancy in the trust account is small or a genuine mistake, it’s still your license on the line.

One of the best ways to prevent confusion is to monitor your accounts. Use a practice management system that makes staying on top of your accounts easy so you don’t end up in a bind.

And if the flat fee is in your trust account, treat it like you would client money in other scenarios – track time to prove you’ve done the work and provide invoices.^[3]

References

1. Advance Fee Deposits and Your Client Trust Account
2. What Every Family Lawyer Should Know about Trust Accounts
3. Do I Need to Track My Time If I Charge My Legal Clients a Flat Fee?