Keeping track of individual client ledger balances and making sure there are sufficient funds to cover any disbursements is a requirement of trust accounting compliance.
To prevent a situation where there is an overdraft on a client trust account, you must keep careful track of the balances of each individual trust account. These funds are typically pooled into one larger trust account, which is where problems arise. While there may be enough money in the total trust account amount to cover a disbursement, that doesn’t mean there is enough in the individual client’s account.
Ways to prevent a client ledger overdraft include:
- Keep individual client ledgers and diligently record any transaction related to the account, including amount, date and purpose
- Complete monthly reconciliations to catch any accounting errors and ensure accurate bookkeeping
- Make sure funds that have been deposited into a trust account have cleared before making withdrawals
- Review the client ledger before issuing a check
- Use legal-specific software that has built-in features to stop you from performing transactions that would cause an overdraft
R.C. 4705.10 requires banks who handle trust accounts to notify the Disciplinary Counsel of any checks that couldn’t be honored that were written on an IOLTA account, so always make sure you have enough funds in the account before taking money out.