Trust accounts are client money held in trust by a lawyer or law firm. Even though the money isn’t being held in a bank account that the client has access to, it’s still the client’s money—and must be treated that way.
Types of trust accounts
The money in a trust account belongs to the client, including the interest.
But in some instances, client money held in trust isn’t enough to generate significant interest for the client on its own—or it isn’t held for long enough to earn interest. In these cases, the client money is pooled and interest is typically donated to fund pro-bono legal work. These kinds of accounts and the regulations around them vary slightly by state, but they’re generally known as Interest on Lawyer Trust Account (IOLTA) accounts.
Regardless of which kind of trust account you are using, the rules for taking money out require lawyers to adhere to the same standards.
The only money that a law firm should take out of a trust account is money earned by doing legal work.
Traditionally, flat fees have been treated differently in that they aren’t deposited into trust accounts. But some states, like California, are beginning to ask lawyers to keep even flat fees in trust accounts until the work is completed.
Regardless of location, however, lawyers should only take money out of a trust account after the client has been billed for legal services.
Keep a paper trail
When the time comes to take funds out of a trust account, all the details must be recorded. You must record who is taking the money out, how much is being removed, and the client matter the funds are associated with—as well as updating trust account books with the new account balance.
Should your firm ever be subject to a trust account audit, you will be asked to produce these records. In many instances, banks don’t maintain records for as many years as you would be required to produce them for, so it’s important to keep your own records.
Use tech to reduce error
The consequences of mismanaging client money—even by accident—can be severe. Inappropriately removing money from a trust account or failing to maintain proper records can result in being disbarred.
But modern practice management systems—which have been designed with trust accounting issues in mind—help prevent human errors, such as ledger overdrafts and commingling, that can have big consequences.