Almost every lawyer will handle a client trust account at least once in their career.
Trust accounts operate according to very specific regulations, and even if you live and breathe them every day, it can still be a lot to keep track of. Never mind if it’s your first time handling a trust account or you haven’t touched one for a few years.
Below, we’ll review the key components to remember when overseeing a client trust account so that you can stay informed and compliant.
Whenever you hold funds for a client, you’re holding those funds “in trust.” Trust accounting gets at the unique relationship between lawyers and their clients—you may earn money by working for your client, but you have an ethical responsibility to do what’s in their best interest.
The three most common situations for holding a client’s funds in a trust account are:
- You receive money from a client for services you have yet to perform
- You’re the fiduciary agent for your client or their estate
- A settlement is being paid out
Although in certain situations, the money in a trust account may ultimately be distributed to you, when it’s in the trust account, it doesn’t belong to you or your law firm yet. Legally, you can’t touch the money, and yet you must keep very precise records of every cent.
Regulations for trust accounts vary by state. In addition to standard client trust accounts, some states allow for IOLTA (Interest on Lawyers’ Trust Account) accounts.
IOLTA accounts pool together various client trust accounts that are small enough or held for a short enough duration that on their own, they wouldn’t earn interest for the client. However, once combined, these accounts may earn a more substantial amount of interest that is then donated to charity.
Points to keep in mind
Although regulations vary by state, a few requirements stay more or less consistent no matter where you practice. Knowing and following these rules can make the difference between staying compliant and facing professional repercussions.
Even though the contents of the trust account don’t belong to you, you are still responsible for keeping track of everything. Model Rule 1.15 stipulates that lawyers must safekeep client property “with the care of a professional fiduciary.” In other words, you must keep complete records of every trust account.
In practice, this means lawyers need to keep an account journal for each account and track all deposits and disbursements. You’re required to keep a detailed ledger for every client with a trust account.
Run monthly reconciliation
In addition, law firms with trust accounts need to run monthly reconciliation. This process helps you catch any mistakes while they’re fresh and relatively easier to fix. If an error gets buried too far back in the books, it may be nearly impossible to untangle what went wrong.
Law firms also need to run three-way reconciliation with individual client ledgers, the trust bank ledger, and the trust balance.
Random audits happen, and they can happen at any time.
It’s a good idea to run monthly reconciliation and keep records of any and all money going in and out of every client trust account in order to stay organized and catch errors promptly.
But in the event of an audit, records and reconciliation go from “good idea” to “essential paperwork.”
No auditor is going to be impressed if you need a lot of time to hand over records. In this situation, a mistake from a few months ago can become a nightmare. And in certain cases, a failure to maintain required records can result in being disbarred.
We recommend breaking everything down into smaller, monthly tasks so that you’re prepared for a random audit.
Key mistakes to avoid
In addition to maintaining complete and up-to-date financial records, keep in mind that there are regulations around what should and shouldn’t be kept in a trust account.
What belongs in the trust account
As mentioned above, there are a few common situations where money belongs in a client trust account.
Unearned income, or money received at the start of representation, belongs in a trust account. Retainers and other fees do too and can only be removed after they’ve been earned and billed for. Similarly, advances for costs in managing a case also go into a trust account.
In the role of a fiduciary, you may need to hold third-party funds in trust as well.
And finally, trust accounts may also hold judgment funds awarded by the court and settlement funds for real estate transactions and personal injury cases.
What to keep out of a trust account
Just as unearned fees should always be held in a trust account, there are certain types of funds that should never end up in a trust account. Namely, the law firm’s money.
If fees have been earned and billed for, they should be recorded and removed from the account. In fact, any money that technically belongs to the law firm shouldn’t be in the client trust account.
Credit cards merit a special mention because of how credit card merchants who aren’t legal-specific operate.
When a charge is made to a client’s credit card, non-legal merchants will withdraw the charge fee from the same account they deposit the money into. However, if the money is going into a client trust account—since it legally can’t first make a detour into the firm’s operating account—then that’s where the merchant will withdraw the fee from.
Even if you act quickly to replace the fee with money from your operating account, the charge fee withdrawal is technically considered accessing client funds.
But this hang-up with non-legal credit card merchants doesn’t mean you can’t accept credit cards at all. Instead, look for a legal-specific merchant with software designed to deposit charges and withdraw fees from separate accounts.
Tools that help keep you compliant
Along with legal-specific credit card options, more lawyers are turning to legal technology to help them stay compliant when managing client trust accounts.
A modern practice management program can help you stay on top of the paperwork with software designed to run three-way reconciliation for law firms. These features can save you reams of time and make keeping up-to-date records less of a chore.
Likewise, contemporary legal software comes with trust account safeguards in place to help you stay on top of do’s and don’t when it comes to moving money between accounts.
Save yourself time and earn back a little peace of mind with a boost from modern tech.
Sign up now to get more tips and news from CosmoLex
- What Every Lawyer Should Know About Operating and Trust Accounts
- What Are the Three Bank Accounts Every Law Firm Should Have?
- Should I Deposit a Retainer into an Operating Account or a Trust Account?
- 9 Tips to Boost Law Practice Success by Getting Back to Basics
- How to Keep Your Three-Way Reconciliation Accurate and Efficient