In law firms, where every decision and action carries serious consequences, trust is the cornerstone of the lawyer-client relationship. Today, lawyers have not only the authority of advocacy but also the duty of financial guardianship. Trust accounting is fundamental to this responsibility, protecting the integrity of client funds. This blog post will guide attorneys through the specifics of trust accounting for lawyers, highlighting specific recommendations and common traps and sidestep.
What is Trust Accounting for Lawyers, and Why Does it Matter?
Trust accounting is a financial management that lawyers perform on behalf of a customer or a third party. Usually, such accounting involves the following stages:
- Lawyers open a dedicated trust account specifically designated to store client funds.
- The customer pays you for services, e.g., settlement capital or a retainer fee payment.
- You deposit money into the previously opened account.
- When you gain a commission, you take money from this deposit.
- All unspent money is returned to the customer.
Maintain detailed records for all trust account transactions. This includes recording deposits, withdrawals, transfers, and any interest earned on the account. If a client disagrees with payment, the State Bar will ask you to hold the savings until a final decision is made.
Setting Up a Lawyer Trust Account (IOLTA)
An Interest on Lawyer Trust Account (IOLTA) forms capital to pay for services clients need. This is possible through interest accrued on the attorney trust account.
In the USA, attorneys can place client money in interest-bearing trust accounts. The IOLTA project, launched in the 1980s, is valid nationwide.
Understanding that your law organization needs an IOLTA account is the initial stage of financial responsibility. The second phase is to learn how to configure it. The simplest option is to create and set up such accounts in your current financial system.
Many financial institutions participate in such a project. They are informed of the algorithm for creating them and what reporting needs to be provided for the financial institution and your company to meet your region’s directives. When selecting a partner, you must consider the following functions:
- Significant record-keeping potential for trust accounts.
- Compliance with area standards.
- Reliable security features to protect partner privacy.
- Effective synchronization with third-party systems.
The financial establishments should have all the necessary forms ready to complete. They will tell you what documents you must provide to ensure your account meets region requirements.
Best Practices in Trust Account Management
Incorrect trust accounting for lawyers can have irreversible consequences. You risk losing your license or damaging your reputation. Client funds should be disbursed promptly for the intended purposes once the legal services have been rendered or expenses incurred. Delays in disbursement can erode trust and lead to dissatisfaction among clients. Let’s consider practices to protect your business from negative consequences:
- Implement timely reconciliation: A three-stage procedure involves comparing numbers from your customer register, the trust register, and the bank reports. The information in the first two should be similar, and the reports must confirm the amounts. Reconcile reports on the last days of each month.
- Establish a transparent billing process: During the first meeting with clientele, be honest about your billing systems. Tell them about your rates and policies. Reassure them that their finances will be protected and that you will utilize it for their intended purpose.
The State Bar requires attorneys to divide fiduciary and personal funds. We recommend utilizing special software to promote better control over the money.
Handling Client Funds and Transactions
While accounting for trusts may seem simple, the procedure becomes more challenging when you must monitor the records of multiple clients. Systematized record-keeping serves as a paper trail to track the movement of client funds. Let’s look at the norms of working with client capital.
Processing retainer fee payments
As a rule, fee funds cannot be transferred from the client’s trust account to the law organization’s main account until the organization has fulfilled its obligations, sent the counterparty an invoice, and received confirmation.
However, in some situations, the advance may be transferred to the principal account of the legal organization. Suppose the word “advance” refers to a fee that clients pay to ensure that the organization is ready to work within a required time frame on a particular matter. In such a situation, this money can be transferred to the organization’s main account.
Some regions enable retainers to be placed in main accounts if specified in the contract between the clients and the law firms.
Dealing with settlement funds
Optimal settlement funds management begins with properly writing and executing a contingent fee agreement. This contract informs the counterparty how payments on the settlement check occur.
Cash checks belong to the clients and are deposited into their attorney’s trust account but certainly not their main account. Before utilizing a draft, it must be signed by the client and the organization if the check is issued to both participants. The document must indicate the client, case number, and description. You must scan the draft and add it to the counterparty’s file.
Lawyers must inform the client about how they plan to disburse the capital. They also must state what funds will be returned to the client, what percentage covers the spending, and what sums will be transferred to other interested parties.
Dealing with trust requests
Not all clients’ savings appear in the trust account. Below, we’ll analyze the main kinds of capital you should place there:
- Miscellaneous spending includes advance payments, insurance payout, and payment of future obligations. It is cash you haven’t earned yet and expenses you haven’t paid yet. This money should be placed in a trust account because clients expect you to safeguard it.
- Settlement Payments: This capital must be held in such an account until the client is paid. Suppose the settlement resolves a problem that you supervised through the contingent fee. In that situation, you must provide the client with a report indicating the sum of settlement amount, commission, costs, and remaining balance.
- Fiduciary funds: If you receive capital as a trustee, guardian, or other representative, those savings are also displayed in the trust account.
- Overpayments on bills: Overpayments are partly earned (the capital that covers the outstanding balance) and partly unearned (overpaid cash). The capital you earned can be withdrawn. The overpayment should be returned to the customer or, in agreement with him, saved and applied when providing services in the future.
Understanding what money should be displayed in a particular account and how to interact with a trust request is essential. Commingling funds can change the character of the account, creating the danger that creditors could raid it.
Avoiding Ethical Pitfalls in Trust Accounting for Lawyers
Understanding the relevance of trust accounts is one thing, but recognizing where mistakes can occur is another. Let’s look at what pitfalls there may be when working with this category of accounts:
- Reconciliation gap. Failure to regularly reconcile trust accounts can result in inaccuracies, failure to detect mistakes or missing capital. Regular reconciliation is essential to ensure reliable records and data.
- Illegal withdrawal of money. You must have good reason and permission to withdraw money from a trust account. Such operations must be supported by relevant documents and agreed upon with clients.
- Failure to engage well with clientele, lack of clarity in procedures, and failure to provide data on transactions and trust account balances undermine trust. Ongoing collaboration and clear communication is critical.
Lawyers must maintain high operating standards by knowing these legal trust accounting risks and taking preventive measures.
Leveraging Technology for Efficient Trust Accounting
You should adopt a specialized e-system to address all the details of trust activity. Each trust operation must be monitored. You have to complete a reconciliation procedure at the end of each month to ensure your books are correct. The following points need to be agreed upon:
- trust account balance,
- account liability balances,
- financial data for each client.
One-size-fits-all solutions are unlikely to handle such tasks. However, a trust account management application designed with legal specialists in mind may make many things more accessible, including legal billing. Such e-systems form a single space to accept payments, work with them, and help prevent commingling funds. This ensures compliance with fiduciary recording standards.
Closing
Forward-thinking business owners know that trust accounting for lawyers is as critical as finding qualified attorneys. Even if you don’t need an in-house accountant to handle banking operations for trust accounts, interacting with a financial expert can save your business from considerable losses. Trust accounting can be risky if you don’t keep up with all the changes. Working with a specialist familiar with trust accounting will be a valuable asset for your organization.
BooksTime’s team of financial experts specializes in trust activity and technology implementation in law organizations. We have experience in financial reporting, payment plans, and business consulting. Partnering with seasonal financial experts helps ensure compliance while simplifying financial operations. Contact us for additional data about trust accounting services, tax deductions, and how we may help your legal organization grow in the long-term.
