Trust Accounts: Best Practices
Trust accounts are accounts in which money is held and managed by an individual designated as trustee for the benefit of another party. For a law firm, the trust account is opened by the law firm to hold money belonging to a client or other third party.
The money could come from retainers, escrow funds, settlement funds, or any other kind of client prepaid funds. The common denominator in all these is that the money does not belong to the law firm. When law firms accept money that belongs to someone other than the firm, it is generally kept in an Interest Only Lawyers Trust Account (IOLTA).
Since trust money is not owned by the firm, it is highly regulated.
What is an IOLTA
According to the American Bar Association, IOLTA is a method of raising money for charitable purposes, primarily the provision of civil legal services to indigent persons. The money raised is by way of interest earned on all law firm IOLTA accounts. IOLTA programs currently operate in 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.
In most states, IOLTA accounts are created by the state’s supreme court; those that are not, and there are very few, are created by state legislatures. American Bar Model Rule 1.15 entitled Safekeeping Property is very specific regarding how a lawyer will deal with property (including money) of clients or third parties. Most state bar associations have adopted something very similar to this rule in their professional codes of conduct.
Check your local state Bar regarding IOLTA accounts and encourage your attorneys to do the same. It is, after all, the attorneys who are ultimately responsible for any issues relating to their trust account.
- Do not comingle funds. Firm income should go into your operating account and money belonging to clients or a third party, for which you are a fiduciary, should go into your trust account. The only time law firm funds can be deposited into a trust account is to pay bank fees and charges.
- Never borrow money from your trust account. Remember, money in your trust account is not your money. Taking money in anticipation of work to be performed is a slippery slope and should never occur.
- Ordinarily, banks are not typically allowed to charge fees on IOLTA trust accounts. However, it is your responsibility to make sure that they are aware of this
- It is important you understand when you may deposit an advanced payment into your operating account and when it needs to be deposited into trust. Several Bar Associations have written opinions about this topic. In fact, there are some states that do not allow the use of advances in any instance. If in doubt about whether money should go to your trust or operating account, err on the side of caution and deposit it into your trust account.
- Your legal accounting software should allow you to manage every accounting element of your firm’s trust accounting for your firm. If that is not the case you should consider changing to a software that does.
- Know your jurisdictions trust accounting rules and remember that if you have offices in different states the rules could be different in each state.
- Make sure the financial institution where you are opening your trust account is approved by your state’s Bar Association.
- Keep accurate and timely records of all transactions going through your trust account, and be as descriptive as possible when recording these transactions. You need to be prepared to provide clients with an accounting of their trust account whenever they ask.
- Reconcile your trust account monthly: First, reconcile the actual bank statement; second, reconcile against a journal of all deposits and disbursements; and third, reconcile against all client trust accounts.
- In addition to the above reconciliations, ensure that your general ledger trust account balance matches the balance on your client/matter ledger. All funds in the trust account must be accounted for and you must know who the funds belong to. Therefore, it goes without saying that the trust liability and the trust asset accounts on the firm’s balance sheet should net to zero.
- Allow for adequate clearing time on deposits. Checks deposited into your account are not immediately available, so until a check has cleared, the funds are not available to disburse.
- Ensure you have the correct check and balance procedures in place. For example, if possible, use different staff members to make deposits, disburse funds, and reconcile the account.
- Keep trust records for the entire length of time required by your local jurisdiction.
- Manage signatories on your law firm’s trust account. Not all state bar associations have the same rules. For example, some may allow for non-lawyers to sign a trust check.
Law Firm trust accounts are possibly the most regulated aspect of the accounting process because it deals with money that does not belongs to the firm. Lawyers are responsible for the money in their trust account, as they are the fiduciary. The two big takeaways from this blog are first, know your state’s Bar rules, and second, have a good legal billing software that can manage this for you. If you would like more information about how regarding anything contained in the blog please contact Coyote Analytics.
About Rob McKay
Rob McKay, CLM serves as Product Manager at Coyote Analytics, where he focuses on helping the company’s developers design new and innovative additions to our software applications. Rob previously spent more than 25 years managing law firms in Florida and Texas. He can be reached at firstname.lastname@example.org.
About Coyote Analytics
Coyote Analytics offers a complete financial software system (time, billing, accounting) as well as a full practice management solution (calendar, docketing, document management, forms, contacts) to assist firms in managing the business of law. Coyote Analytics’ program was built through a collaborative effort with clients. It offers a simple, easy-to-navigate interface, a robust feature set, and great customer service, all at a reasonable price point.