For law firms, it is imperative to know how to manage trust accounts. Not having a good understanding of trust accounting can result in mistakes, errors, ethics violations, and potentially even disbarment! If your law firm has struggled with trust accounts – or are currently struggling with managing trust accounts – these tips will help your attorneys and staff familiarize themselves with these accounts, and help prevent disbarment from any oversights, especially negative trust account balances.
1. Understand Which Funds Belong in Trust Accounts
When it comes to managing client trust funds, not just any fund can be deposited into them. It is extremely important that you make sure your deposits into client trust funds are limited to the few select funds permitted by law. The only funds that can be deposited into a trust account are:
- real estate transactions
- settlements and judgments
- collections
- unearned retainers or advances
Personal funds, earned income, and payroll funds are just some of the common funds that many attorneys mistakenly try to deposit into trust accounts. If your firm doesn’t use a practice management software to maintain records, investing in one is a great way to avoid making illegal deposits into your clients’ trust funds.
2. Keep Client Funds Separate
Running a successful law firm often means balancing multiple clients at the same time. However, this can create confusion and make it difficult to prevent negative trust accounting. Knowing each client’s balance – and being able to generate a client transaction report showing all activity associated with the client’s funds – can be a full-time job for your law firm!
Again, investing in a great practice management software – or a bookkeeper like Legal Ease Bookkeeping that specializes in law firm finances – can help you keep client funds separate by maintaining regular client transaction reports.
3. Never Overdraft from Your Clients' Accounts
As the client’s attorney, maintaining a positive trust account balance is your responsibility. Your clients’ trust accounts should never reach a negative balance. Many law firms have learned the hard way that using one client’s funds to correct another client’s negative balance is a serious misappropriation of funds.
If an audit uncovers these kinds of practices, your law firm will almost certainly be subject to penalties, or even disbarment. An easy way to avoid an overdraft is by billing for work completed, and then writing a check from the client account to the firm’s operating account with the client’s approval.
Using credit cards and online payment methods can make this more complicated. Still, practice management software can send you and your clients automated low retainer reminders to prevent any overdrafts.
Your firm could also be at risk of overdraft due to fraud. This is a scenario that happened with one of our clients recently. Luckily, we identified the fraudulent checks immediately and notified our client. However, law firms without a specialized bookkeeper keeping track of these things may not realize something like this until it’s too late. Setting up a positive pay system at your bank to verify any unusual checks is a great way to prevent such a serious mishap.
4. Balance All Incoming and Outgoing Funds
When it comes to managing client trust accounts properly, there can’t be anything left over. All funds need to be paid to your firm for work completed, or returned to the client. When all is said and done, your client’s trust accounts should balance to ZERO.
Moreover, client funds should always be deposited directly into the client’s account. Client funds should never be placed in a law firm’s operating account, even if you have begun the work. The funds must stay in your client’s trust account until you have billed the client and given them the opportunity to review and approve the bill.
Keep In Mind...
The most important thing to remember when managing trust accounts is that none of that money belongs to your firm until you have justly earned it. If any of your client’s funds go unearned, you must return them to your client. You’ve worked countless hours to earn the trust of your clients and your community; don’t jeopardize that trust with careless mistakes and oversights like negative client accounts and poor client trust fund practices.
Keeping detailed records of all work completed, invoicing your clients on a regular basis, and keeping close tabs on your client’s accounts – whether with the help of a bookkeeper, a software program, or both – will help you not only maintain positive trust accounts, but also maintain positive relationships with your clients!
