What is Trustworthy? Is it Reliable? Perhaps when it comes to discussing Trust Accounts, it refers to “ethical” or “unimpeachable”. A trust account is different from other bank accounts? An attorney representing his or her law firm is the trustee for the monies or assets belonging to a client. The attorney is responsible for safeguarding and protecting the client’s monies and/or other assets. The attorney has the power to disburse funds on behalf of the client, based on the Attorney/Client Agreement. Any and all Trust Monies or Assets are not to be comingled with Assets and Monies belonging to the attorney or the Firm. Attorneys have a fiduciary responsibility to know and understand the Rules Governing Trust Accounts in their state.
The Rules are generally published at each State Bar’s web site or can be obtained from their State Bar Association. Rule changes and enforcement falls under the jurisdiction of each states’ highest court.
Tip #1 Know the Rules
Very often, actually, too often, the managing of trust bank accounts, is left to employees in the firm, such as a legal assistant, office manager, or bookkeeper. And, more often than not, that person has never read the Rules Governing Trust Accounts in their jurisdiction. Ultimately, it is the responsibility of each attorney to know the rules and requirements in the State in which they practice law. It is essential that attorneys maintain oversight and management of their client’s monies and assets.
The most common cause for a practicing attorney to get suspended or disbarred is misuse or comingling of client funds or assets.
Tip #2 Follow the Rules
Begin with maintaining Trust Bank Accounts is approved financial institutions. Some states provide a list of those banking institutions that are qualified or authorized to manage a Client Trust Account.
For example, in Florida, if a Client Trust Account is overdrawn or a returned item for insufficient funds, the Financial Institution must notify the Florida Bar. Many other states have the same requirement.
Tip #3 Know What Monies Belong in the Trust Bank Account...
The Rules can be different from state to state so check the Rules in your state to know exactly what the rules are on Retainers. Determine what is allowed to go directly to Operating versus what types of Retainers go into a trust bank account.
For example, in Florida the language is:
Advances for fees and costs are the property of the client and are required to be maintained in trust. Retainers are not funds against which future services are billed. Retainers are funds paid to guarantee the future availability of the lawyer’s legal services and are earned by the lawyer up receipt. Retainers, being funds of the client, may not be placed in the client’s trust account.
Refer back to Tip #1 - Know the Rules in your state.
Tip #4 Is Your Accounting System Designed for Law Firms?
Considering the options available to law firms, it may be foolhardy to leave the managing of trust accounts to a non-legal accounting system. The legal-specific accounting packages should include the three-point trust account reconciliation not available in generic accounting systems.
What is a 3-way trust accounting reconciliation? It is ensuring a fully balanced trust bank account system whereby the balance in the trust bank account reconciles to the bank statement. This is a standard bank reconciliation. However, in the case of trust bank accounts, the 3rd point is to ensure the balances attributable to each client on their ledgers also balance.
All transactions in a trust bank account must be part of a Register of bank activity while also being associated with a client on their ledger.
Tip #5 Just because there is money in the bank account does not mean your client has money to disburse.
Trust accounting software ensures against using someone else’s money to cover any disbursements. In other words, no client ledger should ever go negative. In order to prevent a potential problem, do not disburse funds unless absolutely sure the funds have cleared the bank. Funds must be clear funds before transacting any business against those funds.
Tip #6 Understanding the Bank Reconciliation Report
Just because the bank reconciliation balances does not mean the job is finished. Learn how to read the reconciliation report for outstanding items that need attention.
A deposit that remains outstanding on the bank reconciliation is a problem. The significance is generally the deposit failed to reach the bank or the bank made an error. Do not leave a deposit on the outstanding list without doing the research.
Next look for uncleared disbursements – these are checks that have been written but have not cleared the bank. If a check has not cleared in 6 months, it is the responsibility of the attorney(s) to find out why it has not been presented for payment. Did it get lost in the mail? Did it go to the wrong person? This is not the Law Firm’s money; it belongs to the client and due diligence is required.
Every effort must be made to properly disburse funds belonging to the client. Each state has rules about when and how unidentifiable trust fund accumulations are handled.
Tip #7 What are the Consequences?
The ultimate responsibility for properly maintaining trust bank accounts and other trust assets is the attorney. To ensure it is being properly managed and maintained, take responsibility by have the bank statement mailed to a home address, or if mailed to the office, instruct staff to deliver it to the attorney. Review the statement. Pay attention to the disbursements and checks written. Review ledger balances.
In some states, checks may only be signed by an attorney. In other states, such as Florida, someone that is not an attorney may be allowed to sign checks and transaction business. But, regardless of who is signing checks and authorizing transactions, it should NOT be the same person that is doing the bank reconciliations.
Request a printout of the 3-way reconciliation each month.
Ensure that all transactions are properly documented.
Follow the record retention rules governing your state. Never close a file without ensuring all trust has been disbursed and that all transactions have cleared the bank.
Trustworthy Doesn’t Have to Be Scary!
Was some of this information scary? It should be. But, it is not complicated. Maintaining vigilance and control over trust account transactions is a daily routine that should not take up a lot of time. This is especially true if using a qualified law firm accounting system that fully supports trust accounting and the 3-way reconciliation.
About the Author
Sandra L. Adams, Partner at Affinity Consulting Group, has been consulting and supporting law firms with the billing, accounting, and practice and document management solutions since 1982. With a degree in Finance, she spends much of her time coaching and counseling law firms on developing processes to streamline the bookkeeping and billing functions.