Skip to main content

Law firms use trust accounts to hold client funds and keep them separate from law firm funds. Businesses must keep detailed records of money coming in and going out of their trust accounts, track each customer’s balance in the trust account, and ensure that a customer’s funds are not used to pay expenses. from another customer.

If you don’t follow state bar rules when handling your clients’ trust accounts, you can lose your law degree.

What is fiduciary accounting?

Fiduciary accounting is the process of tracking and controlling funds that a lawyer has received on behalf of or belonging to a client or third party. This usually includes the following steps:

  • Your client pays you in advance for your services, such as settlement money or attorney fees. (ABA)

  • You put the money in a bank account designated as a client trust or joint account, depending on the size of the sum.

  • You write a check to your company’s operating account when you earn the prepaid money.

  • Any remaining amount goes to the customer.

  • If you have a dispute over money with your client, your state bar’s guidelines may direct you to keep the funds in your account until you reach a resolution.

Funds in the trust account can never meddle with company funds. Thus, the company must keep accurate and detailed records of the money deposited and withdrawn from the account. Remember that each state has its own bar rules, so the specifics of these accounting rules will vary by jurisdiction.

Rules and Regulations for Trust Accounting Compliance

The American Bar Association (ABA) states that lawyers hold their clients’ prepayments in trust accounts before they begin to work and bill their cases. As fees received by the lawyer, the money should be transferred from the client’s fund to the firm’s operating account. The trust account essentially provides a way to separate the customer’s money and the company’s money.

What is IOLTA?

According to the ABA, Interest on Lawyers’ Trust Accounts (IOLTA) provides a way to raise funds for charity from the interest that lawyers earn on their trust accounts.

When a lawyer obtains a large sum for a client, he generally deposits this money in a trust fund which earns interest. When lawyers get a lesser sum, they can place it in a joint trust account. In the past, however, these mutual funds could not earn interest.

When the Supreme Court and state legislatures created IOLTA in the 1980s, attorneys could deposit their earnings in an interest-bearing trust account. The banks usually donated the interest to a program or charity controlled by the state bar. Therefore, lawyers derive no net income from this interest. But they always fulfill their ethical and fiduciary obligations by protecting their customers’ money.

Common Trust Accounting Mistakes

Making just one mistake in managing a trust account could cost you your license to practice. Be sure to avoid:

  • Billing customers for payment processing fees: Depending on your state’s laws, you cannot charge processing fees to your customers. If your state allows it, you must, in writing, obtain the client’s consent to the payment of these fees.

  • Reporting trust accounts as income: The money your client pays you in advance or for a deposit is prepaid, so it’s their money until you get a settlement or perform any agreed-upon services.

  • Negative customer, business or trust account balances: It is important never to bring the balance of your trust account or that of your clients or business into the negative. You must always maintain good bookkeeping to ensure that your trust account balance and your customer and business balances remain positive.

  • Withdrawing funds too soon: You want to ensure that your deposited trust funds are fully cleared through the trust bank account and that you have proper instructions from your client before making any disbursements. Having the proper agreements and documentation with your clients regarding the disbursement of their trust funds will ensure that you follow your state bar’s rules.

  • Mix professional and customer accounts: It is essential to separate your firm’s trust account from your clients’ accounts. For internal tracking purposes, your firm may tag the client’s and your firm’s operating trust accounts. You can include the customer’s name and ID number so you don’t confuse their account with yours.

Trust Accounting Best Practices for Lawyers

Poor trust accounting in your jurisdiction could have permanent negative consequences. In the worst case, you could lose your license to practice law and be disbarred. Mismanagement of funds could also cause you financial problems with your clients. If they paid you up front and you didn’t use all the money, they may take legal action if you can’t locate it.

To avoid these devastating results, consider applying some of these fiduciary accounting best practices:

  • Use a three-way match: This method consists of three elements: the sum of your client books, the trust book and the trust bank statement. The first two should always match, while the trusted bank statement should verify the numbers. You must reconcile your account at the end of each month.

  • Be transparent about your company’s billing practices: During your first consultation with your client, be upfront about your billing methods. Tell them how much you charge and give them an overview of how trust accounts work. Assure them that their money will be safe and intact, and that you will only use it for your services.

  • Educate clients about your firm’s practices: Educating your customers on how your business works not only gives them peace of mind, but it also benefits your reputation. You establish yourself and your staff as authority figures, increasing brand awareness and building customer loyalty and trust. You can see an increase in customers when you are open and honest with your current customers.

  • Always keep company funds separate from customer accounts: The ABA requires attorneys to keep their clients’ trust account funds separate from their firm’s funds. This task can get complicated when credit card processors and banks are involved, so you can use software to track and avoid mismanagement of funds.

What is fiduciary accounting software?

Trust accounts require constant supervision to ensure client funds are properly allocated, reconciled and remain in compliance. It is always possible for a law firm to be audited due to legal regulations, so managing client accounts is a major responsibility that can impact a firm’s overall success.

Trust accounting software makes the process of tracking, reporting, and transferring funds easier for law firms. When audit season approaches, detailed tracking and reporting of trust accounts is essential.

While there are several accounting solutions that lawyers can rely on to manage their trust accounting, the safest approach is to use software specifically designed for trust accounting within law firms.

Now that you have an idea of ​​what fiduciary accounting software is, let’s dive into the key features and functionality your business should look for when choosing fiduciary accounting software. Software.

Choosing the Best Fiduciary Accounting Software

You should not rely on manual audits of your clients’ trust accounts to ensure that they are error-free and compliant. Finding fiduciary accounting software for your business will make everything smoother and more efficient.

Look for software with easy-to-use features. Make sure it tracks incoming and outgoing funds from clients’ trust accounts and stays compliant with your state bar’s rules. You should be able to check your company’s financial records and progress at any time, so you can make informed decisions for your customers and your business.

Features crucial to maintaining a strong reputation, customer satisfaction and consistent trust accounting practices include:

  • Custom reports: Law firms can be audited at any time. Having the ability to quickly generate reports on your business billing, revenue, or trust accounts will save you time and headaches.

  • Integrations: We understand that you need certain tools for your law firm to thrive. Integrations allow your business to adopt new platforms without sacrificing functionality, the need for duplication of work, or the potential loss of vital data.