Trust accounting isn’t a laughing matter for small law firms anywhere in the country. If the handling of clients’ money is not less than prudent, then damage to both reputation and purse can be severe-even to the extent of disbarment. The sometimes complex process of trust accounting is explained in an easily understandable way in this guide, which provides practical insight into matters relevant to the unique challenges of the small law firm.
Understanding the Basics of Trust Accounting
It deals with the receipt and disbursement of money held in the firm’s trust for clients’ services. The money may be owned by clients but not to the firm itself. Accordingly, bookkeeping must do this kind of bookkeeping with accuracy as well as a high amount of transparency. Most widely examples of the same will are retainers, advanced cost payments, as well as settlement proceeds.
Principles Of Trust Accounting :
- Segregation of Funds: All the funds that it received on behalf of the clients shall be transferred to a separate trust account and not into the operating account of the attorney’s office.
- Recordkeeping: The lawyer shall keep proper records of all transactions, detailing from where it came, the amount, its receipt, and for what particular purpose it was received.
- Reconciliation: Records of the trust account are to be reconciled against bank statements on specific dates for the purpose of ensuring that it is accurate and free from errors.
- Observe Rules: Observe rules pertaining to trust accounts from both your state bar and codes of ethics.
How to Create a Trust Account
Everything starts here in terms of compliance and being a good manager: the opening of the trust account.
- Find an IOLTA-Eligible Bank: The latter needs to be selected for your state bar association certification. Besides, it has to be a bank offering overdraft notice to the bar and IOLTA.
- Open a Separate Account: It needs to be clearly identified and described as a trust account and have nothing whatsoever to do with all the accounts of your firm.
- Establish Policy and Procedure: Develop procedures on the receipt, timing of deposits, disbursement procedure, and reconciliations relating to client money.
Best Practice in Trust Accounting
Following are some of the best practices that will ensure that a small law firm does not find its-self outside the law into grey areas.
1. Use of Trust Accounting Software
Simplify it by investing in some specialty trust accounting software. At the very minimum the product should do the following:
- Automation of bank reconciliations
- Ledger management skills
- Provide for transaction tracking
- Be linked to case management system
A few famous ones include Clio, Practice Panther and Complex – these software have been tailored according to the requirements of law firms.
2. Have One Client, One Ledger
What it means is that a ledger for each client, reflecting deposits and withdrawals along with the balance, is to be maintained. This way, everything stays crystal clear in the front, and auditing also becomes much easier.
3. Segregation of Funds
Only customer deposits are passed through the trust account. Never at any time post business or personal transactions in a trust account. Never at any time cover a shortfall on a trust account with an operating account balance.
4. Time of Transaction
Deposit the money as and when received from the client and disburse it only when fully earned and/or if necessary. Any delaying of transaction processing opens the floodgates of compliance issues.
5. Monthly Reconciliations
Match the balance in the trust account with the ledger of the particular client’s and bank statement every month. The habit will develop and thereby assist in recognizing discrepancies quite earlier.
Common Challenges and How to Overcome Them
Trust accounting creates some unique challenges in the small firm. Here’s how one overcomes them:
1. Limited Resources
Small firms cannot always devote full-time employees to trust accounting. Bookkeeping is increasingly outsourced or done using extremely user-friendly software to control the workload.
2. Understanding Regulations
The trust accounting rules in each state vary as different as night and day. That is a good opportunity to refresh your memory of the rules and regulations of your state bar involving trust accounting and to attend any seminars about the rules.
3. Human Error
These differences may either be because of wrong entries or maybe due to some mathematical calculations. In this case, the record shall be checked and verified; more so, it shall use automation of work done up to that extent by which the same work executed more than once is executed.
4. Dispute about Funds
If a dispute arises regarding the funds, deposit the disputed amount into the trust account pending resolution of dispute. Contact your state’s rules to seek further advice on this ethical issue.
Importance of Trust Accounting Compliance
In terms of trust accounting, compliance is not an option for any practicing law firm in the United States. Non-compliance can mean:
- Audits and Investigations: The state bar runs random audits for compliance. Anomalies are one basis on which investigations may be summoned.
- Financial Penalties: Mismanagement may lead to fines or restitution amounts.
- Damage to Reputation: Violations could affect your firm’s reputation and credibility; thus, potential lost clients and referrals.
- Disbarment: Non-compliance, if serious enough, could result in suspension or disbarment.
Using IOLTA Programs
Most states require participation in Interest on Lawyers’ Trust Accounts programs, which distribute interest on pooled client funds to various legal aid organizations. While such accounts make life just a little bit easier for the smaller firms, it is of importance to:
- Properly account for the money of each client.
- Not to use IOLTA when a single client can get substantial interest on funds.
Update Yourself with Training and Resources
One should invest in continuing education and resources to stay well out in front of the trust accounting compliance curve, such as through the following:
- State bar seminars and webinars
- Legal accounting subscription services
- Consult with experienced practitioners in trust accounting about issues specific to your situation.
Bottom Line
Trust accounting need not overwhelm the small law firm. Nail the basics, aided by technology and best practices, in how one receives and disburses money responsibly for the client, all while keeping all compliance matters intact. Trust Accounting Simplified will save your firm from any potential legal risks while having a tremendous bearing to bring an air of trust that could be a major resource in times to come, taking care of them as professional lifelines.
