Best practice tips for setting up your firm’s trust accounts

Your trust account is a key part of your legal practice. It not only provides protection for your client’s funds and property, but it also assures that your fee will be available when earned. For the new attorney, setting up a trust account can be stressful, especially as you try to navigate the numerous rules and regulations of your jurisdiction. While I can’t direct you on how to set up trust accounts, I can provide some industry best practices, as noted by the ABA and several other legal professional organizations. Hopefully these tips will help point you in the right direction, so you can properly set up your practice trust account.

 

Initial questions

When setting up a trust account, one of your first decisions is choosing which type of client trust account is most appropriate to meet your firm needs. Two of the main factors you want to consider include:

  • The value of the client funds to be held – For large amounts, an interest earning account may be the best option.
  • The length of time that you anticipate holding the client’s funds – As with a large amount, the ABA suggests that funds held for a significant amount of time should be in an interest earning trust account.

 

The right financial institution

Your financial institution choice needs to carefully consider the specific rules of your state, but there are some general considerations that the ABA suggests. For example, does your state require you to choose from a specific list of banking institutions? Some jurisdictions maintain a list of banks that meet the state’s trust accounting specifications and attorneys are required to choose a financial institution from this list. So, check whether your state maintains one of these lists. You also need to check for any documentation requirements maintained by your state bar. According to the ABA, states usually require lawyers to submit some type of application or official notification upon opening a new trust account.

Remember, when opening an IOLTA account, related expenses cannot be paid with client funds. This includes service charges and check printing. Find out how your bank handles these expenses. While some will waive these charges, others may offer a program that covers them without taking money from client funds. If your bank does not have a system in place, then you may have to pay these expenses from your firm’s operating account or possibly make scheduled deposits into your IOLTA to cover the costs of monthly service fees. Lastly, make sure you select a financial institution that is covered by the Federal Deposit Insurance Corporation.

 

Who signs

Setting up your trust account also requires the selection of signatories. These are the people who have the authorization to sign for account related tasks, like withdrawals or checks. The ABA advises that the most ideal arrangement is to have only one authorized signer on the trust account. It’s a lot of responsibility, but it can also eliminate potential problems down the line. When making this decision, it is vitally important that you review the rules in your state, particularly if you are thinking about selecting a non-lawyer. While some states do allow this option, many do not. You should also consider the fiduciary duty that comes along with handling client funds. You are being entrusted with your clients’ money and/or property. It is your responsibility to ensure that anyone with access to that trust account exercises an appropriate level of care. Your state may require you to provide all signatories with specific training and oversight. Criminal background checks and fidelity bonds can also add a layer of protection for your clients.

 

Protection from overdrafts

You should establish your firm’s trust account with the expectation that overdraft fees will never be an issue. After all, if you properly manage the account, you should never be overdrawn or charged any related fees. But states vary in their requirements for overdraft protection. While some states allow overdraft protection to cover related bank charges or NSF fees, others prohibit such protections and closely monitor trust accounts for any overdraft activity. Keep in mind that your firm’s trust account is for the safekeeping of client funds and, according to the ABA, an overdraft protection that adds additional money into the account may subject you to a reprimand from the state bar.

 

Avoid commingling

As stated by the ABA, “One of the most important principles in client trust accounting is the prohibition against commingling the lawyer’s own funds with the client’s funds.” This means that your personal and business funds must be maintained completely separate from funds held on behalf of clients or third parties. Your trust account is not the proper location for payroll funds, firm savings, anticipated tax liabilities, or any other practice-related funds. The ABA also advises that, just as you cannot deposit business funds into the account, you cannot withdraw client funds from the trust account to pay firm expenses. Your trust account is not a backup plan for your law firm, so keep that in mind when setting it up.

Avoiding the commingling of funds also relates to the appropriate disbursement of funds from your trust account. Once funds are earned, your state may require you to remove the fees in a timely and reasonable manner, so that earned funds are not sitting in the trust account with client funds. Timely withdrawal may also apply to the payment of client settlements, case expenses, and third-party payments.

 

Create a file

The ABA advises that each state maintains its own record-keeping requirements for trust accounts. This is done to ensure that accurate records are maintained in case needed by a client or the state bar. Your state may require you to keep records of:

  • Deposits into the account
  • Withdrawals and disbursements from the account
  • Every monetary transaction
  • Any fees levied against the account by the financial institution
  • Records of monthly reconciliations

By setting up a system to keep track of these records right from the start, you can implement trust account best practices right from the onset.


About Erika Winston:

Erika Winston is a freelance writer with a passion for law. Through her business, The Legal Writing Studio, she helps legal professionals deliver effective written messages. Erika is a regular contributor to TimeSolv and a variety of other publications. 

www.legalwritingstudio.com