Trust Accounting: Importance of Accurately Tracking Your Trust Accounts
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Trust Accounting: Importance of Accurately Tracking Your Trust Accounts

Written by Raza Hasan

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Believe it or not, the end of the year is a great time for more than pie and presents. It’s an opportunity to review key processes in your law firm’s daily operations and evaluate how they might be improved in the year ahead.  

If your law firm has faced challenges managing trust accounts, now is the perfect time to address them. To improve your legal team’s confidence in—and strategy for—managing client funds, knowledge is key.  

In addition to trying the suggestions below, we recommend researching American Bar Association (ABA) and local regulations on trust account management.  

The importance of tracking trust accounts accurately  

Even seemingly minor trust accounting mistakes can lead to major consequences, so it’s critical that every member of your firm handle client funds with care.  

At best, trust accounting errors can cause inefficient workflows and billing silos. At worst, trouble with trust accounting can lead to violating a tax law or being disbarred for a violation of industry regulations.  

Traditionally, trust accounting requires a good sense of numbers and the ability to manually track an abundance of financial transactions. Software makes it easier, but even in the best of circumstances, trust accounting can be a challenge.  

Of course, overworked attorneys are only human.  

When attorneys are balancing a full client load, trust accounting mistakes become even more likely. Plus, knowing exactly which trust accounting regulations apply to your firm can be a challenge in the first place, since they vary by state.  

The five most common trust accounting pitfalls  

1. Using the wrong account  

Using the wrong kind of bank account for trust accounting—or opening too many accounts—makes monitoring client trust accounts unnecessarily challenging.  

Most state bar associations provide a list of approved banking institutions, which offer specialized accounts to protect client funds. These accounts, sometimes called IOLTA accounts, meet certain qualifications, such as offering overdraft protection or special insurance, to make trust accounting easier.  

2. Billing clients for fees 

Most states don’t allow attorneys to bill clients for banking or credit card processing fees, but by default, most banking organizations will charge the client account for these expenses. 

This could be considered commingling client funds with operational funds, so using billing software and banking accounts that aren’t designed for legal accounting is too risky. Choose a payment processor that will charge your law firm for processing fees, not your clients.  

3. Improper withdrawal of client funds 

Prematurely withdrawing and over-withdrawing client funds are surprisingly common offenses, despite the weighty consequences of accessing unearned client funds. Avoid this misstep by knowing which funds should be stored where in your state.  

In addition, double-verify that you’re looking at the proper trust account and that the funds you are transferring have officially cleared before initiating any transfer.  

4. Commingling trust and operational funds 

Client funds should never be spent on anything but legal expenses. The ABA explicitly forbids attorneys to mix unearned client funds with a law firm’s operational funds.  

The following expenses should only be withdrawn from your law firm’s operations account:  

  • Deposit slip fees  
  • Credit card processing fees  
  • Banking fees  
  • Check printing fees  
  • Overdraft fees  

 Meanwhile, these funds should only be stored in the proper client’s trust account:  

  • Settlement funds  
  • Advances for anticipated filing fees  
  • Unearned fees  
  • Real estate closing costs  
  • Retainers  
  • Funds owed to lienholders  
  • Amounts in dispute  

While the separation may seem confusing initially, it helps protect clients’ best financial interests.  

5. Trusting the bank too much  

It seems reasonable to assume that a bar-approved banking institution should know and follow basic trust accounting rules. Don’t.  

Even when a mistake or compliance break is caused by the bank’s negligence, you could still be held accountable for the consequences.  

Improving trust account management in 2023 

There are a variety of measures you can take to manage clients’ money more efficiently in the new year. However, the best way to avoid inadvertently breaking tax laws or industry regulations is to invest in legal-specific accounting software.  

Reap the benefits of legal-specific trust accounting software  

With built-in fail-safes and convenient reporting features, trust accounting software, like TimeSolv, may help you avoid the severe penalties of trust fund mismanagement.  

Software that’s specifically designed for managing legal trust accounts makes it possible to monitor unprecedented amounts of financial information in a single click, including:  

  • Client ledgers 
  • Accounts receivable 
  • Invoice summaries  
  • Client payment histories  
  • 3-way reconciliations  

Quality trust accounting software may also provide warnings about uncleared items, reminders about local trust account reporting requirements, and protection against using the wrong client’s cash to cover legal services.  

Look for software that integrates with your billing and payment software. Bonus points if it allows clients to monitor and replenish their trust accounts independently via credit card—without charging the client for processing fees.  

Run regular 3-way reconciliations  

Being prepared is the best way to take the stress out of audits. Use trust accounting software to automate regular three-way reconciliations of client ledgers, trust account ledgers, and trust bank statements, so you’re never caught off guard by inconsistencies.   

Communicate with your clients  

We recommend beginning every client relationship with a written agreement that outlines:  

  • Trust account basics 
  • The purpose of trust accounts 
  • The safeguards in place to protect client funds 
  • Payment processing basics 
  • The client’s responsibility to maintain a minimum trust account balance  

Provide a detailed monthly balance and transaction history to each client along with their invoice.  

Not only does this establish trust and transparency in your attorney-client relationship, but it also acts as an extra layer of security against the mismanagement of client funds. After all, who else is more interested in monitoring your clients’ money than they are?  

Use and store client funds as intended 

Never—ever—commingle your clients’ funds with funds intended to be used for your law firm’s operations. Whether the discretion is accidental or malicious, it’s an expedited route to disciplinary action from the ABA.  

Keep immaculate records that demonstrate when, how, and why your law firm transfers client funds, and that funds are only transferred once they are earned. (Trust accounting software makes this easy!)  

Many states have regulations for how long you should maintain the following records:  

  • The purpose of holding funds  
  • The source of funds 
  • Signed authorizations to store and transfer funds  
  • Data storage records  
  • 3-way reconciliation reports  

Remember, the ABA or your state bar association may request a copy of trust fund records at any time.  

Address errors proactively 

Even the best attorneys make mistakes sometimes. We are all human and fallible. If you discover an error at any point in your trust accounting responsibilities, be proactive.  

It’s your fiduciary duty as an attorney to investigate the situation to determine why the error occurred—and how to correct it.  

Perhaps an amount was omitted from a client ledger or entered incorrectly. Maybe an uncleared transaction is affecting your 3-way reconciliation. Either way, honesty is the best policy.  

If local regulations require you to report such errors to your local bar association, do so as quickly as possible to minimize the fallout.  

Take the stress out of trust accounting in 2023: Try Timesolv 

TimeSolv offers powerful trust accounting software that is trusted by thousands of firms worldwide. Using TimeSolv’s game-changing trust accounting software, you can easily manage and monitor trust accounts for your clients and legal matters.  

TimeSolv takes care of trust accounting for you, so you can take better care of your clients. Contact us for your free one-on-one training today.  

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