Exploring best practices for trust account management

As an attorney, you are trusted to handle your client’s most valuable assets, which includes their money. When you place client funds into your trust account, you have a responsibility to protect and manage them in an ethical manner. Failure to meet this duty can result in serious consequences for you and your legal practice. What follows are tips and strategies that legal experts characterize as best practices for trust account management.


Separate, separate, separate

Remember that the money in your firm’s trust account does not belong to you or your practice. It belongs to your clients and you are only holding it in trust as a fiduciary, which means that you can only spend the funds in a manner that conforms to the laws and regulations of your state. As such, experts stress the importance of keeping your trust account separate from all other firm or personal accounts.

According to an article in Law Practice Today, even placing $100 of personal money into a trust account can be viewed as inappropriate commingling of funds. When trust account funds are commingled with other funds, it can give the appearance of impropriety, even if you have no intention of breaking any rules and no actual harm comes to the client. For example, if you borrow funds from the trust account to cover payroll and promptly return the funds before the client realizes they are gone, you may still be vulnerable to ethical violation proceedings. At any given time, the Bar can request your trust account records, and any discrepancies can land you in serious trouble.


Know the rules

Each state has very specific rules about the management of trust accounts, including guidelines for such issues as:

  • Advanced fees – Fees earned in advance can cause significant problems if handled improperly. Some states prohibit attorneys from depositing these funds into the general account, instead requiring that they remain in the firm’s trust account until the fee is earned. Other states allow attorneys to deposit advanced funds into their general accounts, even before the work is completed. Make sure you know the rules of your state and handle advanced fees appropriately.
  • Earned fees – Some bar associations require attorneys to remove funds from the trust account when earned. Leaving them in the account may be viewed as commingling of funds. Even if the funds have been earned, experts say that it is bad business to pay bills or make any types of office-related payments from the trust account. Depending on your jurisdiction, these acts may even lead to an ethical violation.
  • Account interest – Interest earned on a client trust account also carries some restrictions on use. Interest on Lawyer Trust Accounts (IOLTA) regulations mandate that interest earned on a trust account be sent to the state bar association, usually for the provision of legal services to low-income residents. Make sure you understand the IOLTA procedures in your state and properly set up your IOLTA accounts.


Maintain records

Legal experts also advise that lawyers maintain accurate and complete records of all trust account activity. Not only do most states require detailed records of these transactions, but this documentation can also help you reconcile your accounts and keep you in compliance with state rules. For example, an article published by The Balance suggests that you write client names and file numbers on each check that you issue. You never know when circumstances may require that you request statements and check copies from the bank. Checks with names or matter numbers are much easier to reconcile than checks with no identifying information.

It is also suggested that you maintain an individual ledger for each client’s trust account funds. Depending on the ethics rules in your state, you may be required to maintain an accounting of each client’s funds. These records must show how much money the client has in the account at any given time, including an accounting of all deposits and withdrawals. This practice not only helps you comply with ethics rules, it can also keep you from commingling client funds or spending one client’s money on another client’s case.


Software as a resource

Legal-specific software can be integral to implementing effective trust account practices within your law firm. The right software can easily assist you with reconciling your trust account, while taking the unique requirements of the legal industry into account. The ABA advises lawyers to consider the following when choosing an accounting software:

  • Filtering capabilities – You may need to run accounting reports at any given time for any one of your clients. Your chosen accounting software should allow you to filter reports by individual clients, a range of dates, or transaction types.
  • Transfer of trust account funds – Best practices include the ability to easily transfer funds from your trust account to the operating account. You may need to do this in order to compensate your firm for an outstanding bill. Depending on your jurisdiction, you may be allowed to transfer funds immediately prior to billing in order to reflect the payment on your client invoice.
  • Creation of trust reports – A comprehensive accounting software allows you to easily create trust account reports. As we discussed above, not only are they necessary to keep you out of trouble with the Bar, but they can also help you stay on top of your client funds and the accuracy of your trust account.

Your trust account is a serious matter that requires serious management. These best practices can help you stay on top of your trust account management, but you need to have a clear understanding about the rules of your state. If you don’t understand what’s required of you, make the effort to find out by seeking assistance from your state Bar.

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.