You’ve won. A large new client has just signed on the dotted line. You’ve received a sizeable retainer with the promise of more work if the initial project goes well. Your clients trust you enough to sign on the dotted line. But their trust isn’t where it should be. Not yet. A single mistake can end the client relationship before it begins. The good news is you’re an experienced pro. If you’re like most A-player firms, you take client ethics seriously. You use trust accounting to maintain appropriate financial boundaries.
Trustworthy firms use trust accounting
In the past, attorneys kept track of client trust funds using ledger cards, with the vague hope that their records were both accurate and current. Thankfully we’ve left those days behind.
Today we have trust accounts.
What’s a trust account and why do you need one?
A trust account is simply a special bank account an attorney must maintain. Attorneys receive money from their clients, which are then held in this special bank account.
Here’s what makes a trust account significant.
- The money in this account belongs to the client, not the attorney.
- Attorneys have to earn this money.
- Attorneys are required to follow the rules and regulations laid out by the state bar and local government.
Wait a minute.
Why would attorneys need trust accounts in the first place? As you know, attorneys take on the role of fiduciary. When you represent your clients you’re acting on behalf of your clients for their interests and you’re expected, by law, to provide the highest standard of care.
You probably already know this.
If you’re an established attorney you’re probably aware of the ins and outs of a trust account. Your clients, on the other hand, don’t understand it. Mention the words retainer or trust accounts and they immediately begin to glaze over.
This article is a helpful primer you can share with them.
It’s a big deal for clients. It means there’s built-in protection, assurances that are in place to ensure they’re treated fairly and their firm behaves ethically.
What if you don’t believe in ‘ethics?’
As it turns out, some don’t.
Joseph Talafous Jr. was disbarred, arrested, charged and sentenced to 26 years in prison.
Stealing $1.5 million from his clients.
- He used a power of attorney agreement to pilfer the account of an elderly woman.
- He swindled $461,000 from the trust of an orphan.
- Stole $300,000 from the estate of a woman who died without any immediate family.
- Stole $400,000 from the estate of a family that hired him.
His example isn’t even the most egregious.
Estate attorney Robert Graham stole more than $16 million from his clients. His theft occurred in 64 estate cases, 21 trust funds, 10 guardianship cases and four special needs trusts.
See for yourself.
It’s good for clients. It’s great for attorneys.
You’re probably not the sort of professional who feels comfortable stealing from orphans and widows. You’re skilled at what you do so there’s no need to resort to thievery.
You can win the old fashioned way.
By outperforming those around you, producing the fees, recognition and rewards you deserve. This is why you need trust accounting.
Trust accounting rules: Know what they are?
Rules? What rules?
The bar sets specific rules outlining the dos and don’ts of trust accounts. Believe it or not, these rules are helpful conversion boosters. They’re marketing details you can use to win clients.
If your firm operates above board, going above and beyond other firms you have an advantage. You simply teach clients about how you do things, showing them the benefits of doing things the right way.
This ruins them for your competitors.
They’ll be quick to ask about the details you’ve shared, using the checklist you’ve created to evaluate other firms! And the best part? You’ll always be the perfect fit.
Let’s take a look at the rules.
- No comingling or mixing funds. You can’t mix personal/professional funds with trust accounts. If you’re short on payroll, you can’t dip into trust accounts to borrow what you need, so you can replenish it later. At no time should your funds be stored together or mixed with trust accounts. You may have one trust account with your bank but you should have multiple sub-accounts for each client. Your accounting software should enable you to create the appropriate sub-accounts for each client.
- Maintain a separate ledger. Attorneys must maintain a separate ledger for each client with money in the trust accounts. Clients should be allowed to see their specific ledger at any time, inconvenient as that may be. Your client ledger should show all relevant transactions (funds coming in or going out). Clients, at the absolute bare minimum, should receive their client ledger at least once per year.
- Verify trust accounts regularly. You’ll want to complete a three-way reconciliation of your trust account each month. Check the actual bank balance against the balance you show in your accounting records. If there are any deposits made after the statement cutoff date, add that to the balance shown on the statement. Any withdrawals after the statement cutoff date, subtract that from the balance shown on the statement.
- If you haven’t earned it, don’t touch it. The funds in your trust accounts shouldn’t be listed as an asset of the firm on your financial statement. It should be listed as an “other current liability.” If your clients demand a refund from this trust account, you should be able to issue that refund immediately. Create deposit and withdrawal protocols into your trust account procedures. Funds in this account should never move without a paper trail and an appropriate reason.
- Don’t rob Peter to pay Paul. You’re acting as a fiduciary so you’ll need to be able to provide the right kind of data to your clients. Save everything – the date, amount and purpose of each and every deposit. Save the same data for withdrawals/disbursements. Make sure the appropriate client’s name is on every trust account check. Doing this dramatically reduces the odds that you’ll overspend in one account while acting on behalf of another client.
- Create checks and balances. The staff members responsible for deposits should not be responsible for disbursements and so on. Both employees/teams should be responsible for balancing the accounts at the end of the month. Never sign checks or issue approvals without the records for said transactions. Doing this reduces your ability to catch and prevent questionable purchases. Last thing: Make sure you’re an engaged part of the account reconciliation process.
- Follow state bar and government regulations. The state bar sets, manages and enforces the rules and regulations for trust accounts. The state bar or other governmental body may randomly audit a group of lawyers/firms and their trust accounts. These random audits keep attorneys honest.
- No collecting interest. Attorneys aren’t allowed to earn interest on trust accounts. All interest earned by trust accounts is paid to the appropriate IOLTA program. This non-profit program funds legal services for the indigent and other programs that support other legal causes.
That’s a lot to cover, isn’t it?
But we still haven’t covered when you’d actually use trust accounting. So let’s take a look at that now.
- Real estate transactions. As any real estate attorney knows, funds related to a real estate transaction will flow through their trust account. Escrow payments, appraisal and title fees, loan payoffs, real estate agent commissions and home owner’s insurance are all common examples. The protocols, policies and procedures we’ve discussed above are crucial to maintaining a stable firm.
- Legal settlements. A personal-injury payout, payouts from a class action lawsuit, or a workers’ comp award are all examples of settlements passing through a trust account. The lawyer receives settlement fees into a trust account. They’re able to distribute the funds as needed once the money is available as appropriate.
- Retainers. Attorneys typically charge a retainer at the beginning of the relationship. This retainer doesn’t belong to the attorney. Not yet at least. This retainer is simply a security deposit that’s used to pay for future billings/services.
When an attorney issues an invoice to their client, they’re able to draw against the funds in the trust accounts to settle their client’s account. If the attorney uses the funds in a trust account there should obviously be an agreement or engagement later stating that fact.
This is all fairly straightforward, isn’t it?
You may be surprised at the amounts of lawyers/firms that aren’t managing their trust accounts properly. These attorneys are rolling the dice with their careers and their firms.
You’re different though, aren’t you?
If you’ve read this far, there’s a good chance you’re conscientious. Someone who’s orderly or industrious, willing to do what’s best for their firm. Does this sound like you?
You’re already winning.
Winning is more about trustworthiness, less about defeat
Many firms choose the bare minimum.
They’ll do what’s right, so long as someone’s watching. That’s an incredible opportunity in disguise. Trustworthy firms use trust accounting well.
It’s good for clients. It’s great for attorneys.
You’re not the sort of professional who steals from widows and orphans. You’re skilled at what you do so there’s no need to resort to thievery. Which is exactly how you win.
Train your clients.
Your firm operates above board. Go above and beyond other firms. Teach prospective clients about the value you provide. Show them, in an appealing way, how you do things. Give them a checklist they can use to evaluate your competitors.
It’s one more way to extend your winning streak.
Prospective clients need trust to take a risk. With a bit of education and the right amount of appeal, your clients will see you as the winner you are.