By Elizabeth M. Miller bio
There have been recent reports of law firm trust accounts being involved in money laundering. Maintaining and managing a trust account is regulated by local bar rules. The main reason for this is that the funds do not belong to the firm. Trust monies are client funds deposited with a law firm intended to be used for the benefit of the client.
I believe that the vast majority of attorneys are honest and observe the fiduciary duty to the client and monies held by the firm. There are mistakes that will get law firms in trouble when it comes to client funds. Of primary importance is for the attorney or whoever is managing the trust account to follow the strict regulations set out by the local bar association. Make sure funds are always accounted for. When clients make unusually large deposits especially from overseas, or want to use an attorney trust account as a clearing house, remember to perform due diligence to the extent possible to make sure the transactions are legal.
Here are the top 5 errors that get firms in trouble:
1. Drawing on funds too early.
You cannot draw on monies deposited until they clear the bank. Don’t draw on trust account monies just deposited thinking there are other client funds in the trust account to cover a check or transfer until a deposit clears. The bar would see that as being “out of trust” for however long it takes for those funds to clear. If you need to draw on funds right away, make sure the deposit is in the form of a bank check or an electronic transfer to deposit. Verify with the bank that the funds are clear before you draw on them.
2. Not maintaining separate client ledgers.
Maintain a ledger for each client that shows every deposit and withdrawal made in behalf of that client. Accounting and bookkeeping programs that are available today provide for keeping separate client ledgers. If they are set up correctly, you can input information one time and it is reflected on the ledger, on the balance sheet and on the register.
3. Not reconciling trust accounts.
Reconcile your trust account every month—not just the bank statement. Reconcile the bank statement with your client ledgers and your check register every month and make sure all the balances match exactly. If all your accounting processes are in order, reconciling the trust account does not take long at all.
4. Credit card merchants debiting trust account.
If you take credit cards, be mindful that some merchants only allow you to deposit to the operating or the trust. If you deposit all credit card payments to trust, the merchant will debit the trust for the credit card fees and that is a big no-no. Find a merchant who will allow you to deposit to operating or trust depending on where the monies are supposed to go, but will only debit the fees to your operating account.
5. Paying legal account from trust without proper statement.
If you take retainers that are refundable, the unused proceeds are to be returned to the client at the conclusion of the matter. Make sure that when you take fees from a trust retainer, you have a statement for services rendered reflecting what your firm has earned. You will need this accounting detail if you ever get audited. You cannot just pay your firm fees out of trust without accounting for the client’s money.
A non-refundable retainer does not have to be deposited into trust; however, make sure that your retainer agreement specifically states “non-refundable” and that any “unused funds will not be returned”.
Be sure to include in your retainer agreement that the client agrees that you are permitted to pay the firm out of the fee retainer in trust for any statements for services that are generated. If you do not have a client’s permission to move the money, get it before you withdraw money and pay you firm. Make it part of your retainer agreement and you will not have to worry about it.
No room for error
While the trust account regulations are designed to protect the client from misuse of their funds, even in the case of a bookkeeping mistake such as the transposition of number, the bar has little understanding for error.
Make sure whoever handles your trust account for your firm and does the monthly reconciliations is really familiar with all that is involved in preparing a reconciliation that aligns with the bar rules.
A technicality will usually not result in a reprimand or disbarment; the outcome of a technical trust violation may result in having to hire an accountant to audit and reconcile your trust account every month and submit it to the auditor at the bar for however long the bar decides.
But no matter what the outcome, a trust account audit really is an expensive headache resulting from a mistake that could have been avoided. When all is said and done, it is your law license on the line.
