The Beginner’s Guide to Trust Accounting

Sometimes it is easy to understand the terms or technical words in the field you work in, sometimes it is not. Even when you understand what it is, trying to explain it in words that another person could understand could be a ‘mission impossible'. Attorney’s trust account and trust accounting are some of those subjects that could get people confused, unsure, or lost for words. In this article, we provide the most basics so you could get an essential understanding of these terms.

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What is an Attorney’s Trust Account?

It is actually a special account established and maintained by the attorney to receive and keep money on behalf of the client or third party. It is basically the client’s funds held in trust and on behalf of the client for their case. Why trust account is required? When representing a client, a lawyer has a high level of responsibility as a fiduciary. To reduce the risk that the money may not be used properly, the lawyer is required to put this type of money in a trust account which is separate from all other bank accounts such as operating or personal accounts.

When are the Trust Accounts used?

There are three most common circumstances when an attorney will be responsible for a trust account:

  • At the start of representation when the lawyer takes the client’s case and receives advance money (aka retainer).

  • There is payment from a settlement.

  • When a lawyer is authorized to act as a fiduciary on behalf of a client or a client’s estate.

Five Key Features of Trust Account To Remember


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Follow the rules

  • No commingling of funds: trust account rules forbid any commingling or mixing funds of different types. Obviously, a lawyer can not deposit their personal or firm’s money in a trust account. The exception is when a lawyer deposits small amounts of money to cover bank charges.

  • Keep a separate ledger for each client: clients have the right to ask to see their ledger detailing every monetary transaction going in and out of the trust account held for their case. Lawyers must send the ledger to the client as well at a certain period of time or as soon as all the client’s money has been distributed. Ledger for each client is also the mandatory minimum requirement from the California state bar for California Attorneys.

  • Attorneys cannot keep it: The interest earned on funds in general trust accounts is sent to the IOLTA program where it will be used for charitable purposes, mainly to provide civil legal services to indigent persons.

  • Delivery of funds: you must deliver the money or other properties you’re holding for your client quickly when they ask you.

  • Your trust account records should always be audit-ready: Each state bar has regulations and rules about Client Trust Bank Account and trust accounting to guide lawyers. Make sure you know these rules to set and do things properly.


If you would like to get more information about IOLTA, please read our previous article: What is an IOLTA account? The difference between IOLTA and Attorney Trust.


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What is Trust Accounting?

The basic of trust accounting is bookkeeping of the client trust accounts, separating monetary transactions of the trust into different types, making sure the records are in accordance with the state bar requirements. This involves tracking the expenses and allocating them into correct categories. Expenses for trust accounts must be carefully recorded to ensure correct information maintained for both the attorney and the client.


Basic rules of Trust Accounting


Are your records descriptive enough?

There are many things to remember when you work with trust accounts. The most basic trust accounting rules advised by the experts are listed as follows:

  • Keep separate accounts for separate clients: this is the way to distinguish a client’s money from another which helps you to better manage your attorney’s trust accounts

  • Keep all trust accounts separate from your business and personal funds: this helps to avoid the commingling of funds.

  • Track all activities of the trust funds including deposits and disbursements

  • Keep a client ledger for each client, recording details of every monetary transaction.

  • Reconcile the trust account on a monthly basis

  • Keep detailed records of all transactions and make them accessible: as previously mentioned, clients could ask to see those records or reports at any time and it is your responsibility to provide them promptly. This practice enables you to access the information quickly when needed.

  • Keep descriptive records to maintain an ‘Audit Trail’: According to the handbook on Client Trust Accounting for California Attorney, ‘an “audit trail” is the series of bank-created records, like canceled checks, bank statements, etc., that make it possible to trace what happened to the money you handled’. When all of your records are descriptive in detail, it maintains an audit trail which helps lawyers to prove that you have handled the client’s money properly and also trace mistakes in case of accounting errors.

  • Apply security steps to protect the funds: trust funds could be a target for theft or fraud, especially when there are many people involved. Split up the duties of people managing the funds to make sure a single person cannot steal or do harm to the funds.


More information about Do and Don’t of Trust Accounting can be found in our previous article about Trust Accounting.


 
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What can and cannot be placed in an Attorney’s Trust Account?


Certain funds must not go to Trust Account

Obviously, not all types of funds can be placed in a trust account. Simply put, any money received for the benefit of the clients must go to the trust accounts. Funds owned by the lawyers or law firms are not allowed to place there. Below is a list of what types of funds you can hold and what cannot in your client trust account.


Funds in the trust:

  • Unearned income: these are money paid in advance by the client at the start of the attorney’s representation

  • Settlement payment: this is found in real estate or personal injury cases

  • Judgment funds: just like settlement payment, this one is decided by the court

  • Third-Party Funds: e.g. money received from the sale of client property and to be paid for the service of a third party.


Funds should not be:

  • Personal money: funds belong to a lawyer

  • General operating funds: business funds belong to the law firm

  • Payroll, office money, payroll taxes, etc.

Many people are really confused about rules and what to do in terms of Trust Account management and Trust Accounting rules because the regulations vary across the states. When you fully understand the basics and relevant terms, it gets easier and easier for you to work in detail. Make sure you know the rules where you practice. If you are still unsure, the best way is to seek help from your state bar or legal accounting professionals.


 

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