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.

Big journey begins with small steps

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

trust account rule follow
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 descript