What You Need To Know About Trust Accounting For Attorney

Miley Nguyen
Nov 30, 2020
5 min read

Updated: Jun 2

client trust accounting - trust account - attorney client trust account - trust accounting rules - trust account definition

What is trust account?

Whenever a practice is started, the client will provide their attorney with an advance amount of money, which then will be deposited into the bank as a trust account. It is where client funds are kept safe until it is time to withdraw, basically, it is an account holding money on behalf of a client for their case. Every attorney or law firm has a fiduciary obligation to keep its client funds separate from the law firm’s funds.

Another way to properly describe the client’s trust account: “It is not an asset of the law firm - it is considered another current liability.” If all of the clients request a refund of their trust account balances, you will need to pay them off immediately. As a result, this trust account is another short-term liability for the company, that is why we need Client Trust Accounting to manage funds in this account.

The Essential Role of Trust Accounting

For a basic trust account definition, trust accounting rules is simply bookkeeping of bank trust account under state requirements which involves separating the expenses of a trust account into different categories. Some of the expenses for the practice include legal documents, notaries, accountancy, court fee and it is important to run the money from the Trust account relating to these expenses. At the end of the practice, based on your work, the final invoice will be sent to the client for payment.

What Is Required For Trust Accounting?

Follow regulations, each state bar has a different set of rules governing trust funds, we need to make sure that we keep up with any changes to maintain compliance.
Keep all trust funds separate from business funds
Tracking of all transactions (deposits and disbursements). Every financial transaction made with a trust fund needs to be recorded with a detailed ledger for transparency.
Monthly reconciliation of the account.

What Are the Responsibilities of a Trustee?

Base on the above requirements, we can assume some responsibilities of a trustee (can be a trusted accountant or an attorney) as follow:

Administration of the trust prudently and in good faith when it comes to the needs of the clients.
Proper handling of all tax matters related to the trust account.
Keeping accurate and true accounts of all transactions with receipts and proof of payment as support.
Ensuring that the trust account for attorneys is always available to be inspected by the clients.

Top 5 Accounting Tips for Small Business

10 Reasons Why Business Owners Should Switch to Online Accounting Software

Avoiding Trouble

Trust accounting is a very important job for lawyers because it involves keeping client funds, like fees or settlements, safe in a special trust account that is regulated by strict state rules. These funds belong to clients, not the company, so any mistakes must be made with great care to avoid costly ones. Lawyers should follow these four rules if they want to be successful:

Avoid Trouble by Knowing Consequences: If you don't follow the rules for trust accounts, you could get fined or lose your license. By staying up to date on state laws, you can avoid making big mistakes.

Stay Transparent with Billing: Use legal-specific software to track trust account transactions clearly, ensuring transparent billing that builds client trust and meets regulations.

Educate Clients: Explain trust accounts and client rights to reduce confusion and complaints, fostering stronger relationships through clear communication.

Never Commingle Funds: Keep client funds separate from firm accounts to avoid ethical violations and maintain compliance with regulatory standards.

The Trust Accounting Process

Trust accounting is essential for attorneys to manage client funds—like retainers or settlements—ethically and in compliance with state regulations. These funds, held in a trust account, belong to clients, requiring careful handling to avoid errors and maintain trust.

Receiving Client Funds

When clients or third parties provide funds (e.g., unearned fees, settlements), document their purpose and amount. Educate clients about trust account management to build trust and avoid confusion.

Depositing Funds

Deposit funds into a dedicated trust account, never commingling them with firm funds. For large sums, consider a separate interest-bearing account per state rules. Use legal software for transparent record-keeping.

Disbursing Earned Fees

Transfer earned fees or expenses from the attorney client trust account to your operating account via check or electronic transfer. Provide clients with clear invoices to ensure transparency and prevent disputes.

Refunding Clients

After settling all case-related claims, refund any remaining funds to the client promptly. Explain the refund process upfront to manage expectations and ensure compliance.

Handling Fee Disputes

If fees are disputed, check state bar rules—many require holding disputed funds in the trust account until resolved. Understanding these consequences helps avoid ethical violations.

Reconciling Accounts

Reconcile trust accounts regularly, at least quarterly, to align bank statements with ledgers. Monthly checks using legal software catch errors early, showing diligence to state bars.

If you, as a business owner, see that you cannot handle trust accounting on your own, consider hiring a bookkeeping service for contractors to help you with it.

Last Thoughts

Trust accounting rules makes sure that lawyers are honest with their clients' money and follow the rules set by the state. Once you know the rules, use Irvine Bookkeeping's expert services to put plans in place to make your business's processes run more smoothly. Our team offers customized ways to keep trust accounts in order. Here are four short ways to stay on top of regulations and keep your clients in mind.

Planned Rules: Set and share trust accounting rules to stop mixing funds, which is unethical. Teaching clients about managing funds will make things clearer, cut down on mistakes, and keep you out of trouble with the government.
Systems that stop mistakes: To keep attorney client trust account and firm funds separate, use different checks or accounts. To keep your company in line, teach your employees the rules and make sure they understand what will happen if they don't follow them.
Technology for Law: You can keep track of purchases and balance your accounts clearly with QuickBooks. When you hire Irvine Bookkeeping to set up QuickBooks, we can make sure that you have clear records that keep disagreements to a minimum and meet state requirements.
Having Regular Habits: Monthly reconcile accounts and let clients know what their amounts are, to be honest and teach them. These habits keep you from mixing risks, and they become second nature, which makes your exercise stronger.