As attorneys, we understand the general concept of trust accounts, and that misuse of the same can cost us our bar cards. But, do we really trust ourselves with trust accounting? Attorneys who receive retainers from their clients take on the role of a fiduciary, per their state bar’s rules. Up to and until the attorney has worked that case and billed the client for said work, the money in that IOLTA (also referred to as a trust account in many jurisdictions) is the property of the client. Misuse of those funds is, in essence, theft.
The bottom line is if you are accepting advance payment for your fees, or if you are otherwise receiving money on behalf of your client, you must maintain a trust account. Even more imperative, you must maintain a compliant trust account, which means that you will need to properly account for the funds therein and adhere to local rules and regulations.
Here, we’ve included an overview of trust accounting that will help you get comfortable and stay compliant!
Why do I need a trust account?
As discussed above, the money in your trust account is not yet yours. In addition to a trust account, an attorney will have an operating account. The goal (and ethical rule) is to keep your earned (operating) and unearned (trust) fees separated at all times. If you pull money from the trust account and deposit it into the operating account before you have earned those fees, you are in violation of your state bar’s rules. This means your license to practice is now in jeopardy.
A trust account is necessary to protect both your clients’ funds and your bar card.
State bar considerations
Every state bar promulgates a set of rules and/or regulations that govern your trust account. For instance, some states require that you utilize a bank that has physical locations within your state. Others obligate the IOLTA bank to report any overdrafts of your trust account to your bar.
All state bars require you to do some sort of accounting and reporting regarding your trust account. To properly accomplish this, you must maintain a record of all receipts and payments of funds for each client. This includes things like bank statements, bank documents, instructions or authorizations from a client, and records relating to quarterly and monthly reconciliations. More is always better when it comes to retaining documents related to client funds.
Employ the right software
So, how do you relay this information to your state bar? You can keep a paper log for each client and manually track the funds going to and from your trust account. You can imagine this can get a little crazy if you have more than a few clients. You can also move this to a digital format and keep an electronic spreadsheet to log the funds. This still allows for human error, however, as not everyone is technologically savvy enough to properly input formulas into the spreadsheet, and/or they will not double check the work being done.
The more efficient option by far is to use a software program designed specifically for trust accounting. This makes the tracking and segregating of client funds a lot easier. Essentially, once you set up a client in the system, reconciling their account and running a report for the state bar is as simple as clicking a button. The amount of time this saves an attorney cannot be overstated; free time is a precious commodity.
Use the right payment processor
If you want to take credit cards or eChecks for your firm, you will need to utilize a payment processor. However, not all processors are equipped to handle the specific needs of attorneys, namely keeping their funds properly segregated. To ensure compliance with your state bar, look for a processor that specializes in the legal industry and understands the rules that you are required to follow when it comes to your trust account.
Remember, a trust account violation can land you in sanctions territory with your state bar, so it is imperative that your processor is cognizant of the ins and outs of IOLTAs.
When you went to law school, passed the bar, and started practicing, chances are trust account compliance was not high on your list of priorities. However, this is crucial to your firm, and to maintaining your license to practice law.
As attorneys, we spend so much time on non-billable issues and live in constant fear of accidentally triggering an ethical issue in our practice. That’s why it is such a relief to find software out there that can alleviate apprehension and maintain compliance with your state bar. For instance, the partnership between LexisNexis® Juris® and ClientPay® means that I no longer have to obsess over compliance or accounting. I get to reclaim some of my life back.
Trust accounting can be tedious, but if you utilize the proper tools, the entire process can be made painless.