Trust Adjustments overview

The Trust Adjustment function is used to make an adjustment to a trust account. It is important to use trust adjustments appropriately. The scenarios below illustrate when it is proper to use trust adjustments.

Basics of trust account management

The proper management of the client trust account is a vital concern for any attorney. Trust account mismanagement or violations are the express route to a host of problems, including disciplinary action or disbarment.1

There are basic principles to follow to ensure that client trust accounts are handled legally and ethically, but the core concept is the commingling prohibition. The trust account should contain only client and third party money. A lawyer may be allowed to keep a nominal amount of money in the account to avoid certain bank charges, but only a nominal amount of lawyer’s funds are permissible to be held in the trust account.

Until fees are earned, the funds belong to the client, not the attorney. In The ABA Guide to Lawyer Trust Accounts, Foonberg states:

Unearned fees must be deposited to the trust account and kept in the trust account until earned, at which time they must be removed. Until the fees are earned, the money belongs to the client and can even be reached by the client’s creditors, by attachment or execution, including a bankruptcy trustee or the government or former spouse. Since the funds belong to the client, you must keep them separate from your funds.

Earned fees must be removed when earned. When the fees are earned, they become your funds and must be kept separate from the client’s funds.

Typically the client trust account should be an IOLTAAn acronym for "Interest On Lawyer Trust Accounts." IOLTA accounts are accounts where the interest earned on the account is diverted to a fund to be used for charitable purposes, such as funding legal aid. account, unless a significant amount of interest could be earned for the client. In that case, a separate, interest bearing account should be used. If a significant amount of interest could be earned and the attorney elects to place the funds in an IOLTA account, the attorney may be liable for the interest that may have accrued had the funds been placed in an interest-bearing account.

If the attorney places the funds into the firm’s operating account, not only has commingling occurred, but the attorney may earn interest on the client’s funds, which is improper. This further illustrates that the separation of the client’s funds from the attorney’s or firm’s funds is critical to appropriate trust account management.

The scenarios below illustrate when it is proper to use trust adjustments.

Scenario	Best Practice
Trust Deposit of $1,000.00 was mistakenly entered as $100.00	Use Cash Receipts.  Enter a cash receipt for -$100.00 to undo the error and a positive Cash Receipt of $1,000.00 to properly record the transaction.
Beginning Balances for Trust Accounts need to be entered.	Use Trust Adjustments to enter the balances.
Trust Check for $25.00 was mistakenly entered as $250.00.	Use Void Checks to void the original $250.00 check.  Then issue a new check for $25.00 using Checks or Quick Checks .
Cash receipt of $500.00 to the trust account for client 1234 was mistakenly applied to the trust account for client 1324.	Use Trust Adjustments.  Enter -$500.00 to undo the amount applied to client 1324 and enter a positive entry of $500.00 to apply those funds to client 1234.

 

Footnotes

1 Foonberg, Jay G. , J.D., C.P.A., The ABA Guide to Lawyer Trust Accounts,  (The American Bar Association 1996) p. 3

2 Foonberg, p. 55

3 Foonberg, p. 37

4 Foonberg, p. 15