The practice of law is time-consuming but never more than the time required managing your firm’s finances by hand. Although few of us would consider going back to the days of typewriters and carbon paper, a surprising number attempt to manage their law firm’s bank account and client trust account with pencil and paper.
Previously, law firms laboriously kept track of client trust money using buff ledger cards on which they’d hopefully capture sufficient details to keep these accounts accurately. Technology makes this an interesting historic relic of law practice management, but you must make the technology work. You are in good shape if you follow a few steps and principles to keep proper track of your clients’ trust account records. Details matter!
1. Preserve property belonging to your client.
Deposit checks and cash promptly. Lock up deposits that you receive at the end of the day if you are unable to get them deposited in your bank. Be sure that you employ up-to-date virus protection and use two-factor authentication or a unique strong password for online banking.
2. Delegate, never abdicate, responsibility for your trust account.
Ensure there are checks and balances to your procedures. Split up duties so that one staff member is responsible for handling deposits and another staff member is responsible for handling disbursements and have both staff members involved with the month-end balancing of accounts. Never sign checks without underlying records for the transaction so that you can catch any questionable transactions. Be involved and oversee the trust account reconciliation process.
3. Your bank considers that you have one client trust account.
You really have multiple accounts—one for each client for whom you hold money.
Set up a sub-account for each of those clients for whom you hold money. Your accounting program will allow you to do this by creating an account that is a sub-account of the trust for each client with trust account money.
4. The money in the trust account is not yours until you earn it.
Properly characterize your client trust account. It is not an asset of the firm—it is considered to be an “other current liability.” Should your clients all ask for refunds of their trust account balance, you would need to immediately pay them. Thus this account is another current liability of the firm.
5. Keep adequate records of each client transaction.
As a fiduciary, you have a duty to be able to provide accountings to your clients. Capture all the details to account for each client’s funds held in trust: on which client’s behalf have you received a deposit to the trust account, the date amount, source and purpose of the deposit; on which client’s behalf have you issued a disbursement from the trust account, the date, amount, recipient, and purpose of the withdrawal.
6. Trust but verify.
Check that you have properly set up your client sub-accounts and allocated the deposits to and disbursements from these individual client sub-accounts. Build verification of all deposits and withdraws into your trust account procedures. Don’t ever skip this step. Ever.
7. Don’t spend what you don’t have.
Be sure that there are adequate funds held in your trust account for the client on whose behalf you are about to issue a disbursement.
Wait an adequate amount of time before withdrawing funds that have been deposited. There is a difference between cleared funds and collected funds. When a bank says you have $200 cleared after depositing $200, you merely have $200 in your account. The funds need to be collected from the issuing bank otherwise that $200 belongs to another client. Wait an adequate amount of time for funds to be collected and that deposit safe to negotiate. In Oregon, we have suggested three banking days for a local check, five banking days for an in-state check, and ten banking days for an out of state check. Note that banks may hold deposits of $5,000 and more for seven days whether local, in-state, or out of state. Beware of phony cashier checks. When in doubt, wait longer.
8. Be prepared to promptly account to your client for all money you have received that belongs in whole or in part to that client.
Would you be happy with your bank if you did not get a monthly statement detailing deposits and withdrawal in your account? Neither would your client. Keep your client informed and your client will be happy. Here is where you should exceed the rule requirement for accounting to your client: don’t wait for your client to ask for an accounting of funds.
9. Do a three-way reconciliation of your trust account monthly.
First: Reconcile your trust account bank statement.
When your trust account bank statement comes, reconcile the actual balance you show in your accounting records by checking off all checks against your withdrawal records and all deposits against your deposit detail. Verify that the numbers are accurate as banks make mistakes.
- If there are any deposits made after the statement cutoff date, add them to the balance of shown on the bank statement.
- If there are any checks or withdrawal made after the statement cutoff date, subtract them from the balance shown on the bank statement.
Second: Print out your journal of deposits and disbursements for your trust account as this is the equivalent to the checkbook register for your trust account. Compare this amount to your reconciled trust account bank statement. They should be equal.
Third: Print out client sub-account reports as these are equivalent to the client ledger cards. Total all of the balances shown on your client sub-accounts.
Compare this amount to your reconciled trust account bank statement. They should be equal.
Assuming that all three numbers are equal, congratulations! You have properly reconciled your trust account. Keep a record of this reconciliation.
10. Keep your trust account records for the required amount of time in your jurisdiction.
Most jurisdictions require you to preserve trust account records for five years after the client matter is closed.
Preserve all records of your trust account: copies of bank statements, canceled checks, and deposit receipts. This may be scanned record of documents if that is your business practice or PDFs you have made from your online digital records. Don’t rely on your bank to maintain your records because most only keep records of account transactions for four years. Preserve copies of your client ledger or client sub-account reports. Preserve copies of your journal of receipts and transactions or checkbook register. Preserve copies of your three-way reconciliations.