Authors: #Dana Riel and #David Michael
(3-minute read)
Trust account management is one of the most sensitive and important aspects of a law firm’s operations. Improper handling of trust accounts can result in severe legal consequences, damage to a law firm’s reputation, and the loss of client confidence.
In this post, we will explore key strategies for effective trust account management, which include guidance for both attorneys and staff.
- Establish Separate Trust Accounts for Client Funds
As the name implies, a trust account establishes trust. Holding your clients’ money is a fiduciary responsibility – it is a legal service. One of the most critical steps in trust account management is establishing a separate trust account to hold client funds. This account must be separate from the law firm’s operating account, ensuring that client funds are kept entirely separate from the firm’s business funds. Co-mingling client funds with operating funds is not only unethical but illegal in many jurisdictions. Within the trust account, each client’s funds should either be tracked through individual client sub-accounts, or have each transaction tagged to a matter to guarantee that no misappropriation or misuse occurs.
- Implement Rigorous Bookkeeping Practices for Trust Accounts
Law firms must implement rigorous bookkeeping practices to ensure that all trust account transactions are properly documented and categorized. This includes tracking all deposits, withdrawals, disbursements, and transfers related to each matter.
There are two factors that make this difficult for law firms:
- Hiring a bookkeeper or accountant who doesn’t understand Legal Accounting – Legal accounting is as much a specialty as accounting for manufacturing or industry. Anyone who will maintain your books and accounting records must have a working knowledge of trust accounting.
- Using generic accounting/bookkeeping programs –Legal-specific accounting software is required to meet the complex requirements transactions of trust account management. Helping law firms track and categorize transactions reliably is one of our core services at Crosspointe.
Key bookkeeping practices include:
- Maintaining detailed records: Every transaction should include the date, amount, description, and client or matter identification. When in doubt, use the memo field for additional context.
- Recording all disbursements: Any withdrawal or payment made from the trust account must be linked to a matter that had the funds available. You cannot borrow from “client Peter” to pay “client Paul”.
- Conduct Regular Reconciliations of Trust Accounts
Law firms must conduct regular reconciliations of their trust accounts. Account reconciliations should be completed on at least a monthly basis. The process should include:
- Checking each individual client’s balance
- Identifying discrepancies.
- Correcting errors promptly.
Legal accounting programs have reports that show reconciled bank balances, and the breakdown of those balances, to show that “the whole equals the sum of its parts”. Regular reconciliations help ensure that all transactions are legitimate, properly recorded, and accurate, thereby preventing costly mistakes or mismanagement of funds.
- Provide Detailed Billing Statements to Clients
Generic accounting programs that produce generic invoices are NOT your friends if trust funds are involved. Providing detailed billing statements helps clients understand how their funds are being used and reassures them that their money is being managed properly. Billing statements should be clear, comprehensive, and easy for clients to understand, showing all transactions and ending balances in their trust accounts.
- Train Staff on Proper Trust Account Management
Even the best systems and procedures will fail without proper training. It is crucial that law firms train staff on the best practices for managing trust accounts. This includes educating all personnel involved in trust account management — whether they are attorneys, accountants, or office managers — in the ethical and legal standards that apply to client funds.
Training ensures that everyone involved in trust account management is on the same page and equipped to handle client funds with integrity and accuracy.
Trust account management is a critical component of a law firm’s operations, and failure to manage client funds responsibly can have serious legal and financial repercussions. Our Crosspointe team can help your firm identify where improvement is needed in these areas, review your present time, billing, collection, and trust account management procedures, and provide training and support to ensure your firm meets its ethical and fiduciary standards. Contact us at [email protected] or call us at 877-375-2810.
See also:
Business of Law: Having the Last Word
Crosspointe Consulting Group is a technology consulting firm specializing in software and related technology solutions for law firms, professional service firms, nonprofits, and small businesses. The firm’s founding partners have consulted in the software and technology fields for over 30 years, and focus their services on commercial software products for the industries cited above.
Crosspointe adds value to every project we undertake for our clients, through integration of the right combination of products and features, to deliver the appropriate solution.