California Lawyers Association

Trust Accounting Management

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By Mary Elizabeth Hammond

Trust account management is often thought to be complicated and intimidating. Most attorneys and legal professionals don’t receive adequate training on managing trust accounts, although the consequences of mismanagement can be dire. 

Fortunately, in this digital era, there are tools to help your firm manage trust accounts in a simple way that complies with industry standards. In this article, we’ll go over what trust accounting is, common mistakes to avoid, and some best practices to help you steer clear of trust account mismanagement. 

What is Trust Accounting?

Trust accounting refers to the practice of tracking client funds that are held in a trust and ensuring they are kept separate from firm funds. Client funds include settlement funds, advanced costs, court fees, and retainer fees. Firms are expected to maintain meticulous and accurate records of all cash flow to ensure client funds are properly used. 

To put it simply, properly managing trust accounts includes:

  • Depositing client funds into specified trust accounts
  • Keeping client funds separate from all other firm funds
  • Keeping accurate records of all client funds

The American Bar Association outlines the responsibility law firms have to secure clients’ funds and ensure that they do not commingle with other client funds. Additionally, this money should never be used to pay for law firm expenses. Mismanaging trust accounts and failing to comply with trust accounting regulations can result in malpractice and even disbarment.

Trust Accounting Common Mistakes to Avoid

  1. Misappropriation of Funds

Misappropriation is an improper or unlawful use of funds. In legal practice, this can occur by:

  • Using client funds without the express authorization to do so
  • Adding additional hours (that were not spent on the case) to a client invoice
  • Charging a client for an expense that was never incurred 
  • Failing to deposit clients’ funds into a trust account

It may seem straightforward to avoid these instances, but misappropriation can be committed unintentionally without proper care. 

For example, when a lawyer accepts advanced fees for services not yet rendered and doesn’t deposit these fees directly into a trust account—that’s misappropriation. Until the lawyer has earned those fees, they are considered to be client fees and need to be treated as such. 

Borrowing money from a trust account to cover firm expenses is another common misappropriation mistake. Even if you have the intention of paying the money back quickly, you cannot take trust money before it is earned. 

  1. Commingling of Attorney and Client Funds

Commingling means intermixing the funds of the client and attorney. Some common occurrences of this include:

  • Combining funds that have not yet been earned into normal business funds
  • Overdrawing a trust account 
  • Failing to promptly withdraw earned fees from a trust account

As a general rule of thumb, always keep client funds and unearned funds separate from other business funds. Once funds have been earned, transfer them in a timely manner. 

Trust Accounting Best Practices

  1. Do Not Borrow Money or Pay Fees From Your Trust Account

Consider paying expenses from a business operating account and reimbursing yourself when client funds have been earned. Oftentimes, checks written to cover expert witnesses or filing fees get lost or do not get cashed. But these uncashed checks still need to be recorded and the fees must be paid. 

If fees are coming out of a trust account, that may leave you with insufficient client funds. To ensure all funds are where they should be when instances like this occur, pay expenses from business operating accounts. 

  1. Accurately Track All Client Funds

Part of trust account management includes keeping a detailed and up-to-date record of all client funds and transactions. Each client with a trust account should have an individual ledger or log. This should show how much money a client has in a trust at any given time, as well as a history of all deposits and disbursements.

Legal accounting software can help you ensure these records are accurate and consistently updated. You can easily automate payments to be sent to the proper accounts. User-friendly software can also allow you to track the ins and outs of each account on your dashboard and with detailed transaction reports. 

For additional information on trust accounting basics and best practices to implement in your firm, refer to this guide

Trust Accounting Management With Legal Accounting Software

A legal accounting tool, like MyCase, can put safeguards in place to ensure that every account and transaction is accurately tracked and no funds are improperly used. Keep all of your clients’ trust transactions and reconciliation in one place, get an in-depth look into your firm’s financial health, and ensure that your firm complies with all trust accounting standards. 

Try a risk-free 10-day free trial to see what MyCase Accounting can do for your firm. 

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