At some point in an attorney–client relationship, the attorney will hold funds for his or her clients. Generally, these funds come in the form of a retainer, monies collected from a legal settlement or funds collected when an attorney acts in a fiduciary capacity.
When clients give an attorney their money, they are saying, in effect, “We know you are ethical and we trust you to do the right thing.” It is a statement of trust, and trust is at the crux of all attorney–client relationships.
That is why the attorney must deposit any such funds into a designated account, known as a trust account, and set it aside for a specific purpose. Doing so is a declaration of transparency and good faith.
Every state and state bar has rules regarding how trust accounts must be set up and maintained. Although the specific rules vary, they all require attorneys to separate their business funds from clients’ funds. Violations of the trust fund rules are treated seriously.
Although rules vary by jurisdiction, following are some universal guidelines:
- Set up your firm’s trust account in accordance with your jurisdiction. Before setting up your trust account, make sure you are in compliance with the appropriate laws. For example some states require the account to be set up in the state in which your offices are located; others define the type of financial institution to be used. In addition, periodically monitor the law so that you don’t inadvertently go out of compliance.
- Create checks and balances. Ensure that more than one person is responsible for maintaining and reconciling the account. This limits the potential for fraud.
- Deposit retainers. Retainers should be deposited into your trust account as soon as you receive them. They may not be withdrawn until they have been earned. Withdrawals should be made regularly. A good schedule would be monthly, in accordance with the amount earned as documented by the firm’s time and billing report. Caveat: Any funds that are disputed should remain in the account until the dispute is resolved.
- Reconcile the account. Every month, check the actual balance in the trust account against your record of deposits and withdrawals. The balances should be the same.
- Keep detailed records of each client transactions. For each client, ensure that you can document all funds you’ve received (how much and when) and all funds you’ve withdrawn (date, amount, source, recipient and purpose). Be ready and able to issue each client a report of all transactions in their account on demand.
- Choose the right software. Using the right software to help you keep track of these accounts is essential. All transactions must be recorded, and software can substantially ease the burden of doing so.
- Make sure interest is not added to the balance. Attorneys aren’t allowed to earn interest on trust accounts. Earned interest goes to an interest on lawyer trust account.
- Preserve all trust account records for five years. This includes copies of bank statements, canceled checks, deposit receipts, client ledger, journal of receipts and transactions and checkbook register. Caveat: Be sure to check the rules in your jurisdictions. Some jurisdictions require them to be held for a longer period.
Call us today for guidance setting up and maintaining a problem-free trust account for your clients.