Law firms are required to hold money in trust. This money is not their own, so they have a fiduciary responsibility to protect and account for it.
A lawyer’s responsibility to hold client funds separate from their own seems simple in principle, but with strict rules surrounding trust accounts, many lawyers run into challenges with maintaining them correctly. From documenting deposits and disbursements to handling varied payment methods by clients, trust accounting remains a compliance minefield for law firms.
Is your law firm at risk of committing trust account errors?
Learn how to avoid trust account mistakes while improving your firm’s billing process during Clio’s one-hour webinar. In this presentation you’ll learn:
The rules for managing trust accounts
Differences between general bookkeeping & legal accounting
How to reconcile trust accounts
How Clio’s newest trust accounting features can help
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Rule 1.15:SafekeepingProperty
(a) A lawyershallhold property ofclientsor third personsthatis in a
lawyer'spossessioninconnectionwitharepresentationseparate fromthe
lawyer'sownproperty. Fundsshallbe kept in a separate account
maintainedinthe state where the lawyer'soffice issituated, orelsewhere
withthe consentofthe client or third person. Otherproperty shallbe
identifiedas such andappropriately safeguarded.Completerecordsof
such accountfunds andotherproperty shall be kept by the lawyerand
shall be preservedforaperiod of[five years]afterterminationofthe
representation.
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Key Concepts in Client Trust Accounting
• Separate Clientsare Separate Accounts
• YouCan’tSpendWhatYouDon’tHave
• There’sNo SuchThing as a Negative Balance
• Timing Is Everything
• YouCan’tPlay the Game UnlessYouKnowthe Score
• The FinalScore is AlwaysZero
• AlwaysMaintainanAuditTrail
Lawyer’s Trust Account Handbook, The North Carolina State Bar,
Revised 12/2014
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D. 27 N.C.A.C.1D, Rule .1316,IOLTA Accounts
Pursuantto orderofthe North CarolinaSupremeCourt, every
generaltrust account, as definedin the Rules ofProfessional
Conduct, must be an interestor dividend-bearingaccount.
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Rule 1.15:SafekeepingProperty
(b) A lawyer may depositthe lawyer'sown funds in a client
trust account for the sole purposeof paying bankservice
chargeson that account, butonly in an amountnecessaryfor
that purpose.
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Credit Cardsfor Lawyers
Most jurisdictionslet lawyersaccept creditcards,with
caveats:
• Creditcardsmay be used to deposit funds in trust &
operatingaccounts
• Feesand chargebacksshouldneverbe withdrawnfromtrust
accounts
Law firms need specializedcreditcard processors.
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Rule 1.15:SafekeepingProperty
(c) A lawyershall depositinto a client trust account legal fees
and expensesthat havebeen paid in advance,to be
withdrawnby the lawyeronly as fees are earnedor expenses
incurred.
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Clio Firms Get PaidFirst
• ~115,000 bills generated in the first 3
months of 2015
• 36.5% of those bills were marked as
paid on the SAME DAY
– TrustAccountsAdvanced Fee Deposits
– Flat Fees Upfront
– Credit Card Payments
Unpaid
63%
Same
Day
Paid
37%
Q1 2015 Bills
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Fees
Lawyersareentitled to a reasonablefee for their work.
Reasonablefeesarejudged by8 factorsincluding:
• Time & laborrequired,novelty& difficult of the issues,& skill
required
• Preclusionof other employment
• Customaryfees in that locale
• Amount in dispute
• Experience,reputation,andability of the lawyer
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2 Recommended Fee-RelatedDocuments
1. Engagement / Retainer Contract stating terms of client billing
– Get it in writing
– Get it signed by the client
– Mandatory inclusions
– Required for contingency fees , nonrefundable, flat fees, & fee
sharing
2. Invoices
– Detailing work performed, personnel invoiced, and outputs
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Rule 1.15:SafekeepingProperty
(e) When in the courseof representationa lawyer is in
possessionofpropertyin which two or more persons(one of
whommay be the lawyer)claim interests,the propertyshall
be kept separateby the lawyeruntil the disputeis resolved.
The lawyershall promptly distributeallportionsof the
propertyas to which the interestsarenot in dispute.
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Types of Accounting
Cash Basis
• Revenues are recognized when cash
is received
• Expenses are recognized when paid
• Usually followed by individuals and
small companies
• Not in compliance with accounting's
matching principle.
Accrual Basis
• Revenues are recognized when
they are earned
• Expenses are matched to
revenues or the accounting
period when they are incurred
(rather than paid)
• Better for tracking profitability
• Required for use by accountants
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Statement of Cash Flows
Cash amount change over an interval of time
• This is one place where lawyers’ trust accounts will
be tracked
• Pulls information from income statement and
balance sheet
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Workin Progress
Ongoing/unbilled Client activity
For accounting purposes, work in
progress is considered as a current asset
on the balance sheet.
Complex calculations needed to
determine, based on estimated costs and
estimated revenue
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Accounting vs. LegalAccounting
Accounting for most businessesis backwardswhen it comes
to legal:
• Law firms must track bothoperating accounts and trust
accounts
• Trust accountsare a liabilityunder normalaccountingrules,
butare tracked as assetsin most accountingsoftware
Lawyersneedspecializedaccounting software.
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How Trust Requests Differ from Invoices
Law firms issues2 types of documentsto clients aboutmoney
1. Invoices
– work performed by the lawyer which is owed by the client
2. Trust requests
– asking for funds to be deposited into a trust account
Law firms need accounting systems that can track both separately.
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2 Steps to Reconciliation
1. Confirm current bank balance
– From the balance shown on the
bank statement for the monthly
reporting period, subtract all
outstanding checks.
– To this amount, add all deposits
that have not cleared the bank.
2. Compare current bank balance
to trust account amount
– Confirm that the current bank
balance equals the total balance
for the trust account as shown on
the lawyer’s records
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Trust Account Records
• Have an IOLTA / Trust Account
• Deposit Slips
– Date
– Source
– Client or Matter
• Cash Receipts Book
• Disbursement Records
– Cancelled Checks
– Electronic Records
• Ledger
– Client or Matter entries
– Transfers, receipts, balances &
more
• Bank Statements
Florida RULE 5-1.2 TRUST ACCOUNTING RECORDS AND PROCEDURES
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• Monthly reconciliation
– balance per bank
– deposits in transit
– outstanding checks
• Comparison of reconciled
balance and ledgers
Trust Accounting
• Annual listings
• 5 year retention requirements
Florida RULE 5-1.2 TRUST ACCOUNTING RECORDS AND PROCEDURES
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Storing Trust Records
“consider generating and keeping hard
copies of all the records required by the
rule (including bank-created records).”
Handbook on Client Trust Accounting for California Attorneys, 2013
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Storing Trust Records
Rule 1.15 (d)(1) A lawyer shall maintain for
seven years after the events that they record:
(viii) all checkbooks and check stubs,bank
statements, prenumbered canceled checks and
duplicate deposit slip
NYSUCS Rules of Professional Conduct
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"With trust accounting ledgers in Clio, and trust account management
has since become a breeze for us.”
Jason Molder,
Molder Legal Group, P.A.