Best Practices for Law Firm Trust Accounting
Although the concept of law firm trust accounting may seem relatively straightforward (keep money that is not yours in a different account), the actual practice of trust accounting may be more complicated.
That is why to ensure that your firm completes this process correctly, the guide below will walk you through the best practices you need to know about law firm trust accounting and how to ensure your firm is up-to-date with the basics of this professional and ethical responsibility.
What Exactly Is Trust Accounting?
Trust accounting refers to the process of keeping track of all client funds that are held in a trust and making sure that bookkeeping regarding these accounts meets the state’s requirements.
Yet, while the laws regarding trust accounting may vary, in general, these laws require firms to keep detailed records of the money that is coming in and leaving their trust accounts. These firms should also track every client’s trust account balance and ensure funds do not commingle. When lawyers fail to take these steps, they can not only lose their clients but also their law license in the process.
What Your Law Firm Should Do When It Comes to These Trust Accounts
The trust account process often has very stringent requirements for maintaining accurate information regarding a firm’s trust accounts. For instance, this process requires law firms to:
- Verify and track all the deposits made through the account.
- Keep retainer fees, court expenses, advanced fees, and settlement awards in a separate account from law firm operating money.
- Make sure that disbursements are made properly.
- Create a ledger that details every transaction that goes through for each client.
- Not withdraw funds too early from the account.
- Reconcile bank and trust accounts regularly, as well as the client trust ledger, to verify that all accounts are accurate.
The Funds That Should Never Be in a Trust Account
In addition to the above dos and don’ts when it comes to trust accounting, you should also know that there are certain funds that should never be put into a trust account. These include:
- Earned income, such as wages and other money earned
- Personal funds
- Payroll
You need to remember that the trust account should only have the money that the client provided the firm for a designated purpose. As a result, these accounts should not be used to manage payroll or help the firm in any capacity.
The Practices You Should Implement When It Comes to the Firm's Trust Accounting
No matter what size your law firm is, there are certain practices you should implement to ensure that your bookkeeping and your firm are compliant with legal and ethical rules, especially regarding your client’s funds.
These practices include the following:
Stay On Top of Your Trust Accounting Practices
Even though attorneys know that trust accounting is a critical aspect of their law firm practice, sometimes things may fall through the cracks, intentionally or unintentionally, and firms may violate these vital accounting practices.
That is why it is important to adhere to your trust accounting practices and stay on top of what needs to be done, making sure you do not accidentally commingle funds, fail to follow proper trust accounting protocols, and put your law firm at risk.
Monitor Your Money Going in and Coming Out
A great way to ensure that your trust accounting is up-to-date is to monitor the accounts receivables, review any outstanding invoices, and follow up with clients to make sure you get the money needed to clean up your books. It is also vital for law firms to track when settlements will be finalized and when they can expect to receive their proceed shares.
By monitoring what is going in and coming out, law firms will be better able to make sure their accounts are properly balanced.
Always Keep Law Firm Funds Separate
Even though keeping law firm funds separate from client accounts can be complicated, especially when banks and credit cards are involved, you still want to ensure you always keep your firm's business funds separate from your client accounts. If you cannot do this by yourself, you may consider investing in software or hiring professionals to keep track of these funds to avoid mishandling them.
Work with Law Firm Trust Account Professionals
Keeping your trust accounts accurate is vital to the ultimate success of your firm. Unfortunately, for some firms, ensuring these accounts are updated can be challenging, especially when the firm is already overworked or the staff is not adequately trained. Thankfully, when law firms outsource trust accounting to professionals with countless years of experience handling these tasks, it can free up their time to focus on their other work while giving them the peace of mind that their records and accounts are accurate, detailed, and handled appropriately.
For instance, when you hire Back Office Legal to take on your trust accounting, our team can clean up your client ledgers and deposits, reconcile records from your bank to your accounting programs, and make sure that your trust account records are error-free. We can also:
- Provide exceptional oversight of your trust accounts, ensuring that your processes meet legal requirements.
- Provide your firm with detailed records of all your expenses and income, including gains and losses, taxes paid, and disbursements to clients.
- Reduce overhead costs by eliminating the need to hire individuals and train them to take care of your trust accounts.
Contact Back Office Legal Today To Get the Help You Need
If you are looking for further information regarding trust accounting or want to work with professionals to help you with this process, then look no further than Back Office Legal. Instead, contact us today to speak with one of our trust accounting specialists, and let us go over all the ways our skilled team can help you and your firm.
