The American Bar Association Model Rules of Professional Conduct, Rule 1.5 states that a lawyer has a fiduciary obligation to safeguard trust property by segregating it from the lawyer’s own property. It further states that there should be no appearance of impropriety.
Rule 1.15 specifically requires the lawyer to preserve “complete records” with a law firm’s trust accounts which include promptly rendering a full accounting for all receipts and distributions from the trust account. Any violation of Rule 1.15 may subject a lawyer to professional discipline.
Each state bar association will also have model rules of conduct concerning the lawyer’s trust accounting.
Consult your state bar association and familiarize yourself with the standards of conduct and record maintenance. (IOLTA, IOLA)
Here are a few general best practices to follow:
- Always segregate trust accounts from operating accounts. A client fee can only be deposited in a firm’s operating account if it has been “earned” or there is a specific non-refundable retainer agreement in place with the client. Best practice is to deposit in the trust account first and then transfer to the operating account once the fee has been earned.
- Lawyers should never receive, nor are they entitled to receive, any interest from client trust accounts. Typically, a separate trust bank account is set up and can be interest-bearing, but the accrued interest is for the benefit of legal aids or pro bono programs. If a single client trust deposit is significant, the attorney has a due diligence to separate the funds in an interest-bearing account for benefit of the single client. If the deposit is short-term (which is typical), a separate account for benefit of the single client is not necessary but should be disclosed to the single client that the deposit will be in the general trust account. Please consult your state bar rules.
- Full accounting should be provided to any client upon request, which may include copies of vendor invoices for any disbursements made from the client trust account. The client trust accounting should include a running balance of the account. Trust accounts should never have a negative balance. If you have a separate practice management system from the accounting software, ensure that the client ledgers balance to the bank account balance for that particular client.
- ALWAYS ensure that a client trust check has cleared the bank before disbursing funds. If you disburse before the funds are collected, you are in essence borrowing funds from another client account and this is unacceptable.
- The lawyer is accountable for supervising the trust account and only lawyers are authorized to sign trust checks.
Trust accounting is not complex if you know the rules and comply accordingly. If your firm handles trust accounting internally, it is in your best interest to have an outside firm such as B2 Management & Consulting to review your trust accounting. Let us help! For more information on accounting & bookkeeping services, please contact Brenda Barnes at b2-mgmt.com.