Many of you have mentioned that trust accounts are something you struggle with in your law firm. How do you reconcile each month? What are the rules and key concepts of trust accounting? 

Many of you know I’m affiliated with Bench. I’m always talking about Bench, but people have said, Ally, I want a solution for my trust account. And they felt like Bench wasn’t that solution. So I wanted to find the solution for you to help you have access to resources. I was able to get in contact with Tom Boyle of Trust Books, trust accounting software for attorneys. 

In these blog posts, Tom gives us essential pointers on trust accounting, how it works, and how it can serve you and your business. In this blog, we’ll talk about what the trust account is and what goes into it. 

What is The Trust Account? 

The trust account is a special bank account that you have to set up and maintain separately from your personal and business funds. Its sole purpose is to hold money for your clients, a third party. So the judiciary type relationship is between you and your client, your third party.

Attorneys have this fiduciary relationship for things like real estate closings, but things like personal injury settlements, an attorney can make sure that those funds are going to be held safely and properly and accounted for in a complete and accurate way in a trust. 

Your responsibilities are to safeguard this account, keep it separate it from your personal and business accounts, and follow your state’s bar rules on trust accounts. 

Every client gets a ledger in the trust account, and every payment and disbursement must, MUST, be assigned to a client. This is the money they can use for their cases, for any inadvertent expenses or charges. This money is not yours, it’s not the money you’ve earned. 

This is very interesting for me because I don’t have trust accounts. We work on flat fees and my state doesn’t require it for flat fees, so we don’t allow overpayment to be strict in compliance.

So this is all completely new to me and maybe people who are just starting with trust accounts. So I’m glad Tom is telling us about it because this can be scary. Tom tells me that California launched new rules where even flat fees have to go through a trust account. 

According to Tom, having a trust account can be a very beneficial thing. If you collect money and put it in a trust account as like a retainer, then your collections percentage is significantly higher than if you don’t do it through a trust account. 

The legal profession is one of these industries at a huge advantage of this retainer model, this ability to collect money upfront.

While the trust account does have specific rules and regulations, it can also be a huge advantage to use in the law practice to help you on the billing side and the collection side. So that is something I do want to stress because, for law firms, there’s often this lack of collections or gap in what you build versus what you collect. 

And we want to make sure that we can use all the resources available to tackle that issue too. At the end of the day, cash is king. So you want to do all of the best practice you can to bring that cash in the door.

The importance of the Trust Account

Of the total disbarments, 65% of them are related to mismanagement of the trust account. That’s how important this is. You can be disbarred. I’m a CPA and since 2010, I’ve worked exclusively with attorneys, and I’ve found that most mistakes are often due to two things: poor bookkeeping practices, and lack of knowledge. 

You can solve both and manage your trust accounts smoothly, in house, or with the help of consultants and software. 

That’s the reason Trust Books exist. Attorneys, especially smaller law firms, don’t necessarily have the full support of a bookkeeper or a full accounting staff. They’re at risk of mismanagement of their trust account. 

What we do with trust accounting doesn’t have to be complicated. The main reasons that make it complicated are the existing tools many lawyers use– like Quickbooks and Excel– they’re not designed to help lawyers with their trust account. 

This is where attorneys get into trouble. It’s devastating and career-ending. It can be as simple as $3,500 floating around and a lawyer doesn’t know where it belongs. He can be disbarred for that. He’s not embezzling or anything, it’s just bad bookkeeping. 

You want to avoid that situation completely. 

What Goes Into a Trust Account and What Goes Out of the Process Account

Any time you’re holding money on behalf of your client or a third party, that needs to go into the trust account. 

If it’s your money and you earned it, if you’ve got a flat fee or anything, it’s earned fees that go in your operating account. If it’s money you’re holding on behalf of your client or for a party, it goes into a trust account.

Overpayments by a cent or $25, it doesn’t matter how little the amount is, if it’s not yours, it cannot be in your account and your general operating account. It has to be in a trust account. 

Disputed Funds

You’ve invoiced your client for your bill, and you need to transfer the money from the trust to. You send the invoice to your client, they dispute the invoice. Those funds should stay in your trust account until that dispute is resolved. 

Mixed Funds

Let’s say you invoiced your client with billed time ($200) and funds for their case ($300). 

They send you one check for $500. That check should go first into your trust account. And then once it’s deposited and it clears, you can move the $200. That’s earned fees from your trust to your operating. 

Maintaining Balance

State bars will allow, uh, a small amount sufficient to open or maintain the trust bank account. It’s usually anywhere from $100 to $500. It’s also a nice buffer in case your bank charges you bank fees against your trust account, which they shouldn’t do, but sometimes banks can also make errors and they charge the trust account. 

Outgoing Funds

  • Reimbursements for paying court costs on behalf of your client
  • Personal injury practice where you settle a big case with an insurance company. For example, $10,000 settlement check goes into your trust account, and then after that $10,000 settlement check, you’re paying the attorney for earned fees, and there are costs and reimbursements, paying the client their settlement, and medical lien: 4 checks in total coming out of the trust account

One of the key concepts of handling trust account is being patient and waiting for the deposit to fully clear the banking system. You also want to establish a relationship with your bank so that you can call them to fix any errors on charges to the trust account. 

In the next blog, we’ll discuss the other key concepts and important rules of trust accounting.

If you can believe it, I have even more knowledge to share on this topic! If you’d like to learn more about trust accounting, sign up for my Six Figure Solo program!  Six Figure Solo now comes in three tiers – Executive, Solopreneur, and CEO. Sign up here!