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On Balance

Avoiding Common Trust Accounting Errors for Well-Intentioned Lawyers

Five things to check today to make sure you handle client funds correctly.

By Megan Zavieh

Trust accounting mistakes strike fear in the hearts of well-intentioned lawyers. There are the bad apples who intentionally raid a trust account, but for most of us who mean to handle client funds correctly, the fear of making a mistake is terrifying. After all, the consequences of an error can be dire — including disbarment.

To make sure you stay out of trust accounting trouble, here are five things to get on top of today.

1. Reconcile Monthly

Make sure you are reconciling the trust account every month. This avoids the situation where you discover an error, then realize there are 15 more after it that would have been avoided by early detection of the first.

  • Today: Designate a day of the month you will reconcile your trust account. Usually the 1st or 31st, right before you bill clients, is best.

2. Keep Clients Informed

Make sure your clients know how much of their money you are holding in the trust account for them. It helps ensure you also know, that there are no disputes as to how much should be there, helps you fulfill your duty to keep clients informed as to their matter, and helps detect problems early.

  • Today: Choose a method by which you will notify clients of their trust account balance on a monthly basis — including it on their monthly invoice is a simple way.

3. Set Up Appropriate Credit Card Processing

A quick way to get in trouble is to set up credit card processing improperly. Remember that credit card fees should not come out of client funds in trust. Think of it this way. If a client deposits $3,000 into your trust account, they need to have a $3,000 credit in your trust account. If you have credit card processing set up to subtract processing fees before making the deposit, the client will have less than $3,000 in the trust account after the deposit is made. This is not right. Instead, the $3,000 should be deposited in your trust account, and any processing fee should be deducted from your operating account. If you do not have the processing set up correctly, quickly get this fixed.

  • Today: Contact a law-specific credit card processor that can set up your processing so client funds are deposited in full in your trust account and fees are deducted from your operating account.

4. Be the Only Signatory

The simplest protection is sometimes overlooked by delegation-heavy lawyers: Be the only person authorized to sign checks on your trust account. It is tempting to allow a bookkeeper or administrative assistant to go ahead and sign checks; after all, in a pinch, it would be great to have them sign off and send out a filing fee from advanced costs held in trust. For lawyers who work remotely but have an office with staff, the temptation is extra great. However, being the only signatory means you absolutely know what money is legitimately going out of the account. If by chance someone steals a check, you will have a good defense to any bar action against you.

  • Today: Make sure you are the only signatory, and if not, make a change both to your office policy and at the bank.

5. Reduce Personal Funds in Trust

When funds held in trust transform from client funds into your funds (such as when the advanced fees are now earned fees), they need to be withdrawn from trust. To leave personal funds in trust is co-mingling. Risk-averse lawyers will sometimes leave large amounts of personal funds in trust as a buffer, a safeguard against accidentally overdrafting the trust account. While this is an understandable temptation, a much more ethically sound practice is to avoid overdrafts through proper reconciliation and management of the account. You are permitted to have a small amount of personal funds in trust to cover potential bank charges (such as the unexpected wire receipt fee when a client deposits funds by wire, or monthly maintenance fees). But that amount should be truly de minimus.

  • Today: Check the balance in your trust account and if there is a significant credit of personal funds, check your accounting and properly withdraw all but a nominal amount.

Managing our trust accounts is not a skill emphasized in law school. As Jared Correia recently mentioned, lawyers go to law school to avoid math classes. But, we can implement basic account management strategies to avoid common trust account errors and stay out of trouble.

Illustration ©iStockPhoto.com

More Accounting Tips on Attorney at Work:

“Delegate, Don’t Abdicate Trust Accounting” by Sheila Blackford

“Would You Pass a Trust Accounting Audit?” by Peggy Gruenke

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Megan Zavieh Megan Zavieh

Megan Zavieh is the creator and author of “The Playbook: The California Bar Discipline System Practice Guide.” At Zavieh Law, she focuses her practice exclusively on attorney ethics, providing representation to attorneys facing disciplinary action and guidance on questions of legal ethics. Megan is admitted to practice in California, Georgia, New York and New Jersey, as well as in multiple federal courts and the U.S. Supreme Court. She podcasts on Lawyers Gone Ethical, blogs on ethics at California State Bar Defense and tweets @ZaviehLaw.

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