Tips for Managing Your Trust Accounts

A surprisingly large number of law firms are not in compliance with state bar regulations for IOLTA Accounts. In some cases, firms may have as many as five different accounts that haven’t been reconciled properly for more than 10 years. 

California now requires every attorney to certify that they understand and are following state bar guidelines. Is your state next?

Take a few moments to review the following tips and learn how you can check your reconciliation practices to ensure you are in compliance with your state bar’s requirements. Paying attention to details will help you avoid the tangled mess that required one law firm to review records going back 10 years to get their books in order. 

The Foundation:

Client money is not yours until you earn it, bill for it and have no client disputes over it. As an attorney, you are the fiduciary of this account. You do not own the money.

General Terms:

Client Trust Account normally refers to an account that is for one client. This is a trust account in the client’s name with the client’s social security number. The client receives the interest.

IOLTA Account [Interest on Lawyers’ Trust Account] holds money from multiple clients. This account is owned by the State Bar of your state. It uses the State Bar Tax ID number and all interest goes to the State Bar.

Client Ledger Card refers to the former paper ledger cards for each client; attorneys manually recorded the deposits and withdrawals on these cards. Now, these are normally recorded by your software with client/matter trust reports, showing each activity for an individual client or matter from the time you started working for the client until the date it is run.

General Rules:

Most state bar associations, and the ABA, have guidelines for managing trust money. The following best practices will cover most states; be sure to review your state bar guidelines.

  1. When a client receives a bill for your services and then pays you, that money is deposited into an Operating Account.
  2. When you receive money from a client at the time of signing your agreement, but you have not yet started working for them, it goes into your IOLTA Trust account.
  3. When you accept payment at signing and the client leaves your firm before the work is done, you must return the unused portion, even when it is a flat fee matter.
  4. When you receive a payment that is partly yours and partly someone else’s [Client, Opposing Party, Co-Party], the total payment should be deposited into IOLTA and distribution can be made from there.
  5. Each client must have their own ledger card that can be produced at any time.

Learn from the complicated situation of a solo law firm. The firm changed banks and, in addition, moved to a new time and billing software. When switching banks, they didn’t reconcile the first account, move that money to the new account and close the old account. Moreover, when changing to a new time and billing software, they continued to use both software systems for a period of time. Because there were no hard cut offs with reconciliation, the accounts became jumbled. Incorrect transfers, deposits and client credits were made in multiple accounts, as well as in their QuickBooks account. It took a day-by-day review of 10 years of bank accounts and billing records to get everything corrected and balanced. 

You can avoid this situation by following these best practices.

Best Practices:

  1. Be sure your time and billing software trust account matches the IOLTA bank account. Add this task to your monthly reconciliation between your bank and your financial software (QuickBooks/Zero, etc.). You may print out the trust transactions from your time and billing software and give that to your bookkeeper each month, if necessary.
  2. Identify all deposits with the appropriate client name in all your systems, practice management, financial software or anywhere else you track income.
  3. Bank, Billing and Accounting systems should all have the same balance in your IOLTA Trust Account. This must be reconciled each month.
  4. Run your bills, wait 10 days, and then draw from your trust account. This allows time for your clients to dispute anything on the bill.
  5. Outline your process for billing and pulling from the trust account in your engagement agreement. If your state has special guidelines for putting flat fee money into your Operating Account, spell it out in your engagement agreement. For example, California allows for depositing flat fee amounts into an Operating Account, if the engagement agreement states that specifically and adds that the client can have the money put in trust, if they choose.
  6. Make your own trust transfers to the Operating Account. Do not give any employee access to withdraw any money from your trust account. You sign the checks; you make the transfers. Period. You are responsible. Only an owner should make all withdrawals from any trust account.
  7. When you check your balance sheet, your Assets should display your IOLTA bank account with the accurate balance. Your Liabilities section should show your Client Retainers/Deposits. These two numbers must match each other and your bank account.
  8. Reconcile your accounts before you change banks or software and use a hard stop date for the old accounts and software. 
  9. Do NOT use a single link on your website for clients to deposit money into an Operating Account for retainers and then transfer those funds to IOLTA. This is co-mingling money for two different purposes. Too often, an attorney may overlook a deposit and then update an account with a transfer to correct the client’s account. If it is corrected quickly, the situation will not have any consequences. If all client monies are automatically deposited into an Operating Account, this may be in violation of the procedures of your particular bar association, a situation easily avoided by following the best practices outlined above.

Appropriately tracking client deposits, payments and activities may be complicated. Consult an accountant who is well-versed in law firm accounting and operations or contact me when you have questions about trust accounting.

Diane L. Camacho is the founder of DLC Consulting Services, LLC. She has more than 25 years as a legal manager in San Francisco for firms of various sizes. Since 2013, she has been a consultant to small firms around the country on management and operational issues, start-ups, IOLTA accounting and legal practice management software. Camacho is a Certified Legal Manager and teaches law office management at the San Francisco State University. She can be reached at [email protected] or 925-676-6277.

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