Law firms use trust accounts to hold client funds and keep them separate from the law firm’s funds. Firms must keep a detailed record of money going in and out of their trust accounts, track every client’s balance in the trust account, and ensure one client’s funds aren’t used to pay another client’s expenses. 

If you fail to comply with state bar rules when handling your clients’ trust accounts, you can lose your law license. PracticePanther offers software to help you accurately track funds, manage your accounts, and adhere to state bar rules and regulations. Read on to learn more about using these tools to stay compliant, and to request a free demo.

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What Is Trust Accounting?

Trust accounting is the process of tracking and monitoring the funds that a lawyer has received on behalf of or belonging to a client or third party. This generally includes the following steps:

  • Your client pays you in advance for your services, such as settlement money or attorney’s fees. (ABA)
  • You put the money in a bank account designated as a client trust or pooled account, depending on the size of the sum.
  • You write a check to your firm’s operating account when you earn the pre-paid money.
  • Any remaining amount goes back to the client.
  • Should you have any disputes about the money with your client, your state bar guidelines may order you to keep the funds in your account until you come to a resolution.

Trust account funds can never commingle with the firm’s funds. So, the firm must keep accurate and detailed records of the money deposited and withdrawn from the account. Remember that each state has its own bar rules, so the specifics of these accounting rules vary by jurisdiction

Rules and Regulations for Trust Accounting Compliance

The American Bar Association (ABA) states that attorneys hold their clients’ advanced payments in trust accounts before they begin working and billing their cases. As fees earned by the lawyer, the money should transfer from the client’s fund to the firm’s operating account. The trust account essentially offers a way to separate the client’s and firm’s money.

What Is IOLTA?

According to the ABA, Interest on Lawyers’ Trust Accounts (IOLTA) offers a way to raise money for charity from the interest attorneys earn from their trust accounts.

When a lawyer obtains a large sum for a client, they usually deposit this money in a trust fund that accrues interest. When lawyers obtain a smaller sum, they can place it into a pooled trust account. In the past, however, these pooled funds could not earn interest.

When the Supreme Court and state legislatures created IOLTA in the 1980s, attorneys could deposit their earnings into an interest-bearing trust account. The banks would typically donate the interest to a program or charity controlled by the state bar. As a result, attorneys don’t earn a net income from this interest. But they still fulfill their ethical and fiduciary obligations by safeguarding their clients’ money.

Common Trust Accounting Errors

Making a single error in managing a trust account could cost you your bar license. Make sure you avoid:

  • Billing clients for payment processing fees: Depending on your state’s laws, you may not charge your clients processing fees. If your state allows it, you must—in writing—have the client consent to paying these fees.
  • Reporting trust accounts as income: The money your client pays you upfront or for a retainer is pre-paid, so it is their money until you secure a settlement or carry out all of the agreed services. 
  • Negative client, matter, or overall trust account balances: It is important to never bring your trust account balance or your client or matter balances into the negative. You must always maintain good recordkeeping to ensure that your trust account balance and your client and matter balances remain positive.
  • Withdrawing funds too early: You want to ensure that your deposited trust funds fully clear the trust bank account and you have proper instructions from your client before making disbursements. Having the proper agreements and documentation with your clients regarding the disbursement of their trust funds will ensure you follow your state bar rules
  • Commingling business and client accounts: Keeping your firm’s trust account separate from your clients’ accounts is crucial. For internal tracking purposes, your firm can label the client’s and your firm’s operating trust accounts. You could include the client’s name and their ID number so you don’t confuse their account with yours.

Trust Accounting for Lawyers Best Practices

Improper trust accounting in your jurisdiction could have negative, permanent consequences. In the worst case, you could lose your license to practice law and face disbarment. Mishandling funds could also get you into financial trouble with your clients. If they paid you in advance and you didn’t use all the money, they may take legal action if you can’t locate it.

To avoid these devastating outcomes, consider applying some of these trust accounting best practices:

  • Use a three-way reconciliation: This method consists of three elements: the sum of your client ledgers, the trust ledger, and the trust bank statement. The former two must always match, while the trust bank statement should verify the numbers. You should reconcile your account at the end of every month.
  • Be transparent about your firm’s billing practices: During your first consultation with your client, be upfront about your billing methods. Tell them how much you charge, and give them an overview of how trust accounts work. Assure them that their money will be secured and untouched, and you will only use it for your services.
  • Educate clients on your firm’s practices: Educating your clients about how your firm operates gives them not only peace of mind, it also benefits your reputation. You establish yourself and your staff as authority figures, increasing brand awareness and building loyalty and trust with your clients. You may see an uptick in clients when you’re open and honest with your current ones.
  • Always keep business funds separate from client accounts: The ABA mandates lawyers to keep their clients’ trust account funds separate from their business funds. This task can get complicated when credit card processors and banks get involved, so you may want to use software to keep track of and avoid mishandling funds.

What Is Trust Accounting Software?

Trust accounts require constant supervision to ensure client funds are properly allocated, reconciled, and remain compliant. There is always a potential for a law firm to be audited due to legal regulations, so managing client accounts is a major responsibility that can impact a firm’s overall success. 

Trust accounting software makes the process of tracking, reporting, and transferring funds easier for law firms. When audit season rolls around, having detailed tracking and reporting of trust accounts is essential.

While there are several accounting solutions that lawyers make do with in order to manage their trust accounting, the most error-proof approach is to use software specifically designed for trust accounting within law firms. The trust accounting software, TrustBooks, is a great example of this. The intuitive platform empowers law firms to perform essential accounting functions to manage their trust accounts while remaining compliant with state bar regulations.

Now that you have an idea of what trust accounting software is, let’s dive into the key features and functionality your firm should look for when choosing a trust accounting software. 

Choosing the Best Trust Accounting Software

You should not be relying on manual checks of your client’s trust accounts to ensure they are error-free and compliant. Finding trust accounting software for your firm will make everything run more smoothly and efficiently.

Look for software with easy-to-use features. Make sure it tracks funds going in and out of the client trust accounts and remains compliant with your state bar rules. You should be able to check your firm’s financial records and progress at any time, so you can make informed decisions for your clients and your firm.

Crucial features for maintaining a robust reputation, client satisfaction, and consistent trust accounting practices include:

  • Compliant invoice templates: Create multiple invoice templates that comply with state bar guidelines and allow you to set your payment plan on your own terms. An invoice template can help you take payments quicker and avoid errors.
  • Separate trust and operating accounts: Commingling trust and operating accounts with client funds is a violation of state bar and ethical regulations. Having a built-in payment solution helps maintain compliance by allowing your firm to easily deposit funds in the appropriate account.  
  • Transaction logs: A transaction log will record data for both your operating and client trust accounts for a certain amount of time and keep track of the transactions you made from both accounts.
  • Custom reporting: Law firms can be audited at a moment’s notice. Having the ability to quickly generate reports on your firm’s billing, revenue, or trust accounts will save you time and headache. 
  • Integrations: We understand that you need certain tools for your law firm to thrive. Integrations allow your firm to adopt new platforms without sacrificing functionality, the need for duplication of work, or the potential loss of vital data. 
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The PracticePanther and TrustBooks Integration

The probability of your firm catching an error or innocent oversight decreases when you’re using disparate, unconnected, accounting and legal practice management solutions. Having a full view of your active matters and associated trust accounts in integrated systems is a fail-safe way to ensure your firm’s reconciliations and audits go without a hitch. 

The PracticePanther and TrustBooks integration provide a seamless solution for managing trust accounts. The integration eliminates duplicate work while keeping a law firm’s information secure. Unlike other law practice management platforms, the integration between PracticePanther and TrustBooks is automatically updated at the contact, matter, or transaction level. This makes it easier for firms to effortlessly manage their practice, trust, and operating accounts in a central location compared to having to manage data on multiple platforms that don’t speak to each other. 

PracticePanther’s integration with TrustBooks comes with many automated trust accounting features such as:

  • 3-way reconciliations, to maintain state bar compliance
  • Custom reporting, so you can track your performance trends, see what brings you the most revenue, and helps you make the best decisions for your firm
  • Automatic ledger updates for real-time information on trust accounts
  • Intuitive workflows designed for the non-accountant provide a step-by-step process for recording accounting information
  • Import and auto-sync capabilities that allow you to import matters, deposits, and payments data from PracticePanther into TrustBooks with a click of a single button
  • Built-in controls that keep your client’s trust account positive and compliant with state bars

Selecting the right solution to manage your firm’s operating and client trust accounts will help you focus on serving your clients. With PracticePanther’s integration with TrustBooks, you won’t have to worry about commingling accounts or noncompliance with your state bar, ABA, and IOLTA guidelines. To get a full experience of PracticePanther’s functionality, you can schedule a custom demo to see how the platform can enhance your billing practices and automate your practice.