This week we begin our series on trust accounting. Over the next few weeks we will discuss the basics, how-tos, tips & tricks and most importantly, the what not to-dos. We will be revealing all of our secrets! So if you’ve wanted to learn a thing or two about trust accounting, this is a series you won’t want to miss! Today I want to focus on the bare basics of trust accounting. There’s so much to learn on this topic, so let’s take it one step at a time!
What is Trust Accounting?
If you work in the finance department of a law firm, or have plans to, you MUST know about trust accounting. There is no way around it. Regardless of what finance department you work in, at some point these details will come up.
When a client pays a retainer to a lawyer, that is a trust payment. How is that accounted for? Well, that’s trust accounting. Simply put, it’s the accountability of all funds in and out of the firm’s IOLTA account.
Funds in Trust
Funds in a trust commonly begin as retainers. When a potential client decides to secure the services of an attorney, they typically pay a retainer. This financially secures the client’s contract, which is normally in the form of an engagement letter. Over time, the attorney will bill the client for services rendered. At which time, the funds in the client’s trust are used to pay the invoice. This is but a small piece of the process.
IOLTA stands for Interest on Lawyers Trust Accounts. When a client makes a trust deposit, those funds go into the IOLTA account. It is a designated bank account in the law firm’s name. The funds in this account are not used for any of the firm’s expenses. It is designated only for funds to pay the client’s invoices and expenses. This type of account accrues interest, which in turn helps provide for legal aid to those with low income.
The regulations and requirements set in place for lawyers to practice in each state is regulated by the State Bar. As such, they also regulate the accountability of funds held in trust. The State Bar has the right to audit such funds. Through the audit, it will determine if the trust accounting is accurate or not.
The punishment for inaccurate accounting? That depends on several circumstances, however it can be as great as disbarring a lawyer.
Want to learn about more? We have a new DIY learning series coming out soon! You will have to opportunity to purchase courses to gain a better understanding of different subject matters related to the management of law firms. Subscribe to our email list to be notified as soon as it’s released.