Do You Trust Yourself With Trust Accounting?
When you graduate from law school, your primary focus is usually on passing the bar and, if successful, practicing law. No one in law school tells you that, in addition to being an attorney, you will also need to be a salesman, a bill collector, and a de facto accountant.
It then comes as no surprise that, as you start your legal career, you sometimes feel in over your head with all of the added administrative pressures. What is a trust account? What does “aged AR” actually mean? How do I reconcile an account? Don’t just brush these questions off because you plan on outsourcing everything—understanding how the moving parts fit together in your firm is important for your revenue stream and your status with your state bar.
Properly maintaining a trust account is integral to your practice, and could affect your law license! If you’re accepting advance payments from your clients, or receiving money on their behalf, you will need to maintain a trust account. What’s more, you will need to maintain a compliant trust account.
State bars are not shy about enforcing their rules concerning trust account violations; it’s not difficult to find examples in state and local bar journals of attorneys who have been formally disciplined or even disbarred due to such violations—it’s usually the first section I flip to when the Journal arrives in my mailbox. If one of your goals is to keep your name away from the “Disciplinary Actions” section of your bar journal (I would hope so), it is imperative that you properly manage your trust account.
A huge problem with trust account violations is that you might not even realize you’re in sanctions territory. You need to reconcile your trust account every month, which means you need to be reviewing bank statements every month and reconciling them with your check register.
Many attorneys get into trouble when they start “borrowing” small amounts of money from their trust account to pay for firm expenses. For example, Attorney Smith just signed a client yesterday and said client paid $5,000.00 for a retainer, which is deposited into the Attorney’s trust account. Attorney Smith suddenly realizes his electricity bill is due for his office space, but doesn’t have the funds to pay it. Attorney Smith knows he is eventually going to bill against the new client’s retainer for future work, so he goes and takes $400 from the client’s retainer and moves it into his operating account and pays his electricity bill. Attorney Smith works his new case, and the client is billed at the end of the month having no idea about this $400 payment.
Here in Texas where I live and practice, attorney Smith just subjected himself to possible sanctions from the Texas Bar (see Rule 1.14 of the Texas Disciplinary Rules of Professional Conduct). Until you have actually earned those fees in your trust account, you cannot move any of those retainer funds. Most every attorney knows of someone who has played around with their trust account funds, and most every attorney knows of someone who has been featured in the back of the TBJ. Moral of the story: don’t play with your client’s trust account funds.
Trust account compliance is more than just something you learned in your Professional Responsibility class or a topic you studied for the MPRE—it’s serious business, and you need to be able to navigate and master it.
All of this might sound a little scary, but don’t panic—there are tools available to help you and to ease you into trust accounting. Practicing attorneys and soon-to-be-attorneys alike might have some concept of what a trust account is, and that they need one, but how the heck do you actually go about setting one up? How do you go about reconciling accounts? The e-book, A Complete Guide to Trust Accounts, from TrustBooks and LawPay, provides you with a complete step-by-step outline of what you need to do to open and operate your own trust account, from choosing a bank to developing proper trust account management procedures. Download the e-book for free at lawpay.com/trustebook.
Whether it’s questions on trust account recordkeeping or deposits and payment, this e-book has you covered. You went to law school, you passed the bar, you dove head first into the actual practice of law—don’t let trust accounting throw you off your game. You can do this!