Many law firms use trust accounts as part of their day-to-day operations. A trust account is an interest-bearing checking account owned by the firm, which can be used to hold client funds for the benefit of the client or to pay expenses related to the client’s legal work. Understanding what trust accounts are and how they work within your firm will help you avoid common problems, both from an accounting and from a legal perspective.
Types of Law Firm Trust Accounts
There are generally two types of law firm trust accounts: operating and custodial. Operating accounts are reserved for client funds that are needed to run your business, like retaining fees and costs, or for employees who need petty cash for expenses related to client work.
They’re part of your day-to-day operations and may be held either at your firm or an external bank, depending on state requirements. Custodial accounts are limited to client funds; you can only deposit checks into these accounts from third parties who aren’t clients, like when you’re waiting for payment from someone else or if another client paid you with a check.
Services Provided by the Trust Account Department
A trust account department’s job is to handle all of your company’s funds for deposit. In some larger firms, an individual will be responsible for opening new accounts, managing existing accounts and reconciling all of your bank statements, but many Accounting firms use software to automate these tasks. These software packages keep track of each client’s transactions, and automatically flag issues like overdraft fees or insufficient funds for follow-up by staff members.
Most major banks offer online banking that allows you to view your statements online often eliminating paper statements from being mailed out altogether. For those with multiple business accounts at different banks, there are also tools that will consolidate them into one place so you can keep track of everything.
Purpose of Law Firm Trust Accounts
Money and property are held by lawyers and other professionals, acting as fiduciaries, for their clients. A separate account, known as a trust or escrow account, may be set up to hold such money and property. The funds are generally placed there temporarily while they are being invested (for example) or while legal action proceeds regarding them.
However, because of concerns about conflicts of interest among attorneys and financial advisers who work together closely at times with little supervision from others in an office setting and even where there are no actual conflicts lawyers who handle estate matters may be required to keep client funds that belong to heirs in separate accounts. They also might have different investment requirements than other types of escrow accounts.
Benefits & Limitations
It’s important to understand when to use a client trust account and when not to. With proper planning, these accounts can offer great convenience and other benefits while ensuring your clients are protected. However, they also have limitations that should be taken into consideration before you decide how and where to store your money. Here’s what you need to know about using these accounts wisely.
When Should I Set Up A Law Firm Trust Account?
For accounting purposes, it’s important to differentiate between expenses that are direct and those that are indirect. What qualifies as a direct expense, you ask? A direct expense is one that can be directly linked to your business activity. Business travel, for example, is an indirect expense because it was incurred while engaging in normal business operations.
Setting Up A Law Firm Trust Account
Opening up a trust account for your business allows you to provide an extra layer of security to clients by keeping their money separate from your own personal funds. The benefit for clients, who may have a lot invested in your legal services, is peace of mind knowing that if something were to happen to you or your business whether it’s due to fraud or negligence their money will still be protected.
In order to open up an IOLTA (Interest on Lawyer Trust Account) fund with our Orange County attorneys, we’ll need to create a separate bank account and deposit our client’s funds into it. From there, we can use those funds just like any other form of income that comes into our business.
Is There Anything Else I Should Know About Trust Accounts?
Trust accounts are typically operated by lawyers and allow clients to deposit funds into an account managed by their attorney. The funds deposited into these accounts must remain there, untouched, until they’re used for payment of fees or to purchase legal services.
Failure to adhere to these requirements can result in fines, suspension of your practice or disbarment. It’s important that you know how trust accounts work and what you should consider before opening one as an attorney, so here’s some helpful information on trust accounts from LegalZoom.
Resources For Small Business Owners And Entrepreneurs
Choosing an accountant, lawyer or other consultant to help you with your business can be one of your biggest challenges. Before meeting with anyone, make sure you understand what kind of legal services, accounting or tax services your company needs. You’ll need to have some basic answers prepared. What kind of legal entity will you choose.
A client’s funds can be placed into an attorney trust account. A qualified trustee or licensed attorney, known as a custodian, will hold these funds until they are distributed to another person or entity. It is important for clients to know that their money will be protected by strict legal rules and government regulation.
A lawyer can help both clients and other professionals learn about any laws related to a trust fund. If you would like more information about establishing your own lawyer trust account, reach out to such services today.