Client Trust Funds & Law Office Accounting Chapter 10 Client Trust Funds & Law Office Accounting

Client Funds Trust/Escrow Accounts Trust/Escrow account is a bank account that is separate from a law office’s or attorney’s business or operating account. Unearned client funds are deposited here. Checks/ deposit slips will have a designation of “client trust account” or something similar.

How is a trust account used? Sometimes clients pay cash advances on retainers and this money must be kept somewhere until it has been earned. Can also act as a source of settlement on behalf of the client.

Commingling of $ & Ethics Bottom line: Trust funds and operating accounts can not be mixed together. Read & interpret: Rule 1.5 of the Model Rules

Commingling continued… YES: Client Funds * 3rd Party Funds *Settlement Funds *Retainers for legal services that are unearned NO: Personal funds of the attorney or staff. Business funds of the law firm Investment funds Earned fee payments This is a very common problem. Attorneys are disbarred on this matter every year.

Ethics Trust Accounts can not be used to pay law office/personal expenses. One Trust Account Acceptable for all client funds. Attorney must promptly deliver client funds back to the client. No borrowing monies from the trust account. However, trust checks can be written to cover client expenses. For instance, if a client had monies in trust and the firm needed to issue a check to a court report to pay for a deposition transcript for the case, the office would write a check from the trust account. This is perfectly acceptable as long as the expense is for the client’s case. Attorneys have an ethical responsibility to immediately turn over to clients any funds to which they are entitled.

10 Rules for Good Trust Management Have a trust account & use it for all client monies. Only a managing partner should sign on the account. Follow the IOLTA Rules for your state. Notify the client in writing on a monthly basis regarding all deposits & withdrawals from client’s account balance. Unearned fees and unexpended costs belong in the trust account until earned or spent. Do not commingle attorney or firm funds with trust account. Reconcile the trust account monthly and maintain a written record of the reconciliation. Review individual client balances and don’t delay in refunds. Maintain written detailed records justifying every deposit & every withdrawal in trust account, use detailed ledger. Retain trust records even after the matter is closed.

Budgeting A budget is a projected plan of income and expenses for a set period of time, usually a year. Budgets are a planning tool that allow the firm to plan for the future, to anticipate problems, needs and goals.

Steps in a Budget Process: Prepare an income budget. Adjust the time:billing ratio downward Consider realization Prepare a staffing plan. Estimate overhead expenses. Set a profit margin. An income budget estimates how many partners, associates, paralegals and others will bill for their time, what the rate or hourly charge will be, and the number of billable hours each timekeeper will be responsible for billing. the actual number of hours the office will bill to clients, taking into account the fact that timekeepers are not always able to bill at their budgeted levels due to sickness and unforeseen events. what a firm actually receives in income as opposed to the amount it bills. A staffing plan estimates how many employees will be hired or funded by the firm, in what positions or capacities they will serve, what positions will need to be added or deleted, and how much the compensation will be. The law office must make a budget of all expected overhead expenses such as rent, utilities, equipment and other expenses.

Collection Collection and income are closely tied together. Why? Collecting money that has been billed to clients IS how you make your money! It’s easy to bill, but harder to get paid!

Collection Strategies: 1. Get your $ up front! 2. Send invoices frequently! 3. Be selective in the cases you take on! 4. Last resort: sue the client for the fee.

Internal Controls This refers to procedures that an organization establishes to set up checks and balances so that no one individual in the organization has exclusive control over any part of the accounting system. Good internal controls prevent (or make it harder) for employees to embezzle money.

Internal Control Procedures: Never allow a bookkeeper or person preparing checks to sign checks or to sign on an amount. Have careful, unannounced, routine examination of the books. All documents must routinely be read and examined- no exceptions. All checks should be stored in a locked cabinet. Never let the person signing the checks reconcile the checks. Use check request forms. Establish guidelines for how the mail should be opened. Use non-accounting personnel to help with internal controls. Require two signatures on checks over $10,000. Stamp invoices “CANCELED” Have an audit done once a year or hire a CPA to help you set up internal controls.