Client trust accounts come with stipulations, and small business attorneys need to stay compliant with certain requirements. These accounts hold money or property safely and separately from the firm or attorney’s funds. In most instances, money the client pays to the attorney must go first into the trust account, not the business operating account. A firm can either have one trust account for all client funds or a separate account for each client.
Attorneys make several common errors with trust accounts (also known as escrow accounts) that can result in disbarment:
- Failure to keep accurate records on the account
- Using the account improperly to either hold funds or to use them for other, unlawful purposes
- Borrowing money from the trust account
Escrow deposits include client payments, such as retainers, and any funds the attorney receives for clients from a third party. Trust accounts should not to be confused with operating or savings accounts. Trust accounts hold funds until the attorney has earned them. Deposits then become compensation for work performed and cannot fund cash flow or apply to yet-to-be-billed fees. Escrow funds also cannot pay rent, payroll, taxes, bills, or other operating costs on behalf of the firm. Attorneys also cannot delay withdrawing funds to artificially accrue more interest.
Speaking of interest, how does that factor into the equation? In most cases, interest accrued belongs to the client, not the firm. But 44 state bar associations (including North Carolina) have developed IOLTA – interest on lawyer trust accounts. These accounts collect escrow account interest for funding legal services for the poor. Since its inception in 1984, NC IOLTA has applied over $83M in legal services for at-risk citizens.
Some best general practices will keep your firm safe by ensuring your compliance:
- Be aware of the potential ramifications of mishandling trust accounts.
- Look into using software tools to ensure transparency.
- Inform your clients about what their trust accounts are used for.
- Always avoid commingling funds between trust accounts and business accounts.
- Follow your State Bar requirements for reconciling. These may include (but may not be limited to) reconciling your trust account monthly to your bank statement. You must also ensure the balance can be easily identified by client matter.
What can you do if your trust accounts need help? Check to see if your local bar association provides law practice management for free. Another option is to find a private management company or accountant to assist you. They can manage your accounts or fix accounting errors. Your practice will run smoother and you will have peace of mind.