What is Trust Accounting?

Trust Accounting is an intimidating topic, for good reason. First-rate lawyers have been suspended or lost their practices, simply because of one or two mistakes made with their trust account. With the stakes so high, we wanted to make sure you have solid facts to understand this important part of your practice.

While the details of trust accounting can get complicated, the basic purpose of this account is fairly straightforward:

• It’s where you keep your client’s funds when you start representing them.

• It’s the account you draw from if you need to pay a settlement on behalf of your client.

• It’s the account you draw from if you are your client’s fiduciary agent.

To put it even more simply: a trust account is full of your client’s money, not yours. The rules and regulations are in place to make sure a law firm never spends the money in the trust account as if it were their own.

IOLTA vs. IOLA Trust Accounts

One confusing aspect of trust accounting are the terms IOLTA (Interest on Lawyer Trust Account) and IOLA (Interest on Lawyer Account). They are simply different terms for the same thing. Both refer to trust accounts that collect interest and send that interest to the state bar. 

The money raised by IOLTA is used by the state bars to help people who can’t afford legal assistance. There are currently IOLTA Programs in all 50 United States. This article by the American Bar Association explains the history of IOLTA (it’s fascinating) and the nuts and bolts of how it works.

Trust Accounts in Different States

It’s quite common for lawyers to work for clients in multiple states. Having trust accounts in different states can become complicated, so if you are a lawyer in the process of starting your own practice there is one question you need to answer early in the process: In what state/states are you planning on practicing law?

This question is vital, because each state has different rules and regulations for trust accounting. 

Same Account, Different Rules

Most every state has specific rules pertaining to trust accounting, and it is very important to know exactly what those rules are. Many law firms practice in multiple states—of course it’s more challenging, but not impossible. 

Take the time to read through each state's rules and regulations. You will most likely need to open a trust account in each state for clients ONLY in that state. Some states allow you to use a trust account in a different state, but this is not the norm. Because it’s an area of law that has so many stringent regulations, we recommend following the rules to the letter!

While you are researching this topic, try not to get discouraged by all the details. The basic concept of the trust account hasn’t changed: it is an account to hold money for your clients or a third party. 

The details are vital, but they become easier to put into practice with the big picture in mind.

Good Trust Account Habits

No matter what state you are practicing in, there are good trust account habits that translate to all law firms:

1. The trust account should always be completely separate.

Never mix your trust account with your firm’s accounts—never. Make sure the two accounts are entirely separate. Some lawyers take this rule so seriously that they start their trust account in an entirely different bank from their firm’s accounts. This can be a big hassle and isn’t necessary, but it does serve to demonstrate the importance of this rule.

2. Limit who can withdraw and deposit funds into the trust account.

Your firm is undoubtedly staffed by sharp and capable people, but the surest way to prevent mistakes from happening is to limit the variables involved. Restricting who can access the trust account to yourself and maybe one other person helps prevent confusion and mixups. 

3. Use unique checks for your trust account.

Color-coding is a tried and true method of staying organized. Even something as simple as having green checks for your trust account and red checks for your firm’s other accounts will go a long way towards preventing any confusion.

4. Never use your trust account money for yourself or your firm.

The money in this account is not yours, and must only be spent on behalf of your clients or a third party—and even then, only after explicit instructions have been given. 

5. Keep careful records whenever you use your trust account.

Like all bank accounts, you want to keep careful track of ingoing and outgoing money and balance your books regularly. If a client ever has a question about their money, you want to be able to produce balanced books that detail every transaction. This promotes your client’s confidence in you, and protects your law firm.

How Brennan Bookkeeping can help

It’s easy to become frustrated with all the rules and regulations of trust accounting. However, every aspect of trust accounting is important; the rules are what protect the integrity of law firms and their clients’ finances.

While important, trust accounting is time consuming, and law firms make their money by working billable hours. By handing the care of your trust account to Brennan Bookkeeping, you are relieved of a large burden on your time. We also send you regular updates on this important account, so you have peace of mind and a thorough knowledge of every aspect of your firm.

For more information about trust accounting, check out this article. If you are interested in our services, send us an email. We look forward to hearing from you!