Trust Account Basics: Tips for Keeping Your Records in Top Shape
Last year, Peter Bolac, Trust Accounting Compliance Counsel with the North Carolina State Bar, published an article titled 20 Questions for Your Trust Account. Let’s look at those questions, and explore how each one can help you be prepared in the event of an audit.
Question One: Trust Account Funds
The sum of $100.00 is a common amount used to open the account. Ask your bank if they require a minimum balance to avoid unexpected service charges. It seems that regardless of how many times you tell the bank not to charge the trust account for any type service charge, checks, deposit tickets, stop payment charges, etc. it happens. It may be helpful to take a look at the history of your account to determine what service charges have been assessed. If you accept credit cards make sure you either have associated charges paid out of your firm operating account, or keep enough money in the IOLTA account to cover them. Do remember to deposit additional firm funds if the amount you put in initially is depleted. It is important to set up a trust account ledger to document attorney funds. Be sure to record all deposits and disbursements. Identify the source/payee and purpose of all deposits and disbursements. Do not put a large amount of firm funds in the trust account for no apparent reason. If you do, be prepared to explain the reason to an auditor.
A common mistake lawyers make when they open a new trust account and transfer funds from an existing account is that they fail to deposit the amount sufficient to open or service the account. That is due to the fact that they are using client funds to open the account, and do not realize if all client funds are disbursed the account would have a $0.00 balance.
Question 2: Bank Location and IOLTA
Only a dedicated trust account with the written consent of the client, or fiduciary account may be maintained at a bank that does not have offices in North Carolina.
Question 3: Depositing Funds
Lawyers holding client funds must be careful not to commingle those funds with his/her own. Depositing the entire check into the trust account, then writing a check to the firm for only earned fees or advances made on behalf of the client prevents commingling of funds. Do keep in mind no funds belonging to a lawyer in whole should be deposited into the trust account. Earned fees should not remain in the trust account. Once they are earned, they should be paid to the firm account.
Question 4: Disbursing Payments to the Firm
The Rules require the attorney to keep the equivalent to a ledger card for every client, and that ledger card reflect all receipts and disbursements. While it is not against the Rules to write one check containing several payments so long as the clients are clearly identified, I find it is not best practice. I have seen a lot of reconciling errors as a result of that practice. Some trust account software will not allow one check to contain payments from more than one client. If you do make the decision to write one check from the trust account to the attorney for payment from several clients, make sure you identify the clients on the front of the check, and make sure the total combined fees posted to the individual ledger cards total the amount of the check.
Question 5: Writing Disbursements
Simply put, don’t make checks payable to cash or bearer. The whole idea of the trust account is to identify who you are paying, why you are paying, and whose money you are paying with. It does not come up very often, but no cash shall be withdrawn from a trust account or fiduciary account by means of a debit card.
Question 6: Bank Directive
The bank directive instructs the bank to report you to the Executive Director of the State Bar when any item is presented for payment against insufficient funds. Not only is it important to have a copy of the directive on file in your office, it is important to know where it is. “Let me see a copy of your Bank Directive”, is one of the first things the auditor will say when paying a visit to your firm.
Question 7: Client Notification
Examples of entrusted property other than fiduciary funds would be securities, or stock certificates. All entrusted property received by a lawyer that is not deposited in a trust account or fiduciary account shall be promptly identified, labeled as property of the person or entity for whom it is to be held, and placed in a safe deposit box or other suitable place of safekeeping. The lawyer shall disclose the location of the property to the client or other person for whom it is held. Any safe deposit box or other place of safekeeping shall be located in this state, unless the lawyer has been otherwise authorized in writing by the client or other person for whom it is held. Make sure you, as the responsible attorney, know where the property is located, and have access to that place. When all is said and done, the staff is not responsible, the attorney is.
Question 8: Delivery to Clients
To avoid being reported to the State Bar, it is important to stay in communication with your clients, and follow their directions in a reasonable period of time. Any reasonable person would be suspicious if their request to deliver property being held is unnecessarily delayed without explanation.
Question 9: Reporting Suspected Errors
It is your duty as an attorney to promptly inform the NC State Bar if you discover, or reasonably believe that entrusted property has been misappropriated or misapplied.
Question 10: Escheating
Escheating is not a choice, it is a requirement.
Question 11: Check Size and Fields
Size matters: checks should be business-sized and include an Auxiliary On-Us field in the MICR line.
Question 12: Bank Receipts and Deposit Slips
Many firms are making remote deposits using a scanner provided by the bank. It is possible, and recommended that you print a detailed deposit report at the time of deposit showing the front and back image of the deposited items. Keep in mind the ‘source of funds’ is not the bank it is drawn on, it is the person or entity providing the funds. While the bank provides a copy of the cancelled checks, copies of the deposits are not included with the bank statement.
Question 13: Digital Copies of Canceled Checks and Rule 1.15-3(b)(2)(A)
Confirm that your bank is in compliance. If not, provide the bank with a copy of Rule 1.15-3(b)(2)(A). If they remain out of compliance, you MUST close the account, and find a bank that follows the Rules. The Rules make it clear that it is the attorney’s duty to make sure the bank is in compliance, not the other way around.
Questions 14 & 15: Record Retention
Keep all records relating to the trust account for at least six years.
Question 16: Ledgers
There are several excellent attorney specific software programs available that will make reconciling and printing necessary reports much easier. If you have Microsoft Office, you most likely have Excel.
Questions 17 & 18: Reconciliation
Review the trust account reports each month. Make sure a three-way reconciliation report is provided. Keep in mind, you are ultimately responsible, and you cannot delegate this responsibility.
Question 19: Client Statements
If your accounting (billing) software provides the option to print the trust activity on the client statement, you should use that option to provide the client with a detailed statement showing how and when you used their funds.
It is a good practice to ask the client for contact information of someone who will always know where they are.
Question 20: Accuracy
It is important to keep detailed and accurate records for six years. Keep in mind the six years start from the last transaction to which the record pertains.
About the Author
Kathy Pope has 30 years of experience in reconciling trust and operating accounts, as well as conducting trust account audits. As a consultant, Kathy is available to design and implement procedures to assist your firm in improving compliance and documentation.