Trust accounting: why should it be complicated?

While it might be true that most law firms function on a daily basis with rigorous usage of a trust account, a sizeable group of lawyers avoid trust accounting like the plague.

In Saskatchewan, 22 per cent of lawyers don’t have a trust account in their private practice firms. Why aren't these lawyers using trust accounts, exactly?

Well, they've probably heard of the (overstated) horror stories involved with holding on to their client’s money. To them, the whole idea of opening a trust account--separate from the firm’s general account--is just one big headache that can and should be avoided. Or so they say.

At first it might just seem like a personal accounting decision: to have a trust account, or to not have a trust account. Unfortunately this decision completely changes the way a law firm actually gets money.

Without a trust account, a lawyer doesn’t have pre-allocated sums of money devoted to settling matters for their clients. Instead, the onus is shifted to the lawyer to come up with money to spend on behalf of their client. This often leaves you, the lawyer, in a strange circumstance of picking up the tab for a client rather than the other way around.

Getting a client to put aside even a mere $1,000 can allow your firm to conduct work without having to worry whether the client will actually pay you for what you’ve already done. It’s a lot easier to establish a retainer letter than it is to chase clients down for every single piece of work you need to do.

People believe that the complications associated with managing a trust account actually makes a lawyer’s job more difficult, but in reality it’s easier. When you have money in trust, you’re not writing things off or discounting things for clients all the time.

Trust accounting can be a lot more professional, which is why it’s used by a majority of practitioners. In order to get things right, consider how the money is to be obtained by clients. Depending on the type of clients and size of retainer, it might be effective to choose one or the other.

  • Using the banks - Obviously, banks are pretty helpful when dealing with trust accounting, but depending on the arrangement you have with the bank, it is possible for some issues to arise. This is why it is important to establish a good line of communication with your provider to ensure that when a client’s money is deposited into trust, the bank isn't deducting service fees from that sum. Instead, the bank must be instructed to take the service charges out of your general account.
  • Cash - When it comes to taking cash retainers from clients, it’s important to follow the process strictly so you do not run into trouble with law society auditors. Receipts are mandatory with cash and you need to get the client’s signature. This isn't just a suggestion, it’s necessary. Within less than 24 hours your firm should be moving the money from cash into the bank, with detailed depositing information so it’s properly accounted for. You want it clearly established in your records when you received the money and when you deposited. If a client gave you $300 to deal with the settlement of a will or estate and the banks were closed for the day, deposit the money as soon as you can. Everything needs to be recorded.

So while it is true that trust accounting requires special care and consideration when conducting transactions, the pitfalls associated with taking other people’s money can be mitigated with proper accounting procedures.

If your firm’s current accounting practices aren't good enough, or too slow, or onerous, we suggest trying out a free trial of uLawPractice, Canada’s only practice management AND legal accounting software.

Retainer letters and trust accounting are all embedded into the software, along with synchronization with your banking accounts. Try it out by clicking the link below