Trust Trust Accounting Accounting

RulesRulesPeter BolacPeter Bolac

Trust Accounting Compliance Trust Accounting Compliance CounselCounsel

North Carolina State BarNorth Carolina State Bar

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Topics to Be CoveredTopics to Be Covered

1.1. Trust Account RulesTrust Account Rules

2.2. Key ConceptsKey Concepts

3.3. Trust Account BasicsTrust Account Basics

4.4. Funds Go In (Deposit)Funds Go In (Deposit)

5.5. Funds Go Out (Disbursement)Funds Go Out (Disbursement)

6.6. RecordkeepingRecordkeeping

Topics to Be Covered Topics to Be Covered contd.contd.

7.7. ReconciliationReconciliation

8.8. Safeguarding Funds from Safeguarding Funds from EmbezzlementEmbezzlement

9.9. IOLTAIOLTA

10.10. FDIC InsuranceFDIC Insurance

11.11. Random Audit ProgramRandom Audit Program

NNever.ever.

MMust.ust.AAlways.lways.

Trust Account and IOLTA Trust Account and IOLTA RulesRules

NC Rules of Professional ConductNC Rules of Professional Conduct

Rule 1.15, Preserving the Property Rule 1.15, Preserving the Property of Othersof Others Rule 1.15-1, DefinitionsRule 1.15-1, Definitions Rule 1.15-2, General RulesRule 1.15-2, General Rules Rule 1.15-3, Records and AccountingsRule 1.15-3, Records and Accountings

7 Key Concepts of Client 7 Key Concepts of Client Trust AccountingTrust Accounting

Key ConceptsKey Concepts

1.1. Separate Clients Are Separate Separate Clients Are Separate AccountsAccounts

• You are You are NEVERNEVER allowed to use one allowed to use one client’s money to pay either another client’s money to pay either another client’s or your own obligationsclient’s or your own obligations

• Keep a client ledger of each client’s Keep a client ledger of each client’s fundsfunds

• 10 clients in a trust account means 10 10 clients in a trust account means 10 ledgersledgers

Key ConceptsKey Concepts

2.2. You Can’t Spend What You Don’t HaveYou Can’t Spend What You Don’t Have Each client has only his or her funds available Each client has only his or her funds available

to cover their expenses.to cover their expenses.

Client AClient A $1,000$1,000Client BClient B $2,000$2,000Client CClient C $3,000$3,000Client DClient D $500$500TotalTotal $5,000$5,000

A check to Client D for $1,500 will be paid for by A check to Client D for $1,500 will be paid for by Clients A,B and C. This is misappropriation of Clients A,B and C. This is misappropriation of funds. funds.

Key ConceptsKey Concepts

3.3. There’s no Such Thing as a There’s no Such Thing as a Negative BalanceNegative Balance

In client trust accounting, there are In client trust accounting, there are only 3 possibilities:only 3 possibilities:

- You have a - You have a Positive Positive balancebalance

- You have a - You have a Zero Zero balancebalance

- You have a problem. (- You have a problem. (Negative Negative balance) balance)

Key ConceptsKey Concepts

4.4. Timing is EverythingTiming is Everything Bouncing Checks vs. Advancing Bouncing Checks vs. Advancing

Funds = Equally deplorableFunds = Equally deplorable Know your bankKnow your bank

When funds are availableWhen funds are available Deposit deadlineDeposit deadline

Don’t help one client at the expense Don’t help one client at the expense of anotherof another

Key ConceptsKey Concepts

5.5. You Can’t Play the Game Unless You Can’t Play the Game Unless you Know the Scoreyou Know the Score

- “Running Balance” of the client- “Running Balance” of the client

- “Running Balance” of the client - “Running Balance” of the client trust accounttrust account

Key ConceptsKey Concepts

6. The Final Score is 6. The Final Score is ALWAYSALWAYS Zero Zero What comes in = What goes outWhat comes in = What goes out

No more, no lessNo more, no less Take care of small, inactive balances Take care of small, inactive balances

as soon as possibleas soon as possible

Key ConceptsKey Concepts

7.7. AlwaysAlways Maintain an Audit Trail Maintain an Audit Trail- Be DescriptiveBe Descriptive- NEVERNEVER make out a client trust make out a client trust

account check to cashaccount check to cash

Trust Account BasicsTrust Account Basics

What is a trust account?What is a trust account? Who Who mustmust have a trust account? have a trust account? How many trust accounts does a How many trust accounts does a

lawyer need?lawyer need? Does each lawyer in a firm need a Does each lawyer in a firm need a

separate trust account?separate trust account? Is a lawyer ever required to Is a lawyer ever required to

establish a trust account for one establish a trust account for one client, or one transaction?client, or one transaction?

Basics: Opening a Trust Basics: Opening a Trust AccountAccount

What bank should I use?What bank should I use?

How should I label my Trust How should I label my Trust Account?Account?

What type of checks What type of checks mustmust I use? I use?

Who may be a signatory?Who may be a signatory?

Basics: Trust Account Basics: Trust Account ManagementManagement

May I delegate management to one May I delegate management to one lawyer in the firm?lawyer in the firm?

May I delegate management to a May I delegate management to a staff member who is not a lawyer?staff member who is not a lawyer?

May I “link” my trust account with May I “link” my trust account with my business account?my business account?

Basics: Abandoned or Basics: Abandoned or Unclaimed FundsUnclaimed Funds

What should I do with unidentified What should I do with unidentified funds in my trust account?funds in my trust account?

How do I escheat funds?How do I escheat funds?

Basics: Closing a Trust Basics: Closing a Trust AccountAccount

How do I close an account that has How do I close an account that has remaining funds?remaining funds?

What if my law firm is under What if my law firm is under dissolution?dissolution?

Funds Go In (Deposit) Funds Go In (Deposit)

What Goes Into a Trust What Goes Into a Trust Account?Account?

Every receipt of money from a client Every receipt of money from a client or for a client which will be used or or for a client which will be used or delivered on the client’s behalf delivered on the client’s behalf should be placed in the trust account should be placed in the trust account or a fiduciary account. or a fiduciary account.

Funds Go InFunds Go In

What about non-cash items?What about non-cash items?

What about small sums of money?What about small sums of money?

What Does Not Go in the What Does Not Go in the Trust Account? Trust Account?

No funds belonging to the lawyer No funds belonging to the lawyer may be deposited in the trust may be deposited in the trust account except such funds as are account except such funds as are necessary to open or maintain the necessary to open or maintain the account, or pay service charges, or account, or pay service charges, or are funds belonging in part to a are funds belonging in part to a client and in part presently or client and in part presently or potentially to the lawyer. potentially to the lawyer.

Funds Go InFunds Go In

Should retainers be deposited in the Should retainers be deposited in the trust account?trust account?

What about funds belonging to an What about funds belonging to an organization? organization?

Funds Go In: Depositing Funds Go In: Depositing FundsFunds

1.1. Depositing a mix of Trust and Non-Depositing a mix of Trust and Non-Trust FundsTrust Funds

Example:Example:Attorney fee Attorney fee $150.00$150.00

Recording fee Recording fee $30.00$30.00

Sheriff fee Sheriff fee $4.00$4.00

Total Total $184.00$184.00

What happens when: 1) Client writes What happens when: 1) Client writes check for $184.00, 2)Client pays check for $184.00, 2)Client pays with 2 checks, 3)Client pays in cash? with 2 checks, 3)Client pays in cash?

Funds Go In: DepositsFunds Go In: Deposits

Credit Card Payments From ClientsCredit Card Payments From Clients

Funds Go OutFunds Go Out

Funds Go Out: Appropriate Funds Go Out: Appropriate Disbursements Disbursements

May I use funds to pay legal fees or May I use funds to pay legal fees or the claims of creditors?the claims of creditors?

What if I have an interest in What if I have an interest in settlement or judgment funds settlement or judgment funds received? received?

May I disburse funds as an escrow May I disburse funds as an escrow agent in a manner not contemplated agent in a manner not contemplated by the agreement?by the agreement?

Appropriate Appropriate DisbursementsDisbursements

Conditional Delivery to a real estate Conditional Delivery to a real estate agentagent

Disbursing against provisionally Disbursing against provisionally credited fundscredited funds Good Funds Settlement ActGood Funds Settlement Act

Funds Go Out: ProblemsFunds Go Out: Problems

What if a Trust Account Check What if a Trust Account Check Bounces?Bounces?

OverdrawsOverdraws

RecordkeepingRecordkeeping

RecordkeepingRecordkeeping

What Records are Required?What Records are Required? Record of receiptsRecord of receipts All wire instructionsAll wire instructions All bank statementsAll bank statements General ledgerGeneral ledger Client ledgerClient ledger Records of monthly and quarterly Records of monthly and quarterly

reconciliationsreconciliations Any other records required by law Any other records required by law

RecordkeepingRecordkeeping

How long should I keep records?How long should I keep records? May I keep records electronically?May I keep records electronically? How often How often mustmust I provide an I provide an

accounting to my client?accounting to my client?

RecordkeepingRecordkeeping

Manual Records vs. ElectronicManual Records vs. Electronic Document deposits to and Document deposits to and

disbursements fromdisbursements from Maintain a current balanceMaintain a current balance Provide a means for reconciling Provide a means for reconciling

monthly and quarterlymonthly and quarterly Retain recordsRetain records Provide annual accountings Provide annual accountings

Record Keeping Software

Legal-specific trust accounting software(TABS3 Trust Accounts by STI, EasyTrust,

SoftPro-Pro Trust (NC))

Time & billing software with add-on integrated trust accounting,

used by law firms(TimeSlips, Time Matters)

Non-legal specific, small business, accounting software(QuickBooks Pro/Premier)

Fully integrated, legal-specific, trustaccounting, time & billing, general ledger

accounting software.(PCLaw, Abacus Accounting, Amicus

Accounting, Juris)

Low-cost personal and home business financial software(Quicken)

“Make the most of what you already paid for.”(Excel or Quattro Pro)

Non-automated trust account maintenance

Software MistakesSoftware Mistakes

Over reliance on softwareOver reliance on software Using the software wrongUsing the software wrong Creating the wrong reportsCreating the wrong reports

ReconciliationReconciliation

What is reconciliation? What is reconciliation? Monthly ReconciliationMonthly Reconciliation Quarterly ReconciliationQuarterly Reconciliation

Quarterly Quarterly Reconciliation Reconciliation

ExampleExample

1. Reconciling General 1. Reconciling General Ledger with Client LedgerLedger with Client Ledger

Step 1: Write in clients names and client Step 1: Write in clients names and client ledger balances in appropriate spots. ledger balances in appropriate spots.

Step 2: Add up client ledger balances, Step 2: Add up client ledger balances, write in total in appropriate spot.write in total in appropriate spot.

Step 3: Compare “Total of Client Ledger Step 3: Compare “Total of Client Ledger Balances” with “General ledger balance”Balances” with “General ledger balance”

If no mistake found, move on…..If no mistake found, move on…..

2. Reconcile the General 2. Reconcile the General Ledger with the Bank Ledger with the Bank

StatementStatement Step 4: Fill in “Ending Balance per bank Step 4: Fill in “Ending Balance per bank

statement” with running balance as of last statement” with running balance as of last day covered by bank statementday covered by bank statement

Step 5: Enter deposits made to the Step 5: Enter deposits made to the account, yet not captured on the Bank account, yet not captured on the Bank StatementStatement

Step 6: Enter total outstanding checksStep 6: Enter total outstanding checks Step 7: Make sure that bank charges and Step 7: Make sure that bank charges and

interest credits are reflected in your interest credits are reflected in your recordsrecords

Likely MistakesLikely Mistakes

1. Find a deposit or withdrawal on 1. Find a deposit or withdrawal on the bank statement that isn’t in your the bank statement that isn’t in your ledger or checkbook registerledger or checkbook register

2. An entry in the bank statement is 2. An entry in the bank statement is different from the corresponding different from the corresponding entry in the ledger entry in the ledger

Calculate Adjusted Calculate Adjusted BalanceBalance

Step 8: Step 8: Ending Bank Statement BalanceEnding Bank Statement Balance PLUS All outstanding DepositsPLUS All outstanding Deposits MINUS All outstanding checksMINUS All outstanding checks PLUS Interest (if not directly to IOLTA)PLUS Interest (if not directly to IOLTA) MINUS Bank Fees and Charges MINUS Bank Fees and Charges = Adjusted Balance= Adjusted Balance

Final ComparisonFinal Comparison

The total of all client ledgers, The total of all client ledgers, general ledger, and adjusted bank general ledger, and adjusted bank balance should all match.balance should all match. If yes, you are done. Save all records.If yes, you are done. Save all records. If no, go back and find error, or call If no, go back and find error, or call

bookkeeper.bookkeeper.

Safeguarding Safeguarding Funds From Funds From

EmbezzlementEmbezzlement

Practice TipsPractice Tips Do not act in hasteDo not act in haste Use Pre-numbered checksUse Pre-numbered checks Cash is difficultCash is difficult Be wary of sole control of trust account activitiesBe wary of sole control of trust account activities Resolve discrepancies quicklyResolve discrepancies quickly Do not sign blank checksDo not sign blank checks Keep documentation and review everything Keep documentation and review everything

periodicallyperiodically Question lifestyle changes of individuals with Question lifestyle changes of individuals with

access to trust accountaccess to trust account Examine signatures on trust account checks for Examine signatures on trust account checks for

forgeryforgery

Practice TipsPractice Tips

Check periodically with post office Check periodically with post office about mail pick upabout mail pick up

Reconcile trust account promptly Reconcile trust account promptly after receiving bank statementafter receiving bank statement

Question a negative attitude or poor Question a negative attitude or poor work performance of an employee work performance of an employee maintaining the trust accountmaintaining the trust account

DEVELOP AN OFFICE POLICYDEVELOP AN OFFICE POLICY

IOLTAIOLTA

What is IOLTA?What is IOLTA? How does it work?How does it work? Which accounts must be IOLTA Which accounts must be IOLTA

accounts?accounts? Does using an IOLTA account harm Does using an IOLTA account harm

my client financially?my client financially? What about out of state law firms?What about out of state law firms?

FDIC InsuranceFDIC Insurance

What is my responsibility when What is my responsibility when choosing a depository bank?choosing a depository bank?

Does FDIC insurance protect my Does FDIC insurance protect my trust account?trust account?

How must I explain this to my client?How must I explain this to my client?

Random Audit ProgramRandom Audit Program

AuthorityAuthority Selection ProcessSelection Process Scope of AuditScope of Audit Exemption from AuditExemption from Audit ConfidentialityConfidentiality DisciplineDiscipline Trust Accounting Compliance Trust Accounting Compliance

Program (TAC Program)Program (TAC Program)

ConclusionConclusion

Remember the Remember the M.A.NM.A.N… …

... in order to please The Man,

…and hope to avoid THE MAN!

True/False QuizTrue/False Quiz

1. Trust Account violations are 1. Trust Account violations are governed by the “no harm, no foul governed by the “no harm, no foul rule.” A lawyer cannot be disciplined rule.” A lawyer cannot be disciplined if the clients eventually get their if the clients eventually get their money.money.

FALSEFALSE

2. An intervening third-party criminal 2. An intervening third-party criminal act, such as a book-keeper act, such as a book-keeper embezzling funds, relieves the embezzling funds, relieves the lawyer of disciplinary responsibility.lawyer of disciplinary responsibility.

FALSEFALSE

True/False QuizTrue/False Quiz

3. A check certified by a bank (a 3. A check certified by a bank (a certified check) is normally as good certified check) is normally as good as cash. as cash.

TRUE*TRUE*

4. A lawyer may ethically protect 4. A lawyer may ethically protect against bounced checks and checks against bounced checks and checks presented against insufficient funds presented against insufficient funds by keeping a portion of lawyer’s own by keeping a portion of lawyer’s own money in the trust account as money in the trust account as “float”. “float”.

FALSEFALSE

5. A lawyer will not be subject to 5. A lawyer will not be subject to discipline for failing to reconcile the discipline for failing to reconcile the client trust account if no client funds client trust account if no client funds have been harmed. have been harmed.

FALSEFALSE

6. It is permissible for the lawyer’s 6. It is permissible for the lawyer’s fees to remain in the trust account fees to remain in the trust account after they are earned as long as the after they are earned as long as the clients timely get their money.clients timely get their money.

FALSEFALSE