Working With Attorneys: Trust Accounting
This article is for the person who just picked up a brand new law firm client and has no clue where to start. Trust accounting can seem scary. Also, what is all this terminology???? Trust accounts, retainers, matters, advanced client costs, and an Iolta account? What does it all mean?
Well, it is super important to know. Making sure your attorney-client is compliant is paramount. So I'm hoping the steps in this article will help outline some of the terms that attorneys use and how to process working with trust accounting
Learn the Lingo
Trust Account: a trust account is a liability account on a law firm books. Think of it as a client's separate check register. These are funds that a client gives the attorney to hold as a pre-payment of legal fees. An attorney will set an amount, and the funds do not belong to the law firm until the services are performed or rendered. It is important to note that these funds should never be commingled with the operating expenses of the law firm. An attorney should NEVER borrow from this account either. Also important that these funds should not be transferred until the money has been earned. Additionally, all states require attorneys to keep complete records. But each state has its own set of rules. In Florida, we are required to keep a copy of both the front and back sides of a check received from a client into a trust account. Check with your local American Bar Association or "ABA" for your state's guidelines.
Retainer: A retainer is a fancy name for the funds collected above. A fee paid in advance. Think of it like prepaid rent. A landlord collects the rent as prepaid before the tenant moves in. It's the same for an attorney collecting legal fees before the case or matter begins.
Matter: Again, a fancy way of describing the case or lawsuit or job the attorney is about to undertake. Depending on the type of law practice you are working with, a matter can be specific to that micro-niche of the particular firm. For example, working with an estate planning firm, the matter may be called the "Estate of Mary Smith". An immigration attorney might name their matter "Citizenship of Mary Smith". A case named "Car accident involving John Jones and Mary Smith" would be what you would see when working with a personal injury lawyer. You get the idea.
Client advanced costs: These are fees or expenses that an attorney will pay directly from his checkbook. He will then bill those fees back to the client. Client advanced cost is an asset account that belongs on a balance sheet. Think of it as a holding account until your client is invoiced. It's an account that should also be reconciled. If an attorney doesn't bill back all of the costs in the client advanced cost account for whatever reason, the expenses will need to be dropped down onto direct expenses. Think of it as a holding account until your client is invoiced. It's an account that should also be reconciled every month or at year-end. I recommend doing it monthly.
Iolta account: The definition is Interest on Lawyers Trust Accounts (IOLTA). This interest from lawyer trust accounts is pooled to provide civil legal aid to the poor and support improvements to the justice system. To read the full definition, see this article from Iolta.org. So these funds must be handled in a unique way. The funds should be marked as interest payable and then when it is paid out, use the same account to apply it to. Money in/Money out. Simple! There is no affect on the clients books for this account.
The secret weapon or app that I recommend when working with attorneys and law firms is LeanLaw. You can layer your QuickBooks online accounting software with LeanLaw to generate attorney type invoices and navigate trust accounting seamlessly. Remember this account is so vital that if don't keep the books accurate to the penny, (yes, I said penny!), the attorney can lose his or her license to practice. So yes, it is that IMPORTANT.
Using LeanLaw and the flow of working with Trust Accounts: The video below will take you through the steps:
Create a client
Create the matter
Connect both of these to QuickBooks
From here the attorney would enter their time. We will get into that and how you can add advanced client costs and soft costs to the matter billing in a subsequent blog post.
If you need help with any of this type of work, feel free to reach out. I can help you directly or if your are an attorney in need of assistance with your books, I would be more than happy to help! Call us 239-349-2004.
Note: I truly believe LeanLaw is my number one time-saving tool when servicing my clients. If you work with law firms or attorneys, check it out. You won't be disappointed!