I will say it right away. The biggest pain about being a lawyer in solo practice or in a small firm, like me for 30 years, is maintaining the trust account. I am sure my top-notch assistant for the past 19 years would agree.
Whether you like it or not, you are a banker in addition to being a lawyer. As the California State Bar puts it in the Handbook on Client Trust Accounting for California Attorneys (http://ethics.calbar.ca.gov/Portals/9/documents/Publications/2013%20CTA%20Handbook%20D ft%202%20(1-16-14).pdf:)
Whether you find it easy or difficult, the fact is that if you agree to hold money in trust, you take on a non-delegable, personal fiduciary responsibility to account for every penny as long as the funds remain in your possession. Whomever you hire to do your books or fill out your deposit slips, you have full responsibility for his or her actions when you receive money in trust. This responsibility can't be transferred, and it isn't excused by ignorance, inattention, incompetence or dishonesty by you, your employees or your associates. The legal and ethical obligation to account for those monies is yours and yours alone, regardless of how busy your practice is or how hopeless you are with numbers. You may employ others to help you fulfill this duty, but if you do you must provide adequate training and supervision. Failure to live up to this responsibility can result in personal monetary liability, fee disputes, loss of clients and public discipline.
If that doesn’t scare you straight into figuring how to do this right, then be willing to part with your hard-earned “ticket” to the State Bar in a hurry. One of the best pieces of advice I got when I started was to have your trust checks printed in red (actually, it is more like burgundy). Then, every time you go to write a trust check you see “red” and think about what you are doing an extra second more than you would when writing checks from your general account or a personal account.
Here are a few of the requirements and suggestions:
- Do your trust accounting using a software program such as Quicken, or at least an Excel spreadsheet. You will never “account for every penny,” as you have just read above is required, without a simplified way of doing it.
- Don’t let your bank statements pile up. You have to reconcile every month to make sure the money in your account matches your list of client accounts and the amount in each.
- California Rule of Professional Conduct 4-100 includes specific requirements:
- You can’t just leave enough money in the account to cover all the funds you are holding for clients. Funds belonging to you must “be withdrawn at the earliest reasonable time after the member's interest in that portion becomes fixed.” There is even a name for failing to follow this rule, it is called “commingling” and is another violation of the rules.
- When you receive money on behalf of the client you must notify them, and pay them the amount due “promptly.”
- California Rule of Professional Conduct 4-100(C) gives the State Bar the authority to adopt standards, which, of course, it did. The rules could use an update by the bar, but currently, this what you have to do:
- Maintain a written ledger for each client showing the dates funds are received and disbursed (with all the pertinent information) and the current client balance. Remember, I told you that as a lawyer, you are also a banker. At this time, there is no official word on whether the ledger can just be kept on a computer. In my office we have a notebook with a ledger for each client, continuing to kill trees.
- Keep a written “journal” for each bank account showing the “date, amount and client affected by each debit and credit and current balance.” In other words, the days of calling the bank and asking for the balance are over.
- Preserve all “bank statements and cancelled checks,” even though most banks don’t return your cancelled checks with a monthly reconciliation of the account. This is where Quicken comes in handy, allowing you to reconcile your accounts and print out a statement of that accounting.
All of these records must be kept for at least five years. I have a storage shed full of the records for each year.
Finally, although there is plenty more to talk about regarding trust accounts, when a client (or the State Bar) asks how much money you have in trust, you must tell the client (or the bar), and if the client wants the funds back, you have to deliver it “promptly.” So, download the trust accounting manual right now and read it over.
**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis. Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**