Episode #49 – Avoiding Disbarment: The Essentials of Trust Account Management

Listen here

Subscribe To The Podcast Here

Watch here

Read here

So today I want to talk about trust accounting. While I'm grateful to not know anyone personally who has been disbarred for impropriety with their trust account, I know how common trust account issues are, and I'd like to squash this issue today once and for all. So let's dive in! 

What's the purpose? Attorney trust accounts exist to protect client's money by separating the client money from the law firm's money to ensure professional conduct. 

Most but not all state bars require firms to have a trust account. 

Whether you use it or not, it is every lawyer's professional responsibility to manage their trust accounts with the utmost good faith failure could put you at risk for being disbarred.

What does it mean to have a trust account? Actually, you end up with two new general ledger accounts in your books. You have an IOLTA account and a trust liability account. 

The IOLTA account, which means “interest on lawyer trust accounts”, is a specific type of bank account.  It's similar to a checking account. The account is interest earning and all interest earned is automatically transferred to your state IOLTA board each month to fund a variety of programs.  Stuff like legal aid for low income citizens and law school scholarships. 

The trust liability account is your firm's record of who is owed money that is sitting in the IOLTA bank account at the bank. 

On your firm's financials, your balance sheet, you're going to see the IOLTA will be a new asset in your banking section, and the trust liability will be a new liability that's typically under your account's payable account.

Here's the big question. Are you in balance or are you out of balance? There are a few questions to ask at any given moment of time, and this is typically done at the end of every month through the normal bookkeeping process.

Three questions and you have to answer yes to all of these to be in balance. It's not a one or two, you're good. All three of these have to, you have to answer yes to all three of these to be in balance. So again at a specific moment in time.

Question number one, in your bookkeeping system, does the balance appearing on your general ledger or your balance sheet for your IOLTA account agree to the penny to the trust liability account?

Yes or no? If yes, you're good. If no you're in trouble. 

Number two, when you add up the individual balances, you're holding on a per client or per matter basis, does that amount agree to the penny to the trust liability account on your general ledger?

If yes, you're good. If no, you're in trouble. 

And the last question, does your IOLTA balance in your books reconcile to the IOLTA balance per the bank?

Now notice the first two questions. I specifically said that those comparisons need to agree to the penny, no exceptions, they either agree or they don't.

But this last one, this is your standard bank reconciliation that gets done on your bank accounts every month end. So you can have exceptions because there are going to be things that your books have transactions posted that have not yet cleared the bank.

For example, you issued a check. The check is  in the mail. It’s not been cashed. So your books know that transaction, your bank does not.

So those will be different balances, but you can reconcile. You know what that difference is. You can account for it.

So if you can answer all three of these questions yes, then you are in balance! We can celebrate because what a wonderful world it is when you can pass these three tests. Everything's good!

But what if you couldn't answer yes to all three of those questions? 

Let's go back to the first question, which was in your bookkeeping system, does the balance appearing on your general ledger or balance sheet for your IOLTA account agree to the penny to the trust liability account?

If you answered no here, if these two balances don't agree, this is usually caused by one of these two following items.

Either a client trust deposit was posted correctly to the trust liability account, but it was either posted, meaning the journal entry was wrong or it was physically deposited to the wrong bank account. That's the first possible issue. 

The second possible issue: it could be that an expense paid on behalf of a client was correctly paid from the IOLTA account, but posted as the firm's expense in your books when it should have been a reduction in the trust liability balance.

Now these are just two reasons. If I tried to explain all the variety of reasons I've seen this specific question be out of balance, we would be here all day.  These are just the two most common I’ve seen. 

Okay, now what about my second question, which was when you add up the individual balances that you're holding on a per client or per matter basis, does that amount agree to the penny to the trust liability account on your general ledger?

If the sum of what you're holding on behalf of clients does not agree, this is usually caused by an expense that was paid or a trust deposit received was correctly posted on your general ledger, but the detailed report was not correctly updated.

That's the most common, but that doesn't cover every exception, just the most common. And where I see this, the most common is when a firm does not use legal specific accounting software and instead tries to keep the details for their trust account in either a Google sheet or an Excel file. 

Again, this is just the most common exception. 

What about the fix? I'm a handy chick. I tend to do a lot of things myself that I should delegate, but that's usually because I should delegate because of time, not ability.

But this is not one of these situations. Whether you can fix an out of balance situation on your own is a function of ability.

Once you're out of balance, I rarely see a quick fix on this. I guarantee it will take you hours if not weeks, to figure out where the issues are.  And trust me, there will be many different issues. 

But as bad as the investigation phase of this is, the fix is actually worse.

The problem to fix each issue is you need to be extremely careful to correct the right general ledger accounts without making the situation worse.

For example, if your detailed records do not add up to the total per the liability on your general ledger, this could be that your detailed records need to be updated with no journal entries that need to be posted to your books.

But if you don't know whether you need to post a journal entry to your books or to update your detailed records, or possibly both, you are in over your head.

If you're confident that you can tackle each item one by one and that you have the time to stick with it, then roll up your sleeves and get to it.

Be sure to keep records of what you're doing in case you're audited in the future! 

If you have a bookkeeper who created this mess, I recommend having a meeting with him or her to see if they understand what went wrong, if they understand how to fix it, and how it can be prevented in the future.

I'm not one to be dramatic, but at any point if your trust becomes out of balance, you have exposure. Your license to practice is on the line here.

If you have any doubts with your firm's trust process or your bookkeeper, this is assigned to revamp your trust process or replace your bookkeeper immediately.

If you have any questions about today’s episode, feel free to comment if you are watching on YouTube or send me an email at [email protected].

If you know someone who might need to hear this information, please share this episode with them or if you are on YouTube, tag them below! 

Be sure to follow and subscribe to get notifications for future episodes.

Did you enjoy this episode? Please consider leaving a review. 

And before I go – remember - profit is something you intentionally plan for in the beginning. It is not a potential bonus at the end of the year!

Thanks, and have an amazing day!

Today we discuss the critical importance of trust accounting for attorneys and law firms, emphasizing the need to separate client money from law firm money through the use of Attorney Trust Accounts. 

Learn how maintaining an IOLTA (Interest on Lawyer Trust Accounts) and a trust liability account is vital for ensuring professional conduct and avoiding disbarment. We’ll talk about the purpose of these accounts, how to assess if they're in balance through a series of three key questions, and address common issues that may arise, offering guidance on identifying and fixing discrepancies. 

✉️ EMAIL: [email protected]
📞CALL: (234) 207-5772
💻 VISIT: ProfitScaleThrive.com

#attorney #lawyer #profitscalethrive #moneymindset #howtomanageasmalllawfirm #business #CPA #CFO #LawFirm #spotifypodcast #PodcastsOnAmazonMusic #applepodcasts #googlepodcasts #podcast #LawFirmGrowth #LawFirmWealth #WealthyLawFirm #LawFirmProfits #LawFirmMillionaire #LawFirmMoneyMindset #ProsperousLawPractice #MillionDollarLawFirm #IOLTA