How to Avoid Getting Disbarred: The Ultimate Guide to Trust Account Recordkeeping

Today, let's talk about one of the most important and often overlooked aspects of running a law firm: maintaining accurate and up-to-date trust account records. Trust accounts are where you as a law firm keep the money that belongs to your clients, such as retainers, settlements, or fees. The money is kept separate from your operating accounts, where you keep the money that belongs to your firm, such as salaries, expenses, and profits.

Trust accounts are not only a matter of ethics, but also a matter of law. If you mishandle your trust accounts, you could face serious consequences, such as fines, audits, lawsuits, or even disbarment. Yes, you heard me right. You could lose your license to practice law if you don’t keep proper trust account records.

Keep reading as I’m going to show you the right way to manage your trust accounts, and the common mistakes to avoid. By the end, you will have a clear understanding of how to keep your trust accounts in order, and how to protect yourself and your clients from any potential issues.

So, if you’re ready to learn how to avoid getting disbarred, make sure to continue until the end.

What are trust accounts and why are they important?

Before we dive into the details of how to maintain trust account records, let’s first review what trust accounts are and why they are important.

Trust accounts are special bank accounts that hold money that belongs to your clients, not to you or your firm. For example, if a client pays you a retainer fee in advance, you must deposit that money into a trust account, and only withdraw it when you earn it by performing legal services. Similarly, if you receive a settlement check on behalf of a client, you must deposit that money into a trust account, and only disburse it to the client or other parties according to the agreement.

Trust accounts are important for several reasons:

• They protect your clients’ money from being mixed with your own money, or being used for unauthorized purposes.
• They protect your firm from being liable for any losses or damages that may occur to your clients’ money, such as theft, fraud, or bankruptcy.
• They protect you from being accused of misappropriating or commingling your clients’ money, which could result in disciplinary action or disbarment.

How to maintain trust account records?

Now that you know what trust accounts are and why they are important, let’s talk about how to maintain trust account records. Trust account records are the documents and statements that show the transactions and balances of your trust accounts. They include:

• Bank statements and reconciliations
• Deposit slips and receipts
• Check registers and canceled checks
• Client ledgers and invoices
• Disbursement vouchers and authorizations

To maintain proper trust account records, you need to follow these steps:

• Open a separate IOLTA checking account for each jurisdiction where you practice law, and label it clearly as a trust account.
• Deposit all client funds into the appropriate trust account as soon as possible, and never deposit your own funds into a trust account, except for a small amount to cover bank fees.
• Keep a detailed record of every deposit and withdrawal from each trust account, and assign each transaction to a specific client or matter.
• Keep a separate ledger for each client or matter, showing the balance and activity of their trust account funds.
• Reconcile your trust accounts monthly, by comparing your bank statements, check registers, and client ledgers, and resolving any discrepancies or errors.
• Retain your trust account records for at least six years, or longer if required by your jurisdiction or client agreement.

What are the common mistakes to avoid?

Maintaining trust account records may seem like a tedious and time-consuming task, but it is essential for your legal practice. If you neglect or mismanage your trust accounts, you could make some common mistakes that could jeopardize your reputation and career. Some of these mistakes are:

• Misplaced trust: No pun intended, but overreliance on your bookkeeper can put you in hot water. Trust accounts are not applicable in every industry. And, while many bookkeepers are amazing at what they do, this is a nuance that not every bookkeeper is experienced with that can create an unintended nightmare for you. The proverb made famous by President Reagan comes to my mind - "trust but verify." Obtain the 3-way reconciliation your bookkeeper performs every month-end to confirm it was completed. Next, confirm that the "balance per bank" agrees to the bank statement, the "balance per books" agrees to the balance in your books. Lastly, review the detailed report listing of all client money being held in your IOLTA account. The total of this report should agree to the penny to the "balance per books" for both your IOLTA account and trust liability account. Immediately investigate any discrepancies.
• Commingling funds: This means mixing your clients’ money with your own money, or using one client’s money for another client’s matter. This could happen if you deposit your own money into a trust account, or if you deposit client funds into your operating account, or if you transfer money between trust accounts without proper documentation or authorization.
• Misappropriating funds: This means using your clients’ money for your own benefit, or for purposes other than what they intended. This could happen if you withdraw money from a trust account before you earn it, or if you use client funds to pay for your personal or business expenses, or if you fail to disburse client funds promptly and accurately.
• Neglecting records: This means failing to keep accurate and complete records of your trust account transactions and balances. This could happen if you don’t record every deposit and withdrawal from your trust accounts, or if you don’t update your client ledgers regularly, or if you don’t reconcile your trust accounts monthly, or if you don’t retain your trust account records for the required period.

These mistakes could have serious consequences, such as:

• Breaching your fiduciary duty to your clients, and losing their trust and confidence.
• Violating the rules of professional conduct, and facing disciplinary action or disbarment.
• Exposing yourself to civil liability, and being sued by your clients or third parties.
• Attracting criminal charges, and being prosecuted for fraud or theft.

So, there you have it. The ultimate guide to trust account recordkeeping. I hope you found this helpful and informative.