Best Practices In Trust Accounting: What Every Lawyer Needs To Know

Trust accounting is a critical but often overlooked aspect of financial management for many law firms. The rules surrounding trust accounts are strict, and violations can lead to serious disciplinary actions. However, many attorneys struggle with keeping their accounts compliant. In a recent MyCase webinar, Florida attorney and legal performance coach Audrey Ehrhardt explored trust accounting best practices and provided actionable tips to enhance financial operations.

Why Trust Accounting Compliance Matters

Many lawyers enter the profession with little to no business or accounting training. After all, they went to law school to study law, not finances. Unfortunately, this can lead to trust accounting missteps, some of which have devastating repercussions. 

Ehrhardt shared that she has seen firms unknowingly violate trust rules, only to face serious consequences later. Even unintentional mistakes—such as improper withdrawals, commingling funds, or failing to reconcile records—can lead to bar complaints, fines, or license suspension.

With over 20 years of legal experience, Ehrhardt emphasized the importance of having a clear, structured trust account management system to ensure compliance, financial stability, and long-term success. Below, we summarize key takeaways from the webinar and outline trust account management best practices every law firm should follow.

Trust Accounting Best Practices for Law Firms

1. Understand That It’s Not Your Money

One of the most important things to remember about a trust account is that it’s your clients’ money. Ehrhardt likened a trust account to her grandmother’s jar of quarters with a wax seal preventing access. “You could drop a quarter in, but you couldn’t open the jar,” she explained. She states that lawyers should view their trust accounts in a similar way—funds are held in trust for clients and should never be touched for personal or business expenses.

The American Bar Association (ABA) Model Rule 1.15 states that lawyers have a fiduciary duty to safeguard client funds and keep them separate from their own. Mismanaging trust accounts—even unintentionally—can lead to severe penalties, including suspension or disbarment.

Key Takeaway: Always remember that funds in your trust account belong to your clients. Do not borrow, transfer, or use them for anything other than their intended legal purpose.

2. Set Up the Right Banking Structure

A strong financial management system is essential for keeping your firm compliant. Ehrhardt recommended structuring your firm’s bank accounts as follows:

• Operating Account: Covers business expenses such as payroll, office rent, and legal software subscriptions
• Interest on Lawyers’ Trust Account (IOLTA): Holds client funds and must be kept completely separate from operating funds
• Savings Account: Provides a financial buffer for unexpected expenses
• Goals Account: Helps to save for firm growth initiatives such as hiring new staff or expanding services

By keeping these accounts separate, firms can prevent the accidental commingling of funds, one of the most common violations of trust accounting rules.

Key Takeaway: Work with a trusted financial partner who understands legal trust accounting requirements and can help you set up the proper accounts.

3. Maintain Meticulous Record-Keeping

Proper trust accounting requires detailed, accurate, and up-to-date records. According to Ehrhardt, law firms should have a three-way reconciliation process:

1. Bank Statement: The official record from your financial institution
2. Trust Ledger: A record of all trust transactions for the firm as a whole
3. Individual Client Ledgers: Detailed tracking of funds held for each client

Failing to maintain clear records can make audits difficult and increase the risk of errors. Regular reconciliation—preferably weekly or monthly—is the best way to ensure accuracy and compliance.

Common Record-Keeping Mistakes to Avoid:

1. One common mistake is failing to track individual client balances within the trust account, which can lead to misallocation of funds and potential ethical violations.
2. Another frequent error is neglecting to reconcile trust records with bank statements, which can make detecting discrepancies or unauthorized transactions difficult. 
3. Additionally, improper record-keeping can result in overdrawing client funds, which jeopardizes client trust and can lead to regulatory consequences. 

Key Takeaway: Consistently review and reconcile trust accounts to ensure that every dollar is properly accounted for.

4. Establish Clear Client Communication and Billing Policies

One of the biggest challenges law firms face is client misunderstandings regarding fees and trust account usage. After all, clients may not be familiar with standard practices if they don’t have experience in the legal industry. Ehrhardt suggested using clear engagement agreements and billing policies to manage expectations upfront. She outlines a few strategies below: 

Strategies to Improve Client Communication

• Engagement Agreements: Clearly define the scope of work, fee structures, and how trust account funds will be used.
• Client Management Letters: Provide an overview of firm policies, including billing schedules, retainer replenishment requirements, and expected case timelines.
• Regular Statements: Send monthly or quarterly updates on trust balances and upcoming payments.
• Billing Transparency: If initial fees are high due to extensive prep work, explain why the cost is necessary to help clients understand their charges.

Some firms overestimate retainers initially and issue refunds if work is completed under budget. In general, clients are much happier to receive a refund rather than being hit with unexpected bills.

Key Takeaway: Proactively communicate with clients about fees and trust account policies to reduce billing disputes and improve transparency.

5. Secure and Limit Access to Trust Accounts

Lawyers have a duty to protect client information and funds, and trust accounts are no different. Security is a major concern when handling client funds. A single mistake—or worse, fraud—can have serious ramifications, such as destroying a firm’s reputation. 

Ehrhardt stressed that lawyers should always maintain oversight of their trust accounts, even if they delegate bookkeeping tasks to staff or outside professionals. She recommended the following best practices:

Best Practices for Securing Your Trust Accounts

1. Restrict Access: Only essential personnel should have access to trust accounts.
2. Use Dual Sign-Offs: Require at least two authorized signatures for withdrawals.
3. Implement Multifactor Authentication (MFA): Prevent unauthorized access to online banking.
4. Monitor Transactions Weekly: Set up alerts for unusual activity.
5. Work With an IT Manager: Ensure trust account records are backed up securely in case of cyber threats or data loss.

Key Takeaway: Limit access to your trust accounts, implement strong security measures, and regularly review transactions for signs of fraud or error.

Trust Accounting Doesn’t Have to Be Scary

Trust accounting is ultimately about protecting both your firm and your clients. By implementing best practices, keeping proper records, and using legal technology tools, law firms can ensure compliance while focusing on what matters most: providing excellent legal services. Following these guidelines will help lawyers comply with regulations, build client trust, and avoid costly mistakes.

If your firm has questions about trust accounting, it’s best to get help before small issues turn into bigger problems. Legal practice management solutions like MyCase and LawPay offer built-in trust accounting features to streamline compliance and reduce risk. Explore MyCase’s financial management tools and learn how to simplify your trust accounting process today.

Watch the full webinar to learn more about trust accounting best practices for your firm. 

The post Best Practices In Trust Accounting: What Every Lawyer Needs To Know appeared first on Above the Law.