Trust Accounting

The first thing that comes to mind when one sees “trust accounting,” is trust, followed by accounting (it’s quite obvious), but they all boil down to one major thing – detail!

Details matter a lot! And as a lawyer, one of the required tasks for managing client funds and billing is Trust Accounting.

Which brings us to the important frequently asked questions.

What is trust accounting?

Trust accounting is the processes involved in bookkeeping, auditing and reporting so that your trust account (a particular type of business bank account used for holding money that does not belong to your business) remains compliant with the laws and regulations. If you want to keep the accounts of your company update, then you can take Business Valuation Expert Witness advice in doing trust accounting.

Are there rules involved with trust accounting?

Yes, and it differs from one state to another. Each state has its laws and legal requirements that have to be followed. Failure to follow up with those laws and legal requirements can incur some dire consequences.

To guarantee lawful commitments are met in your trust accounting processes, it is essential to understand that requirements vary from state to state. States typically will post their guidelines online, but again, you are best to seek professional legal advice for your specific situation.

The majority of federal rules come from the Uniform Principal and Income Act. One of the major things to be aware of is that there are differences between fiduciary accounting income (FAI) and federal taxable income. There are different types of terms used for these accounts (IOLTA, Trust Account and Escrow Account are often interchangeable)

Why do you need to learn the best practices?

The trust accounting field evolves every year, so practices that have been going on for years may become obsolete, hence the need to keep up with the current laws, regulations, and legal requirements, so as not to end up on the wrong side of the law.

Trust Accounting best practices can help reduce the risk of mismanagement when undertaking these types of accounts. And Economic damages expert would also help you to open the avenues of new opportunities to avoid maximum loss and keep the financial sheet of the company updated.

Trust Accounting Best Practices:

We strongly recommend that the practices mentioned below be taken into consideration to ensure that your trust accounts operate at an optimal level smoothly and efficiently.

  • Transparency: Nothing screams that you are accountable and can be trusted like being transparent. Provide a detailed and extensively written agreement or note that shows what and why you are withdrawing a certain amount of money, catalog receipts of the money withdrawn, be specific about the distribution of funds, retainer fees, and fees used for each and every client. This helps save a lot of time and stress both present and forthcoming.
  • Balance and Reconcile: These two should be done on a regular to show that nothing has been missed from the bank account transactions to the trust accounting software transactions. Ensure that all monthly management and balancing of all trust accounts list all activities that go into and out of the account, along with the complete records of those transactions.
  • Balance and reconcile your records to the banks’ records for all transactions into the bank account(s).

  • Balance and reconcile your records for all funds paid out of the accounts to the bank statement.
  • Balance and reconcile your client/matter sub-account totals to the bank account totals. Reconcile your trust account bank statement. Make sure to keep a record of this reconciliation.
  • Always leave a paper trail in digital form: The world now runs on technological advancements, so if you’re going to leave a paper trail, let it be a digital one. This helps to report and track every deposit that enters into your trust account with a trust accounting specific software that ensures that there are no errors, unlike the paper ledger cards and spreadsheets that have so many human errors and little to no audit report trails.
  • Duplicate all information in images: By maintaining image copies of all bank statements, deposit slips, client engagement letters, and checks, you’ll never lose or misplace a detail.
  • Include an Internal Authorization Form and Separate each fund Check: Request that workflow and e-Payables include an internal authorization form, signed by an attorney to authorize the payment of any IOLTA/Trust/Escrow funds either to the firm or any other third party. Separate the printing or writing of the IOLTA/Trust/Escrow funds checks from the person who will sign the check through internal procedures.
  • Keep Separate Accounts: Funds held for clients must be kept completely separate from the firm’s operational funds. Breaking the rules of managing these accounts (which vary by state) can cause major financial auditing nightmares.
  • Keep and preserve all records even after the client matter has been closed: Keep and preserve all trust account records (scanned, PDFs, copies): deposit receipts, bank statements, canceled checks, client ledgers, client subaccount reports, receipts, register, transactions, and reconciliations.
  • All of these are simple and common mistakes that can be avoided once you pay attention to the tiny details because the details matter! The best practices listed here will help you to be one of the best in trust accounting.
  • Here are some other factors to consider:

  • Appraise assets when appropriate
  • Use a CPA, financial planner or licensed fiduciary when appropriate
  • If taking Trustee compensation be sure to follow all rules to avoid conflicts and fulfill duties
  • Make certain periodic reports, in an informative manner, are provided to the beneficiary or his/her assigns
  • Do you have other practices you’ll like us to know about? Simply, contact us, we would love to hear from you, our Business Valuation Expert will help you!
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