In this instructional video, the speaker outlines the critical role of lawyer trust (attorney‑client) accounts in the legal profession and provides high‑level bookkeeping guidance for bookkeepers serving law firms. The content defines a lawyer trust account as a separate, FDIC‑insured bank account that holds client retainers and other funds until earned, explains the various naming conventions (IOLTA, IOLA, IOTA) and the necessity of keeping these funds distinct from the firm’s operating accounts. It emphasizes the ethical and regulatory obligations imposed by state bar associations, describing how mishandling trust funds can lead to severe professional, legal, and criminal consequences. The speaker details best‑practice bookkeeping methods, including the use of a main liability account for client funds held in trust, sub‑liability accounts for each client, individual client ledgers, and a separate interest/sweep account for earned interest. Common pitfalls such as commingling, premature disbursement, and leaving excessive “cushion” balances are highlighted, along with the importance of adhering to state‑specific rules. Audit readiness is stressed, recommending three‑way bank reconciliations and meticulous record‑keeping to survive bar or IRS audits. The video concludes with a call to action for bookkeepers to help attorneys maintain client trust and protect their reputation.
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This week's topic is safeguarding client trust, the power of lawyer trust accounts. And I wanna explain it kind of at a high level. I know I've done so many videos about this topic, but I just wanna go over it again and just kind of to reeducate anybody who may be new here, landing here. An attorney-client trust is a fundamental principle of the legal profession. As bookkeepers, we have to handle our clients' trust funds with the utmost care and integrity. This is where lawyer trust accounts come into play. So this video is going to give you some of the higher-level tips that I think you need to know and also help understand how we would safeguard our clients' assets, which— our clients' clients' assets, which is your retainers, is typically what I'm talking about. So what is a lawyer trust account? A lawyer trust account, or an attorney or client trust account, is a separate bank account used to exclusively hold client funds during legal proceedings. And this is a typical scenario where an attorney would— we'll just say John Smith Law Firm hires David Boyle as the client, comes in and gives John Smith money to take on his case or matter. So it's for future services and they take an upfront deposit. That's your retainer. So it's important for us to ensure that these funds are not only used for their intended purpose, but also specifically held, impeccably held in— that's the word I was looking for— impeccably held in a detailed way so we know exactly what's in that account. So it's one bank account. We have to account for all the individual trust accounts that are inside of that. So individual ledgers for each client. Lawyers can establish trust and confidence with their clients through transparency of this accurate recordkeeping. That's where we come into play. And they have to abide by strict compliance and ethical rules and regulations. That's your bar association. So if you get your first attorney-client, you want to hop right over to the Bar Association for the state or the area where they're working and practicing the law and make sure that you're compliant. So when you look at it this way, maintaining client trust is the bedrock of the legal profession. Clients— attorneys' clients are entrusting their most sensitive matters, their personal information, and their valuable assets, their cash, to the attorneys, and they're expecting the highest level of care and confidentiality. This trust is the foundation upon which the attorney-client relationship is built, and lawyers are responsible for safeguarding that money at all costs and also safeguarding that detail, the data behind all of that. If they betray this trust, it can be— it can have devastating consequences, not only for the attorney's client, but also for the lawyer's reputation, the integrity of the legal system itself. It can be devastating. So maintaining— mishandling the client funds, it can be just as simple as a breach of confidentiality. It can also be using the money in the trust account in the wrong way, and it can lead to severe professional and legal consequences, including a disciplinary action, or maybe loss of the attorney's clients, loss of their license to practice law, and even some criminal charges and fines. So it's a big, serious thing that we're working with. It's the big elephant in the room when you work with attorneys. So establishing and managing a lawyer trust account is a pretty important job. Establishing and adequately managing that lawyer trust account is crucial in safeguarding the client's trust. And the process typically includes the attorney will open up a bank account. The bank account can be called IOLTA, IOLA, IOTA, tons of names. They're still trust accounts. They can just call it a simple trust account. An attorney can't go and just grab a savings account and put the money in a separate bank account as a savings or money market and call it a trust account. It's not a trust account. There are guidelines around the type of account, what banks they can get these accounts from. So they open this dedicated account and then it's a special separate bank account. They put the funds in there 'cause they haven't earned them. So they're still the client's funds and they keep that separate. And it's important to keep it separate from their distinct or their personal or business bank accounts. It's really important. It has to be FDIC insured. That's another very important— some of these trust accounts you might run into with attorneys, they have really large amounts of money in it, has to be FDIC insured. And then you have to ensure that when you get this funds coming in, let's just say the attorney opens up a brand new bank account and opens it with $100. All you have in that bank account is the balance is $100 and you have $100 in the liability account. We use the sub-liability account method, what we prefer to use. So we would make John Smith Law Firm, and we would put that as a sub-liability of client funds held in trust. So the main account's client funds held in trust, and then the sub will be the law firm of John Smith, and we put that $100 in. That's your opening balance. This is a step that I see missing on a lot of files or throws the balances out of trust. It has to be in that liability account. And then the deposits go in, and then they're gonna be able to get some interest coming in, and the interest will leave. That's used to help poor people be able to get legal, representation so that money's used for that purpose. It's never part of the money coming in and out. And that's where you would make an account called— it's a client trust interest account. And I like to call it like a trust sweep account. So it's money coming in and out of that one account. This is where this work that we do is where we earn our salt. So we have to segregate those funds. And I like to put them in sub-liability accounts, especially if a big account, it's important to do that. And we want to make sure that our client avoids commingling their funds, and it can have profound ethical and legal consequences if they do. The biggest thing I see, which I think attorneys don't really think about, is that improperly dispersing those funds either before they're due— the client maybe say the attorney needs money and has to make his payroll but doesn't have— hasn't done the work for the client but still creates an invoice and moves it over. That's a no-no. I actually see this more on the flip side. I see the client will— our attorney-client will actually earn the funds, bill the client, make the trust apply it to the account, but not actually take the funds out of the trust bank account and move it over to the operating. They leave it in for like a cushion. Also wrong. Can't do it. It has to be moved to the business account when the money's earned. And this is such a simple little oversight. Clients kind of think it's not a big deal to leave a little cushion over there. And you usually can have a cushion, but it depends on the state. Look up those rules at the Bar Association for your client. Where they practice law, sometimes they can keep like $250 in there for wire fees that may be pulled out from the trust account or they order handwritten checks. See, that's still— and that happens. So make sure that, that if they're allowed to put a little bit of money in, they can, but it can't be tens of thousands of dollars that's just sitting there, not moved to operating because that's hiding revenue from the IRS. They don't like that too much. And it's also a bar infraction. So if they're audited and they see all that money just sitting there and the transfers haven't happened, that's bad too. We have to make sure the records are impeccable. A client can be randomly audited. They can be audited because a client puts in a complaint on that attorney. So those are things that are important to think about when the attorney's got these records. You don't get a lot of time. The bar sends out that notice of infraction or notice of audit. And when that happens, you have very little time. You wanna have good records. You wanna be providing that three-way bank reconciliation, which I have plenty of videos on that. Three-way bank reconciliation is is critical. So it's important that we help our clients effectively manage their trust accounts and demonstrate, help them to demonstrate their commitment to protecting those client assets and maintaining the highest standards of ethical conduct. So I hope this video is helpful. I know it was shorter, on the shorter side, but it will definitely help you understand what trust funds are, understand where to go, understand how to set it up so that your client, your attorney-client, can sleep at night and not have to think about that. That's where our job comes in and it's, it's an important one. So we'll see you all next week. Bye now. Bye.
