How to Successfully Manage Client Funds — and Mitigate Accounting and Legal Risks

Whether or not you’re a legislation agency proprietor or a person legal professional, it’s doubtless you’ll end up managing consumer funds in some unspecified time in the future — together with advance funds, settlement checks and bills. As a fiduciary in your purchasers, you have to scrupulously handle these funds — implement correct controls, maintain correct data and guarantee you’re being ethically and legally compliant.

The truth is, improper administration of consumer funds is a prime cause why attorneys get disbarred.

Notably as a small agency or an owner-operator of your personal agency, understanding the main points of consumer fund administration is vitally essential. Small companies might not have devoted assets to deal with this job, particularly whereas the attorneys themselves are busy working level on all points of a given case. With some state handbooks on managing belief accounts reaching 150 pages (e.g., the State of California Bar Affiliation), consumer fund administration can really feel daunting — and so inevitably turns into a decrease precedence.

But given the dangers, legislation companies of all sizes have to make consumer fund administration a elementary a part of their working procedures.

Fundamentals of Consumer Fund Administration and Administration

To get began, listed here are some key issues to maintain prime of thoughts:  

All consumer funds have to be held separate from the legislation agency’s working funds and may by no means be co-mingled.

Consumer funds may be held in both a Consumer Belief Account (CTA), that are sometimes used for bigger sums of cash, or the Curiosity on Lawyer’s Belief Accounts (IOLTA) program, that are sometimes used for smaller quantities or short-term deposits the place any potential curiosity earned is minimal.

A CTA account for a number of purchasers may be established at a financial institution of the legislation agency’s selection — however have to be held in an interest-bearing “belief account” for the advantage of the legislation agency’s purchasers, or one thing related.

IOLTA accounts can solely be saved at banks authorized by the state bar affiliation. Any curiosity earned on the deposits will not be for the consumer or legislation agency however for the advantage of non-profit authorized organizations all through the state. The monetary establishment the place the legislation agency established the IOLTA account will ship any curiosity or dividends to the bar.

Moreover, there are numerous accounting points of managing consumer funds that legislation agency house owners and particular person attorneys ought to pay attention to. For instance, complexity can come up when there may be multiple consumer in a consumer belief account. Although all funds are in a single account, every consumer’s funds should stay separate from each other.

Sub-accounting is the follow of separating these particular person consumer funds throughout the accounting ledger system. When carried out correctly, the sum of every particular person consumer ledger will equal the full quantity of the belief funds throughout the account. Moreover, all transactions, together with credit, debits, curiosity earnings, and charges, have to be documented by way of a trackable audit path.

Defending Consumer Funds from Being Misplaced

A brand new problem has emerged for attorneys managing consumer funds within the wake of 2023’s unprecedented financial institution failures: How you can defend consumer funds from being misplaced.

This subject entails a wide range of banking metrics that almost all small companies and attorneys might not have entry to. Furthermore, a typical lawyer will not be going to have the experience, nor the time, to correctly consider a financial institution’s security and soundness. But as fiduciaries for his or her purchasers’ funds, legislation companies could also be liable ought to the financial institution they’ve chosen fail.

To forestall this, crucial factor that you are able to do to guard consumer funds is to make sure that all consumer belief accounts are totally FDIC-insured by way of a person financial institution or financial institution community.

FDIC insurance coverage is utilized to consumer belief accounts by way of what is named “pass-through protection.” In case your accounts are titled accurately and correctly managed, deposit insurance coverage of as much as $250,000 per tax ID, per establishment, is out there. If you’re managing consumer funds in extra of $250,000 per consumer, per establishment, you will want to have interaction further banking companions to make sure these funds are totally protected.

To assist with the accounting and regulatory complexity of this course of — and mitigate related dangers — there are a number of suppliers obtainable to advise small authorized groups. As an example, software program corporations and software-as-a-service distributors can provide accounting assist to make sure correct record-keeping, whereas different service suppliers can ship options particularly designed for legislation companies. These embody capabilities that automate the administration of a financial institution community, optimize financial institution selection primarily based on rate of interest, and supply full FDIC insurance coverage.

Whatever the answer set chosen to handle consumer belief accounts, you will need to contemplate all points of accounting, regulatory compliance and financial institution security when doing so.

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