Trust Accounting for Law Firms

One of a lawyer’s primary functions is to be a financial intermediary, to hold funds in trust for their clients. Lawyers may hold a customer’s money in trust when buying a property or a business. They may hold funds in trust during a divorce, bankruptcy, or other life events.

A Trust is a legal concept that can be used to separate the legal title of a thing from the beneficial ownership of that thing. In the case of Lawyer’s Trust Accounts, the lawyer takes legal title to the cash. However, the beneficial ownership remains with their clients. If I ask you to ‘Hold my beer’ – it’s still my beer, but you’re holding it, so you are currently responsible for it.

Typically, lawyers act as financial intermediaries and hold funds in Trust when there are, quite literally, trust issues. For example, a bank will generally not provide mortgage proceeds directly to a buyer or the seller. Instead, they generally route the funds through a Lawyer’s trust account. In Alberta alone, there are 4,000 pooled Lawyer’s trust accounts which $150billion flows through annually. The average daily balance of Alberta’s pooled trust accounts is $2 billion.

The Law Society of Alberta, and various other provincial legal bodies, have particular rules regarding handling trust funds. These rules are foundational in legal practice. They shore up public trust for lawyers to be able to act as the financial intermediary in these types of transactions.

Trust Accounting & Safety – Law Society of Alberta

Amended Rules for Trust Accounts in Effect Jan. 1, 2022 – Law Society of Alberta

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Responsible lawyer

Once a lawyer has been approved to handle trust funds by the law society, they are called a ‘responsible lawyer.’ This is effectively the lawyer (or lawyers) in a law firm responsible for the day-to-day controls, operation record keeping and recording of the trust accounts and general account.

Pooled Trust Accounts

After approval, the law firm will set up trust bank accounts and a general account at an approved financial institution, an account that has particular features that align with the Law Society’s rules. For example, a pooled trust account is a single bank account maintained by a law firm that contains trust funds relating to various client matters.

Law firms are responsible for maintaining individual client ledgers of receipts and disbursals for each client matter, and the total balance of all the separate client ledgers must aggregate to the balance in the pooled trust account.

Law firm software can make tracking individual client ledgers and the pooled trust account much more straightforward—more on that below.

Trust fund money cannot be withdrawn or transferred to another trust account or a general account unless it meets the requirements under Rule 119.28.

Start-up reports

Once the accounts are set up, the responsible lawyer(s) must prepare and file a ‘start-up report.’ A start-up report lists the details of the trust account and includes a spot check of the functioning of the trust account to ensure that the account is set up and functioning correctly and that the firm is maintaining records under the rules of the Law Society of Alberta. The start-up report must be filed after the trust account has two months of activity and reconciliations to report.

Annual Trust reporting and Accounting reports (this could also be its own blog post)

Law firms handling trust funds must upload their accounting data to the Law Society of Alberta annually or have a CPA prepare an ‘Accountant’s Report’ if they do not use approved software. The Accountant’s Report tests various transactions in the trust account during the year by an independent accountant to ensure compliance with the law society’s rules around trust reporting. The upload of the Trust accounting data or the Accountant’s Report is due to be filed with the law society within three months after each December 31 for data during that previous year. Late filing fees can run up to $1,500.

Law firm self-report

Unless exempt, law firms are required to submit a Law Firm Self0Report to the Law Society of Alberta Annually. The Self-Report aims to prove compliance with Part 5 of the rules, and reports details about your practice, trust accounting and accounts, the general account, bank information, and other activities in the prior year. A firm’s report typically satisfies the requirement for all the lawyers who work in your practice, and the Responsible Lawyer is accountable for this filing.

Law firm trust accounting reporting software (this could also be a blog)

Lawyers use various workflow, file retention, and accounting software platforms to run their practices. The Law Society of Alberta posts a list of approved software here. Generally, this software makes record-keeping for trust accounts a breeze. The Law Society of Alberta publishes a comparison of the various options here, or you could way our Law Firm software showdown here to get an idea of which software may work best for your firm (we should create this).

Software makes recording receipts, disbursements, and transfers to the firm’s general account a breeze. Using one of the approved software platforms ensures that the recording of these transactions is in line with the Law Society’s rules, provided that the actual bank transactions match what is recorded in the software, so the trust account should be reconciled at least monthly in line with the Law Society’s rules. As a benefit, these platforms not only compile and provide the reporting required to be submitted to the law society of AB. Better still, most of the media also talk to the PwC Connect Tool that facilitates uploading the firm’s annual trust reporting to the Law Society of Alberta. One of the critical benefits aside from easier trust reporting, one of the vital benefits of excellent law firm software is the ability to send out retainer letters, track time, bill, and in some cases, collect electronically from your clients, all in one centralized platform.

At Achen Henderson, our GURU Team supports Clio for the simple reason that not only does it have many of the great features of all the other platforms, but it also integrates with accounting packages like QuickBooks Online and Xero. Non-integrated platforms mean that essential business data needs to be transposed manually to other systems, which can be a massive drain on resources and lead to business processes that could be more optimal.

Integrations with other software platforms mean we can plug in other great business tools for essential business functions like budgeting, forecasting, automated payroll systems, full record electronic payments (e-transfers are a bookkeeper’s nightmare) and receipt capture. While some of these features may be available in platforms that do not offer robust integrations, an integrated system gives you access to all of them and the ability to change providers for a particular business function if you are not happy with one.

Integrations to these types of tools decrease not only your firm’s admin time but also human error. Integration to business tools outside the law firm software also allows the owners of the law practice much faster access to better data and the ability for a remote team of bookkeepers, accountants, and tax advisors, like GURU by Achen Henderson, access to important accounting data in real-time so we can provide better advice. While the accounting functions of Clio integrate with other platforms, your client matters are kept confidential and protected, so you don’t have to worry about improper sharing of that information.

Trust Shortage and Reporting

Lawyers must review a client’s trust ledger to ensure that funds are available for the required withdrawal, transfer, or disbursement. Items such as service charges, credit card fees and bank fees can be a source of shortages. However, such transactions should never occur in a properly functioning trust account. They should instead be charged to general accounts. Sometimes, law firms may maintain a float in their pooled trust account in case such mistakes happen.

If a shortage is discovered, the Responsible Lawyer must be notified immediately of it and its reason. Funds must directly be transferred into the pooled account to cover any shortage and the shortage must be reported to the law society using the Trust Account and Client Ledger Shortages Form, if:

  1. The shortage is less than $2,500 and is not fixed within 7-days; or
  2. The shortage exceeds $2,500.

Tips to prevent a shortage in your pooled account:

  1. Reconcile your trust accounts every month and on time. The responsible lawyer should review the bank statement and bank reconciliations for all bank account monthly as soon as the accounts are reconciled.
  2. Review the online accounts regularly. If a review of the bank reconciliation and bank accounts is delayed until the end of the following month, it may be too late to chase down and correct any issues in the trust accounts. Comparing the pooled trust balance to the online bank balances regularly can help prevent problems from festering too long.
  3. Make sure trust documents are marked. Any bank statements, cheques or transactions in your online bookkeeping software should be marked to indicate that the transaction or paper relates to the pooled account. This makes it easier to track down problems.
  4. Understand clearing times. Many banks require most of a business week to effect electronic transfers. This can cause reconciliation discrepancies and client anxiety. Make sure you are setting expectations properly with your customers.

Hiring a legal accounting team

Accounting is a necessary part of your business, as it safeguards your growth and keeps you compliant with trust reporting. But, even if you aren’t well-versed in law firm accounting or don’t have the time, you don’t have to feel overwhelmed. Working with a law firm accounting partner can help your firm be more effective and ensure that money isn’t left on the table. Implementing virtual accounting software will streamline operations and optimize efficiencies by minimizing errors, decreasing workload, and maintaining compliance.

Show notes:

List of approved software for Trust Safety Accounting
Trust account and client ledger form