One of the biggest challenges trust funds pose, though, is that they have very specific parameters. Law firms must be diligent in how they interact with and manage each trust account. There is a myriad of regulations and compliance requirements for trust accounts, and firms often find themselves with a clunky, inefficient, and frustrating trust accounting system.
It doesn’t have to be this way, though. There are numerous strategies to help your firm improve and streamline its trust accounting process, so everyone can breathe a bit easier.
Here are six ways to improve your firm’s trust accounting today:
1. Review your state’s requirements for trust accounting
Each state bar has rules and guidelines for trust accounting. Take some time to review your own state’s trust account requirements against your practices to find out if your law firm is doing what the state requires. This step is critical to lowering risk and liability for your firm. Any law practice found to mismanage trust accounts is at risk of disbarment, as well as legal action from your clients.
While trust account policies vary state by state, there are some commonalities. For example, every state bar association requires monthly or quarterly reconciliation for trust accounts. Many firms fulfill this requirement through three-way reconciliation, which compares your client ledgers, trust ledgers, and trust bank statements. The required reconciliation frequency will dictate your accounting schedule.
2. Keep trust funds separate from operating funds
Here is the golden rule of trust accounting: do not commingle your firm’s business and client accounts.
The American Bar Association requires that law firms keep any trust accounts separate from other client or corporate accounts. The money in a trust account is a form of prepayment for services rendered, but those funds still belong to your clients until you fulfill the payment terms. As such, funds in a trust account should not be reported as income.
Once your firm has completed your service agreement, any remaining funds in the trust account will be returned to the client. If there is any dispute about trust accounts, the state bar may require you to hold a certain amount of funds in your account until the issue is resolved.
3. Communicate your billing practices to clients clearly
Your clients come to you to protect their assets and interests. Transparent policies and clear communication support good long-term relationships with your clients and can assuage any confusion or misconceptions regarding trust accounting practices.
When you first start working with a client, prepare a list of frequently asked questions and billing procedures such as:
- Your firm’s billing practices, fees, and timeline
- How trust accounts work
- Why clients and law firms use trust accounts
- How trust accounts are secured at your firm, and the various protections in place for client funds
This is a great opportunity to educate clients, which will benefit your ongoing partnership in the long run. By providing user-friendly explanations of your billing practices and trust accounts to clients, all parties are on the same page about the processes in question. This establishes a foundation of trust for everyone.
4. Set up clear workflows and procedures for handling trust account funds
Practices for trust accounts need to be monitored for compliance purposes. Set clear workflows for handling trust accounts, such as when to withdraw funds and when to replenish retainers.
For example, it’s important to have proper agreements in place for the disbursement of trust funds. Without one, you could set up improper workflows. In turn, this could lead to you inadvertently withdrawing funds too early, causing you to breach your state bar’s regulations.
Trust accounting software can act as a safeguard against risky workflows. It can help law firms set up and track ongoing procedures and workflows for trust accounts. What’s more, it provides advanced reporting and easy-to-use dashboards that offer a bird’s eye view of your firm’s trust accounts.
5. Set up your trust accounting on a regular schedule
With so many moving parts, a regular trust accounting schedule will create a manageable system that your practice can follow throughout the year. Regularly scheduled reports and procedures ensure that your firm stays on top of any compliance regulations, no matter how busy your practice becomes.
For example, three-way reconciliations are required every month or quarter, depending on your state. Instead of running reconciliations ad-hoc whenever you remember to do so, firms can set up a regular schedule to review reports and run three-way reconciliations.
When you put a repeatable system in place, your firm can reduce the stress that may arise from last-minute accounting requirements. To further automate your trust accounting, consider using legal-specific trust accounting software for regular reporting and billing statements.
6. Use legal-specific tools that support workflows necessary for compliance
Manual reporting and tracking for trust accounts is an burdensome process for law firms that can take up too much time or fall victim to human error.
Accounting software tailored to legal practices can help law firms streamline their workflows and integrate their trust accounting practices into their law firm’s general accounting system. With the Tabs3 Trust Accounting Software, firms can:
- Track an unlimited number of trust accounts
- Execute three-way reconciliation for trust accounts
- Manage trust accounts from one system
- View dashboard summaries of account activity
- Engage in Positive Pay programs for your bank’s fraud prevention program
These system features take the guesswork out of trust accounts, so law firms can manage their clients’ funds easily and accurately.
Improve your trust accounting system with Tabs3 Software
Tabs3 Software offers a fully integrated suite of billing, accounting, and practice management tools designed to help law firms run more efficiently and profitably.
To see how Tabs3 Trust Accounting can help your law firm implement better billing and accounting practices, schedule a walkthrough demo or sign up for a free trial today.