Oregon State Bar Bulletin January 2002

Managing Your Practice: Trust Accounting
Your license is on the line
By Carol Wilson

Failing to properly maintain your trust account is a surefire way to lose your license. Although trust accounting is not difficult, it intimidates many lawyers. Nevertheless, it is crucial to know how to set up and monitor your trust account. This column provides some basic tips and answers to frequently asked questions.

TRACK THE TRUST ACCOUNT
A trust account can be maintained manually. Lawyers used a manual system for years before the computer came into existence. However, many lawyers find it simpler to use a computerized accounting system. The options for computerized accounting systems include packages that incorporate time and billing as well as simpler computer programs that operate like a checkbook register. No matter which method is chosen, the lawyer should be able to tell at a glance how much money each client has in the trust account.

A manual system will have individual ledgers for each client. This allows for tracking each client's money separately. Computerized systems allow for sorting each client's record to a report for that client. Every transaction - deposits and withdrawals - should be recorded either on the paper ledger or in the computerized system.

It is not acceptable to just use the checkbook register to keep track of client funds. A client who has to wait for two weeks to find out what happened to the money paid to the lawyer, while the lawyer searches through the checkbook stubs or various pieces of paper, won't be very happy. Besides, it is a terribly time-consuming and inefficient way to try to sort out how much money was deposited on behalf of a client and how much was expended.

MANDATORY OVERDRAFT REPORTING
The mandatory overdraft reporting notice, which became effective March 15, 1994, requires banks that participate in the overdraft notification program to notify the bar when a trust account becomes overdrawn. It is also the lawyer's responsibility to promptly notify disciplinary counsel in writing of the overdraft and include a full explanation of the cause of the overdraft. DR 9-102 (E).

Lawyers may not use financial institutions that do not participate in the overdraft notification program for their trust accounts. Also, lawyers may not put some of their own money into the trust account to act as a cushion to avoid an overdraft. Lawyers are allowed to put their own money into the trust account to cover bank charges such as check printing fees, stop payment charges or endorsement stamp costs.

CANNOT USE TRUST MONEY FOR PERSONAL MATTERS
Lawyers cannot pay their personal bills from trust. If a client owes the lawyer $500 and rent of $500 is due on the office, the lawyer cannot write a check from the client's trust money to the landlord. The $500 must be paid to the general or office account for fees, and the lawyer may then write a check for the rent. If the lawyer's trust account is ever audited or the client requests an accounting of the money in trust, there would be many questions as to why the client's money was used to pay the rent.

Lawyers are also prohibited from borrowing money from the trust account. Trust account funds are client funds, and borrowing them is a basis for discipline. Some lawyers still think that if they pay back money they 'borrow' from the trust account it won't hurt anybody. This is just borrowing trouble.

DON'T LEAVE PERSONAL FUNDS IN TRUST
Always have an office or business account that is separate from the trust account. Once the money in trust has been earned, it must be removed from the trust account. Earned money left in the trust account becomes co- mingled funds. Some lawyers may feel that if the money isn't needed immediately, then it is okay to leave it in trust until it is needed to either pay office expenses or pay the lawyer's salary. If the money has been earned but the lawyer doesn't want it to go into the office account at this point, a money market or other interest bearing general account can be opened for these funds.

In recent years, the Internal Revenue Service has been particularly interested in looking at lawyers' trust accounts. The IRS is looking for funds that have been earned and left in the account until after the current tax year to avoid paying taxes on earned income.

If the lawyer is acting as the treasurer of an organization, those funds need to go into a completely separate bank account. The lawyer may rationalize that the money is being held for others and therefore should be in the trust account. This money, however, is not client money. Only money belonging in whole or in part to a client can go in the lawyer trust account. DR 9-101 (2).

DO NOT DELEGATE RESPONSIBILITY
The lawyer who delegates all responsibility to a staff person for the trust account (or even the business account for that matter) is asking for trouble. The staff person may seem to be the most honest person in the world, but if the staff person is facing a money crisis and no one is checking the staff person's actions, it becomes too easy to dip into the lawyer's accounts. The lawyer must remain involved in the maintenance of both the office and trust accounts. Payments from the office should be checked against invoices. Numbered receipts should be written for all cash payments from clients. Instruct clients to ask for these receipts.

Each month the bank statements should be delivered to the lawyer unopened. It is the lawyer's responsibility to review the bank statements and all the canceled checks to be sure there is nothing untoward going on with the accounts. The accounts need to be reconciled on a monthly basis. Failure to reconcile the accounts monthly may result in errors going unnoticed and uncorrected. When a staff person knows no one is paying attention to what is going on with the accounts, that staff person may see it as an opportunity to embezzle.

It is your license that is on the line. Don't be asleep at the wheel. Pay attention to your accounts and properly supervise non-lawyer staff who are handling the account entries and writing checks.

For additional story Answers to Frequently Asked Trust Account Questions.

Protecting yourself and clients from embezzling
Lawyers interested in learning more about protecting their money and their clients' money are invited to attend the PLF's CLE event, 'Don't Be Blindsided - Protect Your Money and Your Clients' Money from Embezzlement,' which will be presented Friday, Jan. 11, at the Portland Hilton Hotel from 9 a.m.-noon.

This event will be replayed around the state on later dates.

For more information, contact Karen Neese at the PLF, (503) 639-6911 or (800) 452-1639.

ABOUT THE AUTHOR
Carol Wilson is a practice management adviser at the OSB Professional Liability Fund. A comprehensive list of frequently asked questions about trust accounts can be found online at www.osbar.org at this issue of the Bulletin.

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