Guide for Law Firm Best Practices
Law firm trust accounting – or IOLTA trust accounting — is often presented as a complex maze, through which if you make the wrong turn, you will end up in legal purgatory or worse, lose your law license. It does not have to be this way.
On the flip side, law firm trust accounting can be the key to a profitable law practice. If you consistently maintain client funds in the trust account, you never have to chase a client for payment of legal fees. Invoice payment for legal services can be a breeze.
Here’s the rub: until now, trust accounting software for law firms has been, if not nightmarish, then at the very least, inadequate. LeanLaw software, with its deep integration into QuickBooks Online, has created an elegant way to setup and manage trust accounts on behalf of a client so that the legacy dread of disbursing trust funds evaporates. First, let’s get into the nitty gritty of trust accounting management in general.
What is Trust Accounting?
A law firm trust account is a bank account separate from the law firm funds, where client funds are kept (in an interest-bearing trust account) that have not yet been earned by the law firm. The funds in the trust account include:
- Client Retainers (money advanced by the client for future payment)
- Settlement Funds
- Advanced Costs
- Court Fees
These are called IOLTA accounts. IOLTA stands for “Interest on Lawyers’ Trust Accounts.” Once the earned fees require disbursements from the client trust account, funds are transferred from the trust to the operating account.
ABA (American Bar Association) rules of professional conduct outline the fiduciary responsibilities of the lawyer and they vary by state. What is essential is detailed recordkeeping and bank statements for every transaction and monthly reconciliations. Mishandling trust account funds can result in losing your law license. This is what turns off many law firms from accepting client retainers — that, and the (up to now) complex bookkeeping that maintaining a trust account requires.
That said, if you keep careful records and follow state bar rules, client trust accounts can exponentially increase your accounts receivable meaning, cash flow. When you bill your client, that’s when you transfer the funds from the trust to the law firm’s operating account. You can display the client trust account balance on the invoice to let them know where they stand.
Pro tip for invoice delivery — especially if it is electronically delivered: Provide a link for a trust deposit, should it dip below an agreed upon threshold. An overdraft in an IOLTA program can only slow everyone down.
Some law firms maintain one trust account, commingling all client money in one separate account. Other law practices create a trust account for each individual client. How you decide to setup your law practice’s trust account(s) will depend on:
- The amount of money deposited by each client
- The request of the client to keep it separate
- Fiduciary decisions made on a case by case basis.
Is Trust Accounting Difficult?
Trust accounting does not have to be difficult. The main difficulty arises out of accounting issues: is the data you’re looking at accurate in real time?
If you are looking at the trust account statement and the amount is say, $1000, but you don’t know that someone withdrew $50 over an hour ago, you’re not looking at real-time data. This matters because at this point, your accounts are out of balance. Reconciling two views of the same account is not a modern way of dealing with law firm accounting.
It doesn’t have to be this way.
When looking for software to manage your law firm accounting and specifically IOLTA trust accounting, the most important feature to look for is three-way reconciliation between the financial institution and the accounting software so that you have the comfort of knowing that the data you are looking at is in sync and accurate in real-time. Unlike other legal practice management software, you are always in sync.
In LeanLaw, the three entities of this sync include:
- Operating Account
- Trust Account
- QuickBooks Online
Since QuickBooks Online is the accounting software and the source of truth for the sync with LeanLaw, and since all of the accounts sync continuously and in real-time, you can be assured that the balance you are looking at is THE BALANCE. More on this at the end of the article.
What is the benefit of trust accounting?
The benefits of trust accounting far outweigh the perils. If you’re a lawyer, you are necessarily involved in the details of a matter. Less capable people than you have figured out trust accounting and you can, too.
Trust Accounting Increases Cash Flow
If the funds are already in the client trust account, you don’t have to worry about when your client will pay you. Accounts receivable will collect 100% of the payment, 100% of the time. All you have to do is transfer the amount owed from the trust account to the operating account. There is no catch! You must keep accurate records of all transactions, that’s it!
The downside of law firm trust accounting is that trust account rules are strict: if you don’t manage the accounts properly and commingle funds, you could lose your law license. While that is a serious consequence, if you have a proper bookkeeping workflow for the trust account records in your law office, you won’t have this issue.
The other downside of trust accounting is if you don’t have modern, automated accounting software. Without three-way sync, you will be doing a lot of manual labor reconciling the accounts before you can balance them — not worth your time when there is software that can do all of this for you in just a few clicks.
How to Simplify IOLTA Trust Accounting – With LeanLaw
LeanLaw is the premier legal app in the QuickBooks Online app store. LeanLaw customizes QuickBooks Online for law firms. You get the robust accounting foundation that QuickBooks provides and then the LeanLaw app creates a more friendly user experience for the law office.
The lawyers and law staff work in LeanLaw while the accounting folks work in QuickBooks. Everyone sees the same data in real time.
If you can provide modern, easy-to-use software for your law practice, they will use it more often and be grateful for the time savings. LeanLaw can provide profitability to your law practice by increasing cash flow / AR. And when the law staff uses software that delights them, it will boost morale and increase professional responsibility. A happy work environment is a productive and profitable work environment.