Trust accounts are among the most complex aspects of running a law firm—and they can be especially intimidating for small firms because there are fewer people to bear the fiduciary responsibility.  

To add to the stress, compliance mistakes with trust or IOLTA accounts can lead to serious consequences, ranging from fines to disbarment.  

But you don’t have to let the complexities of trust accounting intimidate you. A great legal-specific practice management tool can ease the burden of compliance on your small law firm and help you tackle trust accounting with ease.

What is trust accounting? 

Trust accounts are dedicated bank accounts lawyers maintain on behalf of their clients. The only way a law firm can take money out of a trust account is if they have earned it. Since the accounts do not belong to the law firm, there are strict rules for how they must be handled.  

Trust accounting guidelines vary from one jurisdiction to another, but in general, small law firms must follow these three main rules. (Note that you should always contact your local bar association to get the most current rules of professional conduct.)

1. Never commingle or mix trust accounts with personal/professional funds

Because the money doesn’t belong to the law firm, funds contained in trust accounts cannot be used to cover anything other than that client’s matters. Money in trust accounts is still the property of the client, whose interests attorneys have a fiduciary duty to protect.  

Though it may be tempting as a temporary fix, firms may never use trust account funds to cover their own expenses or those of another client.

2. Always maintain a separate ledger for each individual trust account 

Trust accounting requires that attorneys keep detailed records for each individual account. They must track any income and expenses in each trust account’s ledger, and they need to be able to verify that the balance is accurate at all times. 

3. Regularly verify trust account balances with three-way reconciliation 

Three-way reconciliation means balancing the accounts between three different sources:  

1. Individual client accounts 
2. Law firm books 
3. Bank statements

The goal is to ascertain whether all the numbers line up. As a trust administrator, you’re obligated to perform these three-way trust account reconciliations regularly—typically, this is every 30–60 days, though this can vary depending on your state rules.  

How legal-specific accounting software supports compliant trust accounting 

While this may sound simple enough, handling trust accounting correctly can be challenging for small law firms.  

Many small law firms have a good grasp of their general business accounting processes, and frequently rely on accounting tools like QuickBooks to track income and expenses and maintain tax compliance with ease—but general accounting software typically doesn’t support trust accounting needs, at least without cumbersome and error-prone workarounds.  

Fortunately, your firm doesn’t have to stress over the legal and ethical pressures of trust accounting. With legal practice management tools like CosmoLex, small law firms can effortlessly maintain trust accounts for every client.  

There are three main reasons why every small firm should be using legal software for trust accounting: reducing compliance risks, minimizing administrative burdens, and streamlining workflows. 

1. Reduce compliance risk  

General accounting software doesn’t have built-in safeguards to prevent trust accounting mistakes. Unless you use these tools with extreme care, you could accidentally overdraft a client’s trust funds, or commingle the accounts. All of these mistakes can cost you your practice, reputation, and hard-earned income. 

Take heart: there are plenty of tools in legal practice management software that can prevent these common trust mistakes.  

For example, CosmoLex has built-in compliance features designed to give you peace of mind when managing client funds. The software can quickly run through ledgers and transactions to identify any errors and alert the user so that they can be addressed accordingly.  

2. Minimize administrative tasks

When you maintain trust accounts, you have a long list of administrative tasks you must complete just to manage your clients’ different trust accounts. From printing disbursement checks to tracking third-party lien claims, there’s no shortage of steps involved in properly managing those funds. 

With the right software, you can automate many of these tasks and reduce your non-billable hours.

CosmoLex has tools to help with:

• Managing individual client ledgers without mistakes 
• Processing individual or bulk invoice payments from trust funds 
• Transferring earned funds from trusts to firm accounts 
• Importing electronic bank statements 
• Generating comprehensive trust reports 

For small firms with limited resources, reducing the administrative workload for trust accounting can make a huge difference in how the firm operates. 

3. Streamline trust accounting processes 

Three-way reconciliations are one of the most important parts of maintaining a trust account. However, the process of carrying out the reconciliation can be incredibly time-consuming.  

For example, a firm must manually compare its trust account bank statement to its internal books and client ledger balances—and this step must be repeated for every trust account maintained by the firm, so it can take several hours to complete. Not to mention, it opens your firm up to human error.  

When you use legal practice management software with trust accounting tools, though, this process immediately becomes easier. The software can automatically run three-way reconciliations that are fast and error-proof. Best of all, it can also archive all of the reports to protect your firm against future audits.  

Make trust accounting worries a thing of the past

We know how stressful trust accounting can be for small law firms, but you don’t have to let that stop you from providing excellent service to your clients.  

With CosmoLex, it’s easier than ever to maintain trust accounts on behalf of your clients while maintaining strict compliance with the American Bar Association’s requirements. CosmoLex can transform the way you do business with other solutions like: 

• Legal billing software  
• Legal client relationship management software (CRM) 
• Business accounting for law firms 
• Professional law firm websites 

To see how CosmoLex can help your small law firm spend less time managing your practice and more time practicing law, sign up for a free trial or schedule a demo.