Trust accounting is a form of law firm accounting that manages client funds held in trust accounts. In the legal industry, trust accounting is governed by specific compliance rules based on jurisdiction and state bar requirements that attorneys must abide by. For example, client funds in trust accounts cannot commingle with money held in the law firm's general accounts. Additionally, any fees for storing trust account funds, like credit card processing fees, must be charged to the law firm, not the client funds.
Finally, law firms of all sizes are required to provide detailed records of trust accounts, including bank reconciliations.
Because the rules governing client funds and trust accounts are specific and complex, many legal professionals find it easier to use trust accounting software to help ethically manage these complex accounts.
However, generic small business accounting software, like QuickBooks Online, isn't equipped to manage these accounts while ensuring compliance with legal standards. As such, the use of these products can actually create more work for attorneys and other legal professionals since complex workarounds must be used to manage trust transactions.
Legal practice management software solutions that include trust accounting software allow law firms to handle firm financials and legal trust accounts with ease. CosmoLex’s legal trust accounting software was designed for trust accounts, with built-in features that ensure compliance with complex legal standards. Because CosmoLex’s legal accounting software integrates with its other functions, like practice management and billing, CosmoLex streamlines financial processes for firms, meeting law firms’ accounting needs while reducing syncing errors between programs or time spent performing duplicate data entry.
Here are the most common scenarios in which an attorney is responsible for a trust account:
- For funds received at the start of representation
- In connection with a payment from a settlement
- When the attorney is acting as a fiduciary agent on behalf of a client or their estate
Only certain types of funds can be placed into a trust account:
- Settlement funds, such as those obtained through a personal injury case
- Unearned income paid to the lawyer or their firm before services have been rendered (e.g., fees, cost advances, and retainers)
- Advances for costs that a law firm expects to incur associated with managing the case
- Judgment funds awarded by the court (like some settlement funds)
- Third-party funds, including those obtained from the sale of client property or chosen for payment to a third party for their services