Important article from the March KPA Newsletter...
Client Trust Accounting: A Snapshot of What Lawyers Need to Know
Adam Kerns, J.D., C.P.A.
Many attorneys feign interest when dealing with anything involving numbers or calculations; however, all attorneys must follow a few basic principles when handling client money. Client trust accounting, defined as the actual accounting done by attorneys with regard to money held in trust (i.e. in an IOLTA), means more than simply depositing money into that IOLTA. Attorneys must keep detailed records and an up-to-date accounting of each client’s money held in trust.
The California Rule of Professional Conduct 4-100 does not lay out a detailed set of record keeping requirements, rather it simply requires that an attorney maintain sufficient records to enable a detailed accounting of all money being held in trust for a client at any given time. Whether or not you personally maintain the bookkeeping for the trust accounts or employ someone to do so, you remain personally liable, as the attorney, for any money held in trust.
What happens when the attorney receives money related to a client?
All money received from a client or on behalf of a client must be deposited into a trust account until the attorney completes a proper accounting of the money. If the attorney receives property, other than money, on behalf of a client, the attorney must label the property, identify the property in written records, and maintain the property in a safe location (e.g. safe deposit box). The trust account must be maintained in California unless the attorney receives consent in writing from the client to keep the money elsewhere. Attorneys should promptly notify clients upon receipt of money held in trust. No money belonging to the attorney or to the attorney’s law firm can ever be deposited into the trust account. No commingling is permitted.
What about the fees the attorney has earned that are part of the money held in trust?
The attorney must withdraw all fees from the trust account as they are earned, meaning as soon as the attorney’s interest in that portion of the money becomes fixed. However, the attorney cannot withdraw any fees if disputed by the client until the dispute has been resolved.
How long should attorneys keep records related to client trust accounting?
Attorneys must maintain a copy of all records related to client trust accounting for at least five years. Records must be maintained for all money, securities, and other property received from or on behalf of a client.
What types of records must the attorney maintain, at a minimum, under Rule 4-100?
The attorney must maintain a written client ledger for each client, detailing the inflow and outflow of money, and other property, held for the client. There must be a written journal of each trust account maintained by the attorney or the attorney’s law firm. A copy of all bank statements and monthly reconciliations must also be maintained for at least five years.
What money must the attorney put into the trust account?
An attorney must keep the following in the trust account: (1) money that belongs to the client; (2) money in which the attorney and the client have a joint interest; (3) money in which the client and a third party have a joint interest; and (4) money that doesn’t belong to the client but the attorney holds as part of the representation.
This article only provides a brief snapshot of the basic principles all attorneys must follow with regard to client trust accounting. For more information please visit the State Bar of California Website, http://calbar.ca.gov/state/calbar/calbar_home.jsp, click on "Attorney Resources" in the upper left-hand corner and then search under “Ethics Information” on the left-hand side.
About Adam Kerns
As the firm’s Controller, Adam brings almost a decade of experience working as an attorney, finance consultant, and certified public accountant to KPA. He obtained his J.D. from Temple University Beasley School of Law, and a B.S. in Accountancy, summa cum laude, from Villanova University. Adam is admitted to the State Bars of Pennsylvania and New Jersey, and is a Certified Public Accountant (inactive). He can be reached at akerns@kpalawyers.com.
Like this article? Read the rest of the March KPA Newsletter.
