Accounting Services for Attorneys, Standard Work, Retainers and Trust Accounts
Providing bookkeeping services to attorneys requires a solid understanding of how retainers work in the context of attorney trust accounts. Certain types of work that law firms do only require standard bookkeeping processes. However, when it comes to retainers, often associated with litigation, domestic (divorce, dissolution, custody) indeed anything where the amount of time needed is long term and not certain, there are strict rules as to how that retainer money is handled.
Attorney trust accounts can be handled with standard bookkeeping software such as QuickBooks. However, most law firms will make use of specific software that helps them manage the process of keeping track of work done and appropriate billing from trust accounts.
At Columbus Bookkeeping & Accounting Services we have over 15 years of experience in dealing with attorney trust accounting.
Trust Accounting in a Nutshell
Attorney trust accounting is where a retainer is deposited into a trust account. The attorney then draws off those funds as they actually do the work promised to the client paying the retainer.
Where Attorney Trust Accounting Goes Wrong
It is easy for an attorney to become unstuck when the bookkeeper is not diligent in managing the trust account. For example, making sure any funds removed from the trust account do not exceed the amount of a specific client’s retainer. This is an easy and common mistake to make.
There are lots of rules around the management of trust accounts. It is vital to have a bookkeeper who has a solid understanding of the States attorney trust account rules.
Attorney Trust Accounts – A Discussion – How They Work
Speaker 1 (00:00):
So the purpose of this call is to discuss if you are doing bookkeeping or accounting, what you have to do in an attorney’s practice can be different to the kinds of things that you do in other types of businesses, such as contractors and e-commerce stores and so on. Right? Are we all on the same page on that?
Speaker 2 (00:28):
Speaker 1 (00:29):
And following our last conversation, for the sake of our discussion, we’re using the term bookkeeping to denote day-to-day tracking of costs and charges and things that go in the books. And we are talking about accounting as being a more analytical aspect of making sure that ARE things going in the right places and ARE things being done in the best way for the business, right? So just to get those so we don’t circle around on those two definitions again. So we, we all good with that? Mm-hmm.
Speaker 2 (01:03):
Speaker 1 (01:04):
Awesome. Okay. So if I understand this document you’ve put together, Linda, you’ve focused on one aspect of the work that an attorney does, specifically drilling in on Trust work, which is not something necessarily every attorney does because it’s like Andy Incorporation Attorney, he sets businesses up, which would’ve nothing to do with Trust.
Speaker 3 (01:30):
No, it’s, you’re, you’re missing, am I missing? Yes, it’s not, it’s when a client pays the lawyer a retainer, that money has to go into a Trust and that’s what it’s talking about. Um, IOLTA talks about the co-mingling of funds. So if one client gives him $4,000, another client gives him $2,000, another client gives him $7,000, rather than opening an account for each of them, he can put it into one account and it’s a Trust account that he’s putting it into. So it’s not a Trust like our joint revocable Trust, which is a different kind. This is a Trust banking account is a good way of putting it, I guess.
Speaker 1 (02:09):
Is that how you are seeing it as well, Linda?
Speaker 2 (02:12):
Yeah, I was just waiting for you to finish and I was gonna correct you on that. It’s, it’s not that they’re working on a Trust as a type of document or some legal matter, it’s the Trust account is a, a type of bank account.
Speaker 3 (02:28):
Speaker 1 (02:29):
Well, um, Son, I’m glad you are here. So, okay, so I have some immediate questions just to make sure we’re clear on what it is we’re talking about. What you seem to be saying is that when an attorney Uhhuh <affirmative>, that client is gonna pay him some money. So he has to open a separate Trust for every single client?
Speaker 3 (02:46):
No, that’s where the joint part comes in. So he can have one bank account called the Trust and for every client, that can go into that one account. The, the reason this I also think came up because back at the end of the seventies, no checking account got interest. So the government opened up checking accounts to be able to pay interest, but the legalities came with, well what does a lawyer do when he’s got an account with all these p different people’s funds in it? Who gets the interest on that? So IOLTA was created so that when you have an account with lots of different clients money in it, it can earn interest, but IOLTA gets the money and it goes off to pay for charities. Right.
Speaker 1 (03:30):
Uh, well again, so this is something that I’m fundamentally not understanding. So Linda, do you, do you agree with that? With what Sonja’s saying there?
Speaker 2 (03:38):
Yeah, that’s correct. There are two types of Trust accounts. One is an IOLTA and then the other one is just an attorney’s Trust account and that doesn’t incur interest. You don’t get interest. That’s, that’s a non-interest-bearing Trust account for an attorney.
Speaker 1 (03:54):
So I’m clearly missing something fundamental here because I’m not understanding why is it, if a client pays an attorney to do some work for them, it goes in a Trust. But if a client asks us to do some marketing work for them, it just goes in our bank account. Okay. So how is it different?
Speaker 3 (04:13):
How is it different? The, the problem is a lawyer cannot get paid until the work is done, right? And it’s gotta be actually proved to have been done. But you always pay an attorney up front, you give them a retainer, right? So that means that you give them $3,000, they then do four hours worth of work at a hundred dollars an hour, it’s $400. So they can’t just go into that account and pull it out. They’ve gotta send off documents to the client. The client’s gotta say, yes, I will pay that. They can then take the $400 out of the account. So the reason there’s so many rules around it is because there’s a lot of clients’ money in that one pot, and sometimes some lawyers will owe money, they’ll owe a big amount of money for whatever, I don’t know, maybe they need it to do the roof on the building they own, but they, they can’t just decide, okay, you are gonna owe me $4,000, therefore I’m gonna take that $4,000 out of that pot because he hasn’t earned all of that $4,000 yet. So that’s some of the rules and the, and the that surround how you can take money out of that account.
Speaker 1 (05:24):
Linda, do you wanna add anything to that?
Speaker 2 (05:26):
Well, it’s similar, this, this might help you for the analogy. When you have a contractor, like the California contractor that I work with, he, he goes out and he does this, this construction work in homes. Well, because the, that is such a large amount of money and you have all these materials he has to buy up front, he collects a 50% down payment from a client. And the same situation there with, uh, with the construction is that you don’t want that to go into your income. You haven’t earned it yet and you don’t have any billing to go against that for your expenses. So that basically doesn’t sit on your financial statements as income until you, you start to earn that money and you start that project and you start doing the work. It’s similar for an attorney in that they want to collect that money up upfront from a client because they could be working on something, a legal matter that’s gonna be $5,000 or $6,000 for all the work they’re doing.
Speaker 2 (06:31):
They want money up front too. So when they take that money upfront, the difference in a construction company and an attorney is the American Bar Association has strict rules for attorneys collecting money upfront than they do for a construction company collecting money upfront. The American Bar Association says you need to put that money in the trust and we have set guidelines of what you can do with that money and how that money is handled and when and how you can take that out of the trust account and put it into your regular bank account and consider that to be income.
Speaker 3 (07:11):
Speaker 2 (07:12):
Does that make a little more sense?
Speaker 1 (07:15):
Yeah. So what you’re saying then is that attorneys are treated very differently from a different type of business in terms of when they get paid, they can’t make use of that money that they, they get paid until at some point in the future when there’s a, some kind of definition around the work being completed.
Speaker 3 (07:34):
Yeah. So what, when they’ve done certain billable hours and they can create an invoice saying, I have done four hours worth of work, for instance. And if the client says, yes, well right, we’ll pay that then, then they can draw the money and put it into their operating. But they can’t just take the money out of, so this is like one of the laws, right? So the, the money, the money’s in this trust account commingled, they’re owed $400. The client’s saying yes, you can have $400, but they can’t just go in and say, okay, we’re gonna take up $400 in cash, it’s gotta be transferred to their business banking account, the firm’s business banking account. Then it can be sent off to be paid for a bill or something. So the rules are really strict. They can’t even just take it and use it. It’s got go the show, it went into their operation.
Speaker 1 (08:21):
So it’s not that all the work has to be completed. No. It’s that what they’re charging for has to be shown to have been done. Right. It could be an hour of work. Yes. So they charge out front for an hour of work, whatever the $300 bucks or $400 bucks, whatever they
Speaker 3 (08:36):
Charge happy with that.
Speaker 1 (08:37):
Yeah. And then they say, okay, well we’ve done the hour of work, they can now draw that money. Right. Is that Linda, anything to add to that?
Speaker 2 (08:44):
Right. And then, you know, you have to invoice the client, you have to show them what they, they have in retainer funds and then show the work that you’ve done. You itemized on the description what you did. I had a two-hour meeting with you and that was at, you know, $200 an hour. So that’s $400 and that’s their invoices for $400. If they’re okay with that, then you can take the $400 from their retainer.
Speaker 1 (09:11):
So what you are saying then is that the client actually has to approve the money being taken from that trust before they can remove it. There’s actually an approval process?
Speaker 3 (09:22):
Yeah. They say the bill can be paid. They don’t know. I mean, as a client you don’t know the money’s in this commingled trust account. All they know is I’ve paid you, I’ve given you a $6,000, $7,000 retainer. So, um, yes, you can use part of the retainer to pay this bill. Basically, that’s,
Speaker 1 (09:39):
So if you were an attorney and you, you charge somebody $400 bucks for an hour’s work and you said, yeah, I’ve done the four hours work. I, I I read, I, I went online, I did some research, they then send an email to the client and the client doesn’t reply. They can’t take the money out the Trust?
Speaker 3 (09:57):
Right. Right. Yes. They have to have
Speaker 1 (09:59):
Is that accurate, Linda?
Speaker 2 (10:01):
Yeah, you’re, you’re not supposed to take the money out of the trust if you’ve invoiced the client and they don’t respond to you that it’s Okay.
Speaker 1 (10:08):
That’s interesting cuz clients are often unresponsive. Right,
Speaker 3 (10:12):
Right. Do you know what I was reading about this? And it’s like 80, um, um, lawyers get 80, I think it’s like 84 or 86 something some strange number, 80 something percent of their money that they’re owed. They never get the hundred percent. They’re all So where is the shorted? Well they’re shorted. They, they, they cut, the client either doesn’t pay it or they only gave like $6,000, but the whole thing costs 6,500. And so they do the last invoice, but then the guy never pays for the, for the last amount. And that’s amazing how much, and some of it is done because the bookkeeping is not done properly. So they don’t do the invoicing properly or they don’t track what’s in the account properly. So, but yeah, lawyers are frequently shorted. Yeah,
Speaker 1 (10:58):
Speaker 2 (10:58):
Well the biggest problem with the 86% is all they collect is because just like an employee has to send their timesheet into their employer, these are my hours for last week. And that’s, that’s how you know what you’re gonna pay them for hours this week. Attorneys have to do the same thing. They have to keep track of that billing. They have to keep track of everything they’re working on when they’re working on it, how long they worked on it. You know, they could be sitting at their desk and working on two or three clients. They have to keep very diligent records on, okay, I I spent half an hour on this client and then I switched and started working on this client. They, they have to keep track of those billable hours. That’s the only way an attorney gets paid is through, especially if they’ve taken a retainer. They have to keep track of those billable hours and they don’t do a, a very good job with that. So then the money is sitting in there in the retainer. They’ve done the work, but they forgot to, to track that. They worked on Joe Smith’s matter for, for an hour and a half last week. They, they forgot that they did that and they didn’t turn that in. So the client, they didn’t tell the bookkeeper to invoice the client. So the client’s not invoiced the hour and a half just goes by the wayside.
Speaker 1 (12:19):
Presumably it’d be very easy though to just say, yeah, I spent an hour and a half on research!
Speaker 3 (12:24):
Did you watch, I think it’s the movie Jerry McGuire and they said you bill ’em for even if you’re just thinking about it, you bill ’em for it <laugh>. Yeah, well
Speaker 1 (12:33):
Yeah, I mean it would seem to me very easy to retrofit it because you would just say, yeah, I worked an hour and a half.
Speaker 3 (12:39):
Yeah, but they don’t,
Speaker 1 (12:40):
How would anybody
Speaker 3 (12:40):
Know? Yeah, they just, yeah, well they don’t because they’re lawyers and they’ve got a, a fiduciary responsibility to not make shit up <laugh>.
Speaker 2 (12:49):
Right, right. But they do have to keep track of that stuff and they’re, and I do know working with those two attorneys, they are very busy and trying to get billing from them was just like pulling teeth.
Speaker 1 (13:03):
Did you ever address it retrospectively? Like I just suggested where they say, look, you’ve got an hour and a half gap in they, and they just say, yeah, I was working on it then
Speaker 2 (13:12):
I don’t get like a time sheet of what they did, you know, eight hours every day and there’s, okay, you’ve got a gap in here, what was you, what were you working on?
Speaker 1 (13:19):
There’s no way to actually know one way or the other. Cuz you can’t, I assume unless I’m, unless I’m missing something, you can’t actually check to see whether they actually did that or not. It’s just what they said they did.
Speaker 2 (13:33):
Speaker 1 (13:34):
So it’s an interesting system that’s geared to filling stuff in. Well that
Speaker 3 (13:38):
Was what Kerry McGuire was all about wasn’t, yeah. Yeah.
Speaker 1 (13:42):
Alright, so then in summary then in our business we charge our clients upfront. So we charge them at the beginning of the month and then we do work for them during the course of the month. But there’s no law that requires us to justify exactly what we did or on a, on a time basis before we can realize those funds. But an attorney’s practice is subject to different laws. So if I understood all that correctly
Speaker 2 (14:10):
Yeah, that’s correct.
Speaker 1 (14:12):
Wow. I never knew that
Speaker 2 (14:15):
<laugh>, now that’s not for all of their legal work. That’s only for things that they take retainers on.
Speaker 3 (14:21):
Yeah, that’s basically the Trust part of it.
Speaker 1 (14:25):
Alright, so can you, can you clarify for me when you use the word retainer, the context on that, when does it apply and when doesn’t that apply? Can you be any more specific on that?
Speaker 2 (14:36):
So lawyer, it would apply, like let’s say for instance you were gonna have a trust done Trusts are pretty involved and they’re, it’s a lot of time for the attorney to work on that. So a lot maybe for a Trust they would do that, uh, for a, a divorce because that that can go for months and months and months and especially if they had children. Those are domestic matters. Those are, those are pretty lengthy and you wouldn’t even know what to charge for that. You would just have to do retainers and as the retainer was gone you’d get another retainer. Uh, if you had an attorney that did criminal things, similar situation, you wouldn’t know where that was gonna end up. You’d need a retainer, those kind of things. If you sued a doctor, a lawsuit type of thing where you were gonna get a settlement, that would be another one you’d, you would have to use the Trust account for.
Speaker 1 (15:31):
So this sounds like it’s very geared to litigation-type activity where you are paying a lawyer retainer to represent you in some way and you know, there’s a whole range of activities that go into that from the point of view of research, uh, creating documents through to ultimately possibly go into some kind of court proceedings.
Speaker 3 (15:53):
Yeah. Rachel, when Rachel got divorced she had to have a retainer. She gave her him, I can’t remember how much it was, a couple of grand for grand, something like that before he would even start to work on the case cuz they don’t wanna wait until the end because they finally got you, you’re divorced and then you’re like, yeah, sorry I got no money. Now <laugh>, what are you gonna do? Yeah, certain things they want the money up upfront. Now they can’t take the money. No, they can’t use it. It’s gotta go into Trust and they can only use it as they earn it. But yeah,
Speaker 2 (16:23):
Let’s say you were going in and you were just gonna have wills prepared. You would sit down and meet with the attorney and you know, give them all the information and everything. They would prepare those documents and then when you came in to sign you would pay, they have done work prior to that. So if you never come in and sign, they’ve kind of lost out, but they don’t take retainers for things like that. But then when you come in to sign, if you want your documents yeah, then then you have to pay at the time that you sign your documents and you get your will and your power returning, stuff like that.
Speaker 3 (16:54):
We got our wills. We never actually saw the lawyer. Everything was done online, but we got drafts and we were not gonna be able to get the final document until we’d paid for the will and that.
Speaker 1 (17:07):
So if a CPA firm does work for a client, do they have to do the same thing or are the rules different for a CPA firm?
Speaker 2 (17:19):
I don’t believe so. The only entity type that I know of that has such strict rules is for attorneys and that’s, that’s made up from the American Bar Association that says this is how it has to be.
Speaker 1 (17:35):
Right. Okay. Well that’s a, that’s an interesting learning exercise for me. I never knew that. Mm-hmm <affirmative>. Alright, so having established that, that the attorneys are subject to quite different rules where the money for a retainer for work that they do do goes into a Trust and then they essentially draw it off as they do the work, providing the client approves that that money is drawn. Right. I’ve summarized that correctly. Yeah.
Speaker 2 (18:00):
Speaker 1 (18:01):
Right. Awesome. Linda’s experience is great because her experience is based on actually working in an attorney practice. Right, right Linda?
Speaker 2 (18:11):
Yeah, and the difference was he was just, you know, one attorney and then well then there was a second attorney, so it was kind of a sole proprietor business. But if you’ve gotten into some of maybe the bigger law firms, they would have accounting departments. This person would have a bookkeeper that did the bookkeeping and somebody else does payables. A larger firm would probably be more apt to have an outsourced person.
Speaker 1 (18:39):
In the work that you did for the attorney, what type of an attorney were they? What sort of work did they do? Typically
Speaker 2 (18:48):
The attorney that I worked with did probate. He did probate matters and then the other attorney, she did domestic work, which was child custody, divorces, you know, things like that. She, she did domestics, so I got to see both sides of that.
Speaker 1 (19:05):
Was it like litigation or was it something different to that? Was it somebody trying to get custody of their child? What specifically, what type of work specifically was it?
Speaker 2 (19:17):
Domestic is like if you wanna get a divorce, a disillusion, you’re fighting for custody. Litigation is like if you’re gonna sue somebody, that’s a different kind of practice altogether.
Speaker 1 (19:30):
The whole process of getting a divorce, she’s helping a client through right the way through to litigation over something that’s contested. Have I understood it correctly?
Speaker 2 (19:41):
Yes. She’s helping a client get her divorce if it’s contested or whatever, or through child support, all of that.
Speaker 1 (19:50):
Right. What’s probate, help me understand what type of work that is.
Speaker 2 (19:55):
Probate is is like guardianships. If your parent is no longer able to make decisions for themselves, then you have to get a legal guardianship for, for someone that’s not competent any longer. Or probate is also estates, someone passes away and you have to open up the estate and manage all of the estate process through to the end.
Speaker 1 (20:19):
Between the two of them then it’s quite a diverse range of different types of activities.
Speaker 2 (20:24):
Yeah, because John did basically the attorney that I was hired by, he did probate, so he did all of that type of work and then when Erin came on board, she did the domestic, which was completely different type of legal matters.
Speaker 1 (20:42):
Okay. So from a bookkeeping point of view, was the work that had to be done different for the two different types of work?
Speaker 2 (20:52):
Yeah, yeah. In terms of bookkeeping, the probate really didn’t have too much in the way of retainers, which had to go into the trust accounts, those type of things usually just paid for at the time. And then on estates you are paid when the estate is complete. You don’t take retainers on estates either. Probate matters, you don’t, you don’t do retainers for on domestic, almost all of the domestic was all retainer based on the probate side, it would be very similar to just the regular bookkeeping you would do for anyone else. You just do the work, whatever it is, but the work is prepared and then you, you invoice the client, um, you know, along with their documents when they come in to sign, they pay their invoice and then you just receive the payment and put the money in the bank. So that’s very similar to just regular bookkeeping processes.
Speaker 2 (21:51):
You invoice a client, you receive the money, that’s that, you know, those transactions are the same when it comes to domestic, that that is where it’s very different. You may receive that retainer, but then you have to set up clients. So you’ve got a client kind of like a construction company has a jobs, you have customers and then you have jobs. So you would set up that same thing a customer and then their, their job would be their matter. What matter is it because you could have that same client come in and they could be coming in for a divorce one time and then that same client come back to you for now I wanna go for child custody or, and it’s a completely different matter with a different case number. So you would have to set that up. Secondly, when they do the retainer, you would have to take that money in it, in the retainer and, and put that into QuickBooks. It goes in a different way because it’s a client retainer. Then the billing, the attorney has to give you this detailed billing and then you apply that billing to their retainer. You create that invoice and then you send the invoice out to the client and then you record that against their retainer and then you take the money out of the IOLTA account and put it into the regular account. So it’s, it’s just a lot more steps.
Speaker 1 (23:18):
Okay. In this conversation you are talking about QuickBooks, which means, in my mind what you’re saying is an attorney for managing their business is just as likely to use QuickBooks. It’s just as appropriate for for them for bookkeeping as for any other type of client.
Speaker 2 (23:39):
Speaker 1 (23:41):
Um, is there any specific functions in QuickBooks that would be specific to an attorney or is QuickBooks more sort of just generic and anybody can use it for anything?
Speaker 2 (23:53):
QuickBooks is pretty generic and, and any type of business can use it for their accounting purposes. Most attorneys will use a legal software though. They will use legal software because, because they have clients and they have matters. It’s just so much more involved when you start getting into clients and their documents and all this kind of stuff. So it’s an easier way to manage your clients to use a legal software to manage your clients. And they’ll usually pick one that will then integrate with QuickBooks for some of the accounting part of it. But then, ah, there’s some legal software that also has the accounting built into it.
Speaker 1 (24:39):
Right. So you’re saying sometimes they won’t use QuickBooks, they’ll use some a specific legal software that will include the accounting. So QuickBooks is not needed.
Speaker 2 (24:48):
Speaker 1 (24:49):
Right. And but sometimes it is and it will integrate with it.
Speaker 2 (24:52):
Mm-hmm <affirmative>, well there’s one that I had used which was called Abacus. Well, there is one other thing that’s kind of a pitfall when it comes to that Trust account. That is a huge problem for attorneys if they don’t have a bookkeeper that’s keeping track of that Trust account when they’re, when they’re entering these transactions, is that, let’s say a client gives you $5,000 retainer and now you’ve billed them, you’ve got $3,500 and then now you’ve got another $2,700. Well, if you go ahead and just take the $2,700 out of there, if that’s more than what that client had in retainer funds. So what you’ve essentially done by doing that, just taken that from, from the Trust account and not paying attention to how much they had and their current balance. Uh, now what you’ve done is you’ve taken funds that belong to another client.
Speaker 3 (25:51):
Yeah, that’s what I was alluding to at the beginning. When you know, you gotta be really careful to make sure you track what comes out so you don’t take…
Speaker 1 (25:58):
Yeah. And the the consequence of that is?
Speaker 2 (26:00):
Is pretty, pretty rotten for the attorney. I mean, yeah, I mean that’s serious for the attorney because you’ve taken funds from another client that didn’t belong to you. First of all, you haven’t earned it and second it wasn’t even, it wasn’t even their funds. You, you took another client’s funds and paid yourself for another client because you didn’t track your, your account.
Speaker 1 (26:23):
Yeah. So you’ve basically gotta make sure that you only take out, um, that which is directly funded by the client.
Speaker 2 (26:30):
Mm-hmm. <affirmative>. Yeah. You definitely have to keep track of those, those funds what a, a client has in there for retainer funds. You’ve gotta pay attention to that before you go writing a check out of the, the IOLTA account because you can just go in QuickBooks and create a check. Okay, I just invoiced this client for $2,700. Okay. And they’re, they’re okay with with paying that. So okay, I’m just gonna go create a check and print it off in from QuickBooks and have the attorney sign it. I’m gonna go deposit that. That’s great. We need money this week. Not realizing if you went and looked at you needed to look and see what that client had in funds left. They may not have $2,700 left, but it doesn’t prevent the bookkeeper from going in and creating a check for $2,700 for that client out of the Trust account because the Trust account does have $2,700 in it. Doesn’t mean it belongs to that client, but there is $2,700 in that account.
Speaker 1 (27:33):
An attorney has unique challenges with their bookkeeping. These are the kind of challenges they have. This is something we’re experienced in doing work with a bookkeeper that understands the unique challenges of an attorney.
Speaker 2 (27:46):
You know, I do have that experience and I mean I worked with him for 15 years, so I’ve had experience with legal work.
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