The SmartBean® Guide to the Do's and Don'ts of Making Payments from Trust Accounts

Trust Account Bookkeeping
April 29, 2024

When attorneys are entrusted with funds for their clients, a multitude of responsibilities arise. This includes the crucial task of making necessary payments on behalf of a client using the withheld funds. However, just as with every part of the trust accounting process, from selecting an approved banking institution to opening the trust bank account or depositing the funds, there are guidelines for how attorneys may spend the funds. It is a fundamental understanding that attorneys may not use client funds to pay anything other than the client’s obligation, a principle that underpins the trust in the attorney-client relationship. 

SmartBean® doesn’t gatekeep, so here is what you need to know to remain in compliance when making payments from trust accounts. 

The Do’s of Trust Account Payments 

The first thing to know is what payments you can make from the trust bank account. This is a friendly reminder that only costs accrued by your clients may be paid with this money.

But which funds qualify? Mostly, the costs directly related to the case or matter for which they are seeking legal services. This can include court filing fees and deposition transcript costs. These expenses can also include the disbursement of funds from a settlement. 

Bank Charges 

Another payment to consider when managing client trust accounts is accrued bank charges. Regarding individual client trust bank accounts, bank charges are straightforward. All charges incurred are for the client that the account is held for.

The situation regarding IOLTAs (Interest on Lawyers Trust Accounts) is a little more complex.

Per Business and Professions Code section 6212(c), certain “reasonable fees” may be deducted from the interest remitted in an IOLTA account. Services charge fees may not include per-check and per-deposit charges, federal deposit insurance fees, and sweep fees. Note that the monthly fees can appear instead of the minimum balance, federal deposit, and other fees. 

The responsibility of paying typical expenses that accrue in the ordinary course of business and typical bank account usage, such as insufficient funds, collection charges, and check printing, does fall to attorneys. Since these fees mostly concern the account specifically, the attorney is responsible. This is why Rule 1.15(c) permits attorneys to keep a reasonably sufficient amount to cover bank charges and not commit a commingling violation—review Rule 1.15 for further clarification. 

The Don’ts of Trust Account Payments 

A friendly reminder from the accounting team SmartBean: No business, personal, or expenses of the attorney or law firm may be carried out with funds held in the client trust account. If the cost doesn’t directly relate to carrying out duties for an individual client, the payment is a no-go. Mishandling of client funds will be considered a violation by the California State Bar, with potentially serious consequences.

Additionally, money cannot be paid out of the client's trust bank account on behalf of a client if the client does not have sufficient funds in the account to cover those payments. 

What Happens to Disputed Fees? 

orange county bookkeeper making a payment to a trust account
Keeping disputed fees in the client's account is paramount in good trust account bookkeeping

Fees that a client is disputing must stay in the account. This is a standard concept of legal accounting.

However, it's so important that it’s going into its own section. Perhaps the most common fund dispute is between the client and a third party.

If the client and a third party cannot reach an agreement on the funds, further action may need to be taken. This can extend the amount of time before a matter is settled and the amount of time the funds are in an account. No matter what, these funds have to remain in the trust bank account until both parties have agreed upon a resolution.

The other scenario is that disputed fees can directly affect attorneys. Sometimes, clients will dispute the attorney’s pay, arguing that the fees have not been earned. Again, these funds will remain in the account until the dispute is settled. When an agreement is reached, it is not just a legal obligation, but an attorney's ethical duty to remove the fees from the account as soon as possible to avoid commingling.

Upholding these ethical obligations is a cornerstone of the legal profession and should be treated with the utmost seriousness. 

When Should You Make Trust Account Payments?

If funds are undisputed, attorneys must distribute the funds or property that a client or third party is entitled to receive promptly.

As of January 2023, Rule 1.15 (d)(7) changed the previous legislation that clients had to request fund distribution. If the lawyer and client have a written agreement, funds can remain in the trust account longer; however, if a lawyer fails to distribute undisputed funds or property within 45 days of the funds returning to an undisputed status (and without good cause). In that case, it will be considered a violation.

How to Make Trust Account Payments? 

Payments should always be made from the client's trust bank account using a check or wire transfer. Any other format must specify who the recipient and payer are. Funds shouldn’t be paid out in cash. This is because it’s nearly impossible to trace and keep track of–even if written in the account ledger. If you absolutely must do this, the attorney must also obtain a receipt. 

Who Makes the Trust Account Payments? 

Given the fiduciary nature of handling client funds, attorneys bear personal accountability for the money within their trust bank accounts. Therefore, it's highly risky to grant other individuals access. This applies to employees within a practice as well. The best practice is to limit access to trust accounts to as few individuals as possible.

This way, if client funds are misappropriated out of negligence or dishonesty, the responsibility for the financial loss and violation of the fiduciary responsibility to the client will fall on the attorney. Even if the misappropriation was done by someone else, it's best to have the attorney solely manage the client's funds and property. 

It's crucial for attorneys to grasp and adhere to the rules outlined in the new Rule 1.15 expansion and CTAPP. This understanding ensures the management of clients' funds without any trouble. While there is much to be mindful of, it's easier to navigate with assistance.

Trust Account Bookkeeping with SmartBean®

Do you have questions? Do you need to catch up on your CTAPP obligations? Our experienced bookkeeping team in Orange County is ready to help your practice comply with California’s new trust account bookkeeping requirements!

SmartBean® offers free consultations; call for yours today!

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