Fundamentals of Trust Accounting

Featuring 2013 Updates

Kelly Dillon, CFEOffice of Chief Disciplinary Counsel

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Getting StartedWhat you should know.

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The checks should be clearly printed to indicate the account is a “trust account”.

If your bank will not deduct the cost of ordering checks from your operating account, you should be sure to include the cost of the checks on your bank charge ledger and reimburse the account accordingly.

First Step: Check Your Checks

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Looking for advice…

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Formal Opinion 128 (nonrefundable fees) –

Posted on May 19th, 2010The Advisory Committee of the Supreme Court of Missouri has issued a formal opinion concluding that attorneys may not enter into agreements for nonrefundable fees and that all fees must be placed in the attorney's

trust account until not subject to refund…

◦The funds of others.◦All advance fee deposits

What goes into the trust account?

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◦Personal funds◦Earned fees◦Big money generating big interest

What does NOT go into the account?

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Earned fees. Funds due clients and third parties. Payments for which funds are held.

What to disburse…

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Funds in which two or more people claim interest.

Funds not considered “good funds” by the bank.

What NOT to disburse…

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Keep your checkbooks in different locations. Remove your earned fees promptly. Reconcile your account monthly. Supervise your staff. Maintain your trust account records for 5

years. Keep copies of deposited items. Respond promptly to the OCDC.

The Do’s of Trust Accounting…

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Don’t pay your personal or office expenses from your trust account.

The Don’ts of Trust Accounting...

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Don’t make payments to yourself for earned fees unless you know your records are accurate.

Don’t hold your deposits. Don’t authorize clients to make deposits or

withdrawals from your account.

The Don’ts of Trust Accounting...

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General ledgers. Client and bank charge ledgers.

What makes an accounting system a good accounting system?

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TRUST LEDGER

Trust Acct.: Standard

Nancy White File No. DO-02-2008-0034[Client or person with interest in funds]

Date Description of Transaction Check # Funds Paid FundsRec’d

RunningBalance

2/18/08 Advance fee deposit 10,000.00 10,000.00

2/22/08 Filing fee 1999 100.00 9,900.00

3/3/08 Investigator 2001 960.00 8,940.00

3/7/08 Fee disbursement 2008 1,500.00 7,440.00

4/2/08 Investigator 2031 640.00 6,800.00

4/7/08 Fee disbursement 2040 1,500.00 5,300.00

5/7/08 Fee disbursement 2059 3,900.00 1,400.00

5/12/08 Court reporter (neighbor depo) 2062 800.00 600.00

5/15/08 Advance fee deposit 5,000.00 5,600.00

5/20/08 Court reporter (accountant depo) 2072 1,100.00 4,500.00

6/2/08 Advance fee deposit 5,000.00 9,500.00

6/7/08 Fee disbursement 2084 750.00 8,750.00

6/30/08 Court reporter (Husband’s depo) 2096 2,000.00 6,750.00

7/7/08 Fee disbursement 2110 6,000.00 750.00

7/20/08 Advance fee deposit 15,000.00 15,750.00

8/7/08 Fee disbursement 2131 3,600.00 12,150.00

9/7/08 Fee disbursement 2155 5,720.00 6,430.00

9/18/08 Refund of unearned fees 2170 6,430.00 0

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General ledgers. Client and bank charge ledgers. Billing records, settlement sheets, time

sheets, etc.

What makes an accounting system a good accounting system?

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Receipts and disbursement journals of deposits and withdrawals that include the date, source and description of each deposit, and the date payee and purpose for each disbursement.

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Rule 4-1.15(f)(1) through (11)

Ledger records for each account, including the source of all funds deposited, for who the funds are being held, amount of funds, descriptions for withdrawals, and names of persons or entities to whom funds are disbursed.

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Rule 4-1.15(f)(1) through (11)

Compensation agreements with clients, including documents such as fee agreements, engagement letters or retainer agreements.

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Rule 4-1.15(f)(1) through (11)

Accountings to clients or third persons.

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Rule 4-1.15(f)(1) through (11)

Bills to clients.

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Rule 4-1.15(f)(1) through (11)

Records showing disbursements to clients.

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Rule 4-1.15(f)(1) through (11)

Physical or electronic checkbook registers, bank statements, records of deposit, pre-numbered canceled checks, and substitute checks.

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Rule 4-1.15(f)(1) through (11)

Electronic transfer records that include name of the person authorizing the transfer, date of transfer, name of recipient, and confirmation from financial institution showing account number, date and time of transfer.

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Rule 4-1.15(f)(1) through (11)

Reconciliations.

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Rule 4-1.15(f)(1) through (11)

Portions of the client file reasonably related to the client trust account transactions.

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Rule 4-1.15(f)(1) through (11)

Records of credit card transactions, consistent with law and data security standards.

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Rule 4-1.15(f)(1) through (11)

General ledgers. Client and bank charge ledgers. Billing records, settlement sheets, time

sheets, etc. And….

What makes an accounting system a good accounting system?

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Three Four Way Reconciliation

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Minimum Four Way Reconciliation

Receipt & Disbursement Journal

aka: General Ledger

Client and Bank Charge Ledgers

Reconciled Bank Statement

Other Reasonably Related Documentation

Pursuant to Rule 4-1.15(f) & Comment [19]

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Ch-ch-Changes…~David Bowie

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The New Rules New organizational system:

◦Rule 4-1.145 – definitions for safekeeping property and IOLTA accounts;

◦Rule 4-1.15 – provisions for the safekeeping of property;

◦Rule 4-1.155 – provisions for maintaining IOLTA accounts; and

◦Rule 4-1.22 – provisions for file retention.

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New Rule 4-1.15 – Safekeeping Property (Continued) (a)(3) [NEW] – Only a lawyer admitted to practice

law in MO or under the direct supervision of the lawyer shall be authorized as a signatory or authorize transfers from client trust account. (See Comment [2] – “lawyer has a non-delegable duty to protect & preserve the funds in a client trust account and can be disciplined for failure to supervise subordinates who misappropriate client funds.” - See also Rule 4-5.3)

(a)(4) [NEW] Receipts shall be deposited intact and records of deposits shall be sufficiently detailed to identify each item. (See Comment [4] – No split deposits)

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New Rule 4-1.15 – Safekeeping Property (Continued) (a)(5) [NEW] Withdrawals shall be made only by

check payable to named payee, not to cash, or by authorized electronic transfer.

(a)(6) [NEW] Must wait a reasonable period of time for funds to actually be collected by the financial institution where the trust account is held, and cannot make a disbursement if the lawyer has a reasonable belief that the funds have not yet been collected by the financial institution. (See Comment [5])

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New Rule 4-1.15 – Safekeeping Property (Continued) (a)(7) [NEW] Reconciliation of the account

shall be performed in a reasonably prompt time each time an official statement from the financial institution is provided or available.

(b) Lawyer may only deposit his or her own funds in a client trust account for the purpose of paying bank service charges, and only in the amount necessary for that purpose. (See Comment 2)

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Recap of new points:

(a)(3) – Cannot delegate supervision; (a)(4) – No split deposits; (a)(5) – Withdrawals by check or electronically to named payee, not to Cash;

(a)(6) – Need to make sure “good funds”

(a)(7) – Regular reconciliations.

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Protection of the PublicAttorney Education

◦Suggest review of the Trust Account Handbook.

◦Recommend or require CLE attendance.◦Make suggestions for better accounting

practices.

Why mandatory overdraft reporting?

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Number of overdraft cases opened in 2010?

2011?2012?

Mandatory Overdraft Reporting

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◦ Bank error◦ Accounting error ◦ Failed to reconcile◦ Premature disbursement◦ Comingling or misuse◦ Misappropriation by Attorney◦ Other

Reasons for Overdraft

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Missouri Lawyer Trust Account Foundation◦Bank fees, rates, etc. ◦573-634-8117◦www.MOiolta.org

Missouri Legal Ethics Counsel◦Melinda Bentley◦573-638-2263◦www.MO-Legal-Ethics.org

IOLTA and Ethics

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Kelly Dillon573-635-7400Kelly.Dillon@Courts.MO.Gov

www.MoChiefCounsel.org