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Trust Accounting Technology for Law Firms

Law firms are required to hold money in trust. This money is not their own, so they have a fiduciary responsibility to protect and account for it.

A lawyer’s responsibility to hold client funds separate from their own seems simple in principle, but with strict rules surrounding trust accounts, many lawyers run into challenges with maintaining them correctly. From documenting deposits and disbursements to handling varied payment methods by clients, trust accounting remains a compliance minefield for law firms.

Is your law firm at risk of committing trust account errors?

Learn how to avoid trust account mistakes while improving your firm’s billing process during Clio’s one-hour webinar. In this presentation you’ll learn:

The rules for managing trust accounts
Differences between general bookkeeping & legal accounting
How to reconcile trust accounts
How Clio’s newest trust accounting features can help

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Trust Accounting Technology for Law Firms

  1. 1. #ClioWeb Trust Accounting Technology for Law Firms JoshuaLenon Lawyerin Residence Clio
  2. 2. #ClioWeb Instructors Joshua Lenon • Lawyer in Residence at Clio • Attorney Admitted in New York • @JoshuaLenon
  3. 3. #ClioWeb Agenda • Rules for managing trust accounts – 20minutes • General bookkeeping vs legal accounting – 10minutes • Reconcile trust accounts – 10 minutes • Clio’s trust accounting features – 10 minutes • Questions – 10 minutes
  4. 4. #ClioWeb RULES FOR MANAGING TRUSTACCOUNTS
  5. 5. #ClioWeb Rule 1.15:SafekeepingProperty (a) A lawyershallhold property ofclientsor third personsthatis in a lawyer'spossessioninconnectionwitharepresentationseparate fromthe lawyer'sownproperty. Fundsshallbe kept in a separate account maintainedinthe state where the lawyer'soffice issituated, orelsewhere withthe consentofthe client or third person. Otherproperty shallbe identifiedas such andappropriately safeguarded.Completerecordsof such accountfunds andotherproperty shall be kept by the lawyerand shall be preservedforaperiod of[five years]afterterminationofthe representation.
  6. 6. #ClioWeb Key Concepts in Client Trust Accounting • Separate Clientsare Separate Accounts • YouCan’tSpendWhatYouDon’tHave • There’sNo SuchThing as a Negative Balance • Timing Is Everything • YouCan’tPlay the Game UnlessYouKnowthe Score • The FinalScore is AlwaysZero • AlwaysMaintainanAuditTrail Lawyer’s Trust Account Handbook, The North Carolina State Bar, Revised 12/2014
  7. 7. #ClioWeb Separate Clients are Separate Accounts
  8. 8. #ClioWeb D. 27 N.C.A.C.1D, Rule .1316,IOLTA Accounts Pursuantto orderofthe North CarolinaSupremeCourt, every generaltrust account, as definedin the Rules ofProfessional Conduct, must be an interestor dividend-bearingaccount.
  9. 9. #ClioWeb You Can’t Spend What You Don’t Have
  10. 10. #ClioWeb There's No Such Thing as a “Negative Balance”
  11. 11. #ClioWeb Timing Is Everything
  12. 12. #ClioWeb You Can't Play the Game Unless You Know the Score
  13. 13. #ClioWeb The Final Score Is Always Zero
  14. 14. #ClioWeb Always Maintain an Audit Trail
  15. 15. #ClioWeb Rule 1.15:SafekeepingProperty (b) A lawyer may depositthe lawyer'sown funds in a client trust account for the sole purposeof paying bankservice chargeson that account, butonly in an amountnecessaryfor that purpose.
  16. 16. #ClioWeb Credit Cardsfor Lawyers Most jurisdictionslet lawyersaccept creditcards,with caveats: • Creditcardsmay be used to deposit funds in trust & operatingaccounts • Feesand chargebacksshouldneverbe withdrawnfromtrust accounts Law firms need specializedcreditcard processors.
  17. 17. #ClioWeb Rule 1.15:SafekeepingProperty (c) A lawyershall depositinto a client trust account legal fees and expensesthat havebeen paid in advance,to be withdrawnby the lawyeronly as fees are earnedor expenses incurred.
  18. 18. #ClioWeb Clio Firms Get PaidFirst • ~115,000 bills generated in the first 3 months of 2015 • 36.5% of those bills were marked as paid on the SAME DAY – TrustAccountsAdvanced Fee Deposits – Flat Fees Upfront – Credit Card Payments Unpaid 63% Same Day Paid 37% Q1 2015 Bills
  19. 19. #ClioWeb Fees Lawyersareentitled to a reasonablefee for their work. Reasonablefeesarejudged by8 factorsincluding: • Time & laborrequired,novelty& difficult of the issues,& skill required • Preclusionof other employment • Customaryfees in that locale • Amount in dispute • Experience,reputation,andability of the lawyer
  20. 20. #ClioWeb 2 Recommended Fee-RelatedDocuments 1. Engagement / Retainer Contract stating terms of client billing – Get it in writing – Get it signed by the client – Mandatory inclusions – Required for contingency fees , nonrefundable, flat fees, & fee sharing 2. Invoices – Detailing work performed, personnel invoiced, and outputs
  21. 21. #ClioWeb Rule 1.15:SafekeepingProperty (e) When in the courseof representationa lawyer is in possessionofpropertyin which two or more persons(one of whommay be the lawyer)claim interests,the propertyshall be kept separateby the lawyeruntil the disputeis resolved. The lawyershall promptly distributeallportionsof the propertyas to which the interestsarenot in dispute.
  22. 22. #ClioWeb GENERALBOOKKEEPING VS LEGAL ACCOUNTING
  23. 23. #ClioWeb Types of Accounting Cash Basis • Revenues are recognized when cash is received • Expenses are recognized when paid • Usually followed by individuals and small companies • Not in compliance with accounting's matching principle. Accrual Basis • Revenues are recognized when they are earned • Expenses are matched to revenues or the accounting period when they are incurred (rather than paid) • Better for tracking profitability • Required for use by accountants
  24. 24. #ClioWeb Double Entry Bookkeeping Every entry to an account requires a corresponding and opposite entry to a different account.
  25. 25. #ClioWeb ProperAccounting Proper accounting tools should produce the following: 1. Income Statement 2. Balance Sheet 3. Statement of Cash Flows
  26. 26. #ClioWeb Statement of Cash Flows Cash amount change over an interval of time • This is one place where lawyers’ trust accounts will be tracked • Pulls information from income statement and balance sheet
  27. 27. #ClioWeb Workin Progress Ongoing/unbilled Client activity For accounting purposes, work in progress is considered as a current asset on the balance sheet. Complex calculations needed to determine, based on estimated costs and estimated revenue
  28. 28. #ClioWeb Accounting vs. LegalAccounting Accounting for most businessesis backwardswhen it comes to legal: • Law firms must track bothoperating accounts and trust accounts • Trust accountsare a liabilityunder normalaccountingrules, butare tracked as assetsin most accountingsoftware Lawyersneedspecializedaccounting software.
  29. 29. #ClioWeb How Trust Requests Differ from Invoices Law firms issues2 types of documentsto clients aboutmoney 1. Invoices – work performed by the lawyer which is owed by the client 2. Trust requests – asking for funds to be deposited into a trust account Law firms need accounting systems that can track both separately.
  30. 30. #ClioWeb RECONCILE TRUST ACCOUNTS
  31. 31. #ClioWeb 2 Steps to Reconciliation 1. Confirm current bank balance – From the balance shown on the bank statement for the monthly reporting period, subtract all outstanding checks. – To this amount, add all deposits that have not cleared the bank. 2. Compare current bank balance to trust account amount – Confirm that the current bank balance equals the total balance for the trust account as shown on the lawyer’s records
  32. 32. #ClioWeb Trust Account Records • Have an IOLTA / Trust Account • Deposit Slips – Date – Source – Client or Matter • Cash Receipts Book • Disbursement Records – Cancelled Checks – Electronic Records • Ledger – Client or Matter entries – Transfers, receipts, balances & more • Bank Statements Florida RULE 5-1.2 TRUST ACCOUNTING RECORDS AND PROCEDURES
  33. 33. #ClioWeb • Monthly reconciliation – balance per bank – deposits in transit – outstanding checks • Comparison of reconciled balance and ledgers Trust Accounting • Annual listings • 5 year retention requirements Florida RULE 5-1.2 TRUST ACCOUNTING RECORDS AND PROCEDURES
  34. 34. #ClioWeb Storing Trust Records “original or clearly legible copies” Florida RULE 5-1.2 TRUST ACCOUNTING RECORDS AND PROCEDURES
  35. 35. #ClioWeb Storing Trust Records “consider generating and keeping hard copies of all the records required by the rule (including bank-created records).” Handbook on Client Trust Accounting for California Attorneys, 2013
  36. 36. #ClioWeb Storing Trust Records Rule 1.15 (d)(1) A lawyer shall maintain for seven years after the events that they record: (viii) all checkbooks and check stubs,bank statements, prenumbered canceled checks and duplicate deposit slip NYSUCS Rules of Professional Conduct
  37. 37. #ClioWeb Clio Trust Accounting
  38. 38. #ClioWeb CLIO’S TRUST ACCOUNTING FEATURES
  39. 39. #ClioWeb "With trust accounting ledgers in Clio, and trust account management has since become a breeze for us.” Jason Molder, Molder Legal Group, P.A.
  40. 40. #ClioWeb Clio Accounting Tools
  41. 41. #ClioWeb Clio Accounting Tools
  42. 42. #ClioWeb Trust Requests
  43. 43. #ClioWeb Trust Requests
  44. 44. #ClioWeb Powered byLawPay
  45. 45. #ClioWeb
  46. 46. #ClioWeb
  47. 47. #ClioWeb
  48. 48. #ClioWeb
  49. 49. #ClioWeb Clio Accounting Tools
  50. 50. #ClioWeb Clio Accounting Tools
  51. 51. #ClioWeb Client & Trust Ledgers
  52. 52. #ClioWeb Using Full Accounting Suites
  53. 53. #ClioWeb QUESTIONS?
  54. 54. #ClioWeb Thank You Joshua Lenon joshua@clio.com @JoshuaLenon Linkedin.com/in/joshualenon 1-888-858-2546

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