Procrastination is a familiar struggle, especially when faced with tasks outside our comfort zone. Last year, I purchased a beautiful antique piece of furniture with the intention of restoring it. Unfortunately, it still sits untouched in my garage—neglected due to a lack of time and expertise.
Trust accounts, unlike old furniture, cannot be left sitting unfinished. Failing to properly maintain and reconcile a trust account carries serious financial and ethical consequences, including potential disciplinary action. Whether you are establishing a new practice or have delayed addressing trust accounting, now is the time to bring your trust account into compliance with Rule 1.15 of the North Carolina Rules of Professional Conduct.
Reconciling your trust records is the first step and the foundation for accurate trust records.
Where to Start?
The first step is understanding your fiduciary duty to clients. Unearned client funds must be held in a designated trust account, separate from the firm’s operating accounts. Rule 1.15 provides clear guidance on this obligation:
“The purpose of a lawyer’s trust account or fiduciary account is to segregate the funds belonging to others from those belonging to the lawyer. Money received by a lawyer while providing legal services or otherwise serving as a fiduciary should never be used for personal purposes. Failure to place the funds of others in a trust or fiduciary account can subject the funds to claims of the lawyer’s creditors or place the funds in the lawyer’s estate in the event of the lawyer’s death or disability.”
Daily Requirements
To maintain compliance with trust accounting rules, attorneys must implement daily accounting practices, including:
- Recording all deposits and disbursements with detailed client identification, including online transfers and wire transactions.
- Maintaining individual client ledgers that clearly reflect ownership of funds and include running balances.
- Ensuring that, at any given moment, the firm can accurately account for how much money is held in trust for each client.
- Providing clients with a written accounting when their funds are fully disbursed.
Using dedicated trust accounting software can simplify this process. When selecting software, attorneys should look for programs that allow for easy tracking of client-specific transactions; include a bank reconciliation feature within the software; and generate the three-way reconciliation reports as required by Rule 1.15.
Monthly Requirements
Regular reconciliation of trust accounts is essential. Many firms unknowingly operate with unreconciled trust records, exposing themselves to the risk of over-disbursing client funds.
During reconciliation, two types of discrepancies may emerge – intentional and unintentional. Regardless of the cause, it is the attorney’s responsibility to identify and rectify these discrepancies. My firm reconciles nearly 300 attorney trust accounts monthly, and we frequently encounter the following errors:
Data Entry Mistakes. An employee mistakenly records a $480 deposit instead of $450, leading to a $30 over-disbursement.
Bank Errors. It happens! A deposit may be processed as $500 instead of $5,000, or a check for $480.50 may clear as $480.00. Banks do not always catch their own errors, and attorneys must remain vigilant.
Duplicate Mobile Deposits. A check may be deposited via mobile banking and then again at a branch, sometimes without detection by the bank.
The Finished Project: Ensuring Compliance
Reconciling trust accounts on a monthly basis is not optional. Even if an error was not caused by you or your staff, as a fiduciary, you are responsible for ensuring that client funds remain protected.
For firms that lack the time or expertise to complete bank reconciliations promptly, outsourcing to a company specializing in trust accounting can provide peace of mind and ensure compliance with Rule 1.15.
