Mary McPadden 2013-02-01 02:48:56
Keys to Know: Trust Account Bookkeeping Can I write one lump-sum check each month for fees earned and costs advanced for clients with trust fund activity? Yes. In fact this is the preferred method of funds transfer. If clients Smith, Jones and Johnson each owe the firm $500, write one check from trust to the operating account for $1,500. However, you must breakdown in detail the distribution in each client’s ledger card. Recommended Best Practice: Maintain a detailed client ledger card for each client. Reconcile these ledger cards to the trust bank statement and general ledger at least monthly. What is the best way to make sure there are sufficient funds in trust to cover the bank’s fees, service charges and credit card processing fees? It is recommended that the firm arrange for all bank fees, service charges and credit card processing fees to be deducted from the operating account, not the trust account. If this is not possible, the firm is allowed to maintain a small amount, generally not to exceed $250, in the bank trust account as administrative funds. The amount is relative to your business. Take a look back for one year or so and determine an average amount that has been charged by your bank for administrative fees and use this amount as a gauge. The firm’s merchant account should be set up to deduct credit card processing fees from the operating account, not the trust account. It is tactically difficult to estimate in advance each month, the amount of credit card fees that would be owed. It’s a Fact! If the amount of bank charges deducted from the trust account exceeds the amount you are holding in the administrative funds account, you are ‘borrowing’ client money to fund the bank charges. This is a definite violation of trust account rules. What manners of disbursements are allowed from my client trust account? The only disbursements allowed from the trust account are those by pre-numbered check or electronic funds transfers (from trust to operating for example), including wire transfers. Not allowed are: counter checks, cash-back transactions from deposits and ATM card withdrawals. It’s a Fact! ATM [debit] cards cannot be linked to a trust account. Can we accept credit card payments for fees and costs? Yes. A lawyer or law firm may permit funds from a credit card transaction to be deposited into a client trust account for payment of advance fees, costs or expenses, but only if: A. the lawyer has sources of funds, other than client or third-party funds, available at the time of the credit card transaction to replace any funds that may be debited from the account due to a credit card charge back and any associated fees or charges; B. within three business days of receipt of notice or actual knowledge that a charge back has been made, the lawyer deposits into the trust account his or her own funds in an amount equal to the amount of the charge back that exceeds the client’s credit card funds remaining in the trust account, and any fees or charges associated with the charge back; and C. the trust account contains sufficient funds of the lawyer or law firm at the time of the transaction to pay all merchant and credit card transaction fees, except to the extent such fees are paid by the client as part of the transaction. It’s a Fact! If you accept advanced funds by credit card this must be set up on your trust account. You may not set up your operating account to receive the payments and then transfer the money to your trust account. Recommended Best Practice: Arrange for your merchant account to be set up so that you can choose which account to deposit funds – fees earned to operating, advance fee deposits to trust. Can a credit card charge be refunded back to the credit card? Yes, however there are risks if a charge back occurs in addition to the credit given, i.e., the client disputes the charge and the credit card company issues a credit on the card member’s account. In this case, the client will have received two credits. The firm accepts this risk insofar as they will advance funds from another (non-trust fund) source to cover the double credit. Recommended Best Practice: If you choose to process a credit to the client’s credit card, monitor your trust account closely for a duplicate credit from the client’s bank. If a duplicate credit appears, you must cover those funds within 3 business days. Can we link a PayPal account to the IOLTA account? No. PayPal is not a trust account. Is it permissible to have a ‘holding account’ for incoming wire transfers? Funds are transferred into this ‘holding account’ and then transferred either to the operating or trust account. The ‘holding account’ must be registered as a trust account unless only completely earned funds are being transferred in. If any portion of the incoming funds are an advance fee deposit, the funds must immediately be placed in trust. It’s a Fact! First holding the funds in a non trust account is not permissible Settlement funds were received and part of the funds belong to the firm, part belongs to the client and another portion belongs to a third party. Must the entire amount be deposited to the trust account? Yes. Funds belonging in part to a client or third person and in part presently or potentially to the lawyer or law firm must be deposited therein [trust account], but the portion belonging to the lawyer or law firm must be withdrawn when due and legally available from the financial institution, or within a reasonable time thereafter, unless the right of the lawyer or law firm to receive it is disputed by the client or third person, in which event the lawyer shall comply with ER 1.15(e). What are three red-flags that will let me know if the firm’s books are not in compliance? 1. Monthly bank reconciliations are not completed 2. Any client ledger card shows a negative balance 3. The 3-way reconciliation is out of balance It’s a Fact! IOLTA rules state that trust accounts must be reconciled at least monthly. What is a Pre-Audit audit? The goal of a pre-audit is to determine potential deficiencies within a firm’s trust accounting process. It is recommended to have a knowledgeable third-party review current practices and suggest remedial action to bring the firm into compliance if necessary Recommended Best Practice: It is recommended to have a knowledgeable third-party review current practices and, if necessary, suggest remedial action to bring the firm into compliance. Visit Balanced Billing’s website for more information about a pre-audit audit. Http://balancedbilling.com/pre-audit.php Balanced Billing was founded by Mary McPadden in 2008 and offers confidential, affordable and dependable bookkeeping services for law firms and small businesses. Mary, who is not affiliated with the state bar, is considered THE Arizona IOLTA rules expert, helping attorneys maintain compliance with law firm trust accounting rules. Balanced Billing’s services will ensure your books are audit-ready.
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