At some point, all lawyers will find themselves in a situation where they will need to manage client funds. This can include advance payments, settlement checks, or expenses. Legally, acting as a fiduciary for your client means that you must manage funds carefully to remain compliant. In fact, improper management of client funds is a top reason that lawyers get disbarred. 

For small firms, owner/operator firms, or individual attorneys, understanding the details behind ethical and compliant fund management is vitally important. With limited time however, it can feel daunting to take on the challenge of managing client trust accounts. Despite the risks, understanding the accounting processes behind managing client funds is critical. 

Considerations for Managing Client Accounts

• All client funds must be held separate from the law firm’s operating funds and can never be co-mingled.
• Client funds can be held in either a Client Trust Account (CTA), which are typically used for larger sums of money, or the Interest on Lawyer’s Trust Accounts (IOLTA) program, which are typically used for smaller amounts or short-term deposits where any potential interest earned is minimal.
• A CTA account for one or more clients can be established at a bank of the law firm’s choice – but must be held in an interest-bearing “trust account” (or something similar) for the benefit of the law firm’s clients.
•  IOLTA account regulations vary by state. Financial institutions can elect to participate (or not) in these trusts. 
• If there is more than one client’s funds in a client trust account, each client’s funds must remain separate from one another. 
• Understanding the process of sub-accounting is very important. This is the practice of separating these individual client funds within the accounting ledger system; when done properly, the sum of each individual client ledger will equal the total amount of the trust funds within the account. 

New Challenges for the Legal Field 

A new administrative challenge has emerged for attorneys managing client funds: how to protect client funds from being lost. In the wake of the large bank failures of 2023, and the failure of Republic First Bank this year, this topic is timely and important. 

Evaluating a bank’s safety involves a variety of banking metrics that most small firms and lawyers may not have access to. Moreover, a typical lawyer is not going to have the expertise, nor the time, to properly evaluate what truly makes a bank “safe.” Yet as fiduciaries for their clients’ funds, they may be liable should the bank they’ve chosen fail.

To prevent this, the most important thing that you can do to protect client funds is to ensure that all client trust accounts take advantage of deposit protection through an individual bank or bank network.

FDIC insurance is applied to client trust accounts through what is known as “pass-through coverage.” If your accounts are titled correctly and properly managed, deposit insurance of up to $250,000 per tax ID, per institution, is available. If you are managing client funds in excess of $250,000 per client, per institution, you will need to engage additional banking partners, like those Ampersand partners with, to ensure these funds are fully protected. 

If you need more information on securing your client’s funds, we can help. Contact Ampersand to get started.