Law Firms are required to hold and manage client funds separate to the firms everyday operating funds, which is why client funds are held in a company Trust Account.
What is the purpose?
Primarily, to protect the clients’ funds by keeping these funds separate to the firms’ general funds, which are used on everyday expenses such as rent, wages, office supplies, etc.
Why is this important?
This is essential for many reasons, here are some the main factors:
- Legal and ethical requirements – There are very strict rules and regulations which govern how Law Firms handle client funds.
- Prevent mixing of funds – Keeping client funds separate from the firm’s operating funds helps to prevent the commingling of funds. This ensures that client funds are not misused or applied to the companies’ everyday expenses.
- Enables tracking and accounting – A trust account allows firms to track and account for client funds. This helps to prevent errors, misappropriation of funds, or other accounting issues.
- Protects the firm and the client – As the use of a trust account minimizes the risk of an accounting error, it is then less likely the firm can be subjected to legal action or damage the firms reputation
- Protection against fraud – Trust accounts provide an additional layer of protection against fraud or theft, as they require additional controls and oversight to manage the funds. Meaning your funds are safe as they prevent unauthorized access or other fraudulent activities.
How do they work?
The Law Firm notifies the client when the Law Firm receives any funds from the client. The Law Firm also provides clients with regular trust account statements which shows all bank transactions associated with that specific matter such as payment of a Tax Invoice.
For example, a client deposits $1,000.00 into the Law Firms trust account for upcoming professional fees and disbursements on the clients legal matter. The client will receive a Tax Invoice for a specified period of time setting out what work was done on the matter and the total amount of the Invoice, which lets say is $400.00. The Law Firm will then transfer $400.00 from the initial deposit of $1,000 from the Trust Account to the Law Firms office account as payment of your Tax Invoice. This will leave you with $600.00 in the Law Firm Trust Account and you will receive a receipt from the Law Firm confirming this transaction and the balance remaining which is held on your behalf.
