Trust Accounting: The Lawyer’s Responsibility (and Liability)
All lawyers know what trust funds are. That goes without saying. However, too many lawyers rely far too heavily on professional legal accounting and support staff to manage their trust accounts for them. If something goes wrong, it is the responsible lawyer who is liable for the error and penalties (especially repeated errors). This can be of serious consequence to the lawyer’s practice and professional reputation as well as the law firm’s finances and insurability. It is never a staff member’s responsibility. This is all covered under the trust accounting assurance program and compliance rules of the Law Society of BC.
A client may provide their lawyer funds, and sometimes valuable property, IN TRUST for various purposes. Sometimes it is for a retainer for the services of the lawyer, sometimes for safekeeping (wills & estates files for the most part), and often for financial transactions to be made by the lawyer on behalf of the client (real estate transactions, business purchases and sales, etc.). These funds are in trust with the lawyer/law firm on behalf of the client. It is the client’s money/property ONLY. Therefore, the lawyer must be meticulous in the handling of these funds on their client’s behalf.
Payments of lawyers’ accounts (legal fees, disbursements and applicable taxes) are considered general funds and the funds need to be deposited and processed through the lawyer’s general account. Lawyers cannot keep general funds of over $300 in their trust account.
The Law Society’s mandate is the protection of the public from any malfeasance or errors by lawyers in BC. The Trust Assurance Program has been designed, refined and proven effective in protecting client trust funds. Lawyers must comply with the trust rules and the Law Society will conduct a thorough compliance audit of every firm every four to six years. You need to be ready for the audit. Here are just some of the things that you need to know, as a lawyer, to ensure you pass your compliance audit and avoid ultimate discipline or legal claim by the client:
- There are several trust documents that require the actual signature of the responsible lawyer – not a staff member; however, you may authorize staff members to sign for you in certain circumstances. You need to know when your signature is required. Here are some instances. All trust cheques MUST be signed by at least one lawyer. Electronic funds transfer requests must be signed by the lawyer. Letters to the Executive Director of the Law Society detailing the circumstances of errors or mishandling of trust funds must be signed by the lawyer. Refunded cash must have an accompanying cash receipt. It is a best practice that the cash refund receipt be signed by the lawyer; however, s/he may authorize another member of the firm to sign on their behalf. As well, the person receiving the cash must sign the cash refund receipt. It is important that the lawyer be fully aware of the cash refund transaction as the refund of cash may indicate “received” cash vs. “accepted” cash (client or not).
- A lawyer may NEVER withdraw funds from their client’s trust account in payment of the lawyer’s account/invoice/billing without the client’s knowledge and permission. Therefore, a proper invoice must be rendered and delivered to the client before trust funds are withdrawn. For example, you cannot withdraw trust funds in payment of your billing but leave the invoice sitting unsigned in your in-tray. Make sure you sign it and mail (and/or email) it immediately.
- Every individual client must have their own individual trust ledger set up in your trust accounting system, whether manual or electronic, even when the funds are applied to your pooled trust accounts.
- Whether you are signing a trust document or have authorized a staff member to sign in some appropriate circumstances, you must be certain that the trust transaction details are correct before authorizing the transaction. You have to ensure that the mathematical calculations are correct, that the client has sufficient trust funds on account to cover the trust transaction (to protect against causing a trust shortage), and that the client or payee’s name and information are correct. You are responsible and liable for any errors that your staff members may have made, whether or not you sign the trust document.
- You have to keep your trust records up to date and you must check the client’s individual trust ledger to ensure that there are sufficient funds on account so that you do not create a trust shortage. There is the possibility of having or creating a trust shortage even if the client’s trust ledger and/or pooled trust account shows a positive balance. This is a serious compliance error that needs to be reported to the Law Society, even if it is rectified immediately.
- No bank charges or service fees can be charged to a client’s trust account. The bank must be instructed to withdraw any fees of this sort to the lawyer’s general account (there is an allowance for up to a $300 trust float or this purpose; however, it is safer and more convenient to instruct the bank, upfront, to withdraw these charges from the general account). If this happens, even if it is the bank’s fault and the lawyer had nothing to do with it, it still has to be immediately rectified and reported by the lawyer. You may pass on some bank charges to the client, such as wire transfer fees; however, this must be done by billing them as disbursements.
- Canadian chartered banks are covered by CDIC (Canadian Deposit Insurance Corporation) insurance up to a maximum of $100,000 per account. However, US funds accounts are NOT included in this coverage (or any other foreign currency). If you open a US funds pooled trust or special investment account for your client’s funds, you must write the client a letter and keep it on file informing the client that the US funds are not insured. In addition, the client must provide a letter of authorization/instruction to deposit non-Canadian funds into a foreign currency account before the foreign currency account is opened, stating that they are aware that these funds will not be insured by the bank. You must keep these letters on file for every account for trust audit compliance purposes.
- Canadian credit unions, however, are covered by CUDIC (Credit Union Deposit Insurance Corporation) insurance and it is unlimited. In addition, US pooled trust accounts at credit unions are covered, as well as other foreign currencies. Therefore, in some instances, you may want to consider advising your client to use a credit union trust account rather than a chartered bank account.
- You must send a letter to any and all financial institutions at which you set up a trust account, detailing their responsibilities and the purposes of the account (example letter on Law Society website). This letter must be kept on file.
- Net interest earned on pooled trust accounts CANNOT be deposited to the lawyer’s general account. It must be remitted, by the bank, to the Law Foundation of BC. This foundation is specifically set up for this purpose as well as to assist with unclaimed trust funds and is entirely separate from the Law Society of BC. The lawyer is responsible to ensure that the bank remits these funds consistently (sometimes banks fail to do this). You need to determine this by preparing consistent trust account reconciliations. Net interest earned on separate special (investment) trust accounts accrue to the benefit of the client. You should consider opening one of these accounts if you need to hold a large amount of your client’s funds for an extended period of time.
- You also should ask your client for written instructions to open a special interest bearing (investment) account, before you open the account. The trust rules do not specifically require the instructions to be in writing; however, it is recommended (best practice).
- You cannot hold client trust funds for more than two years without reporting it to the Law Society on your annual trust declaration/trust self-audit. You then need to explain why you are still holding these old trust funds and what steps you have taken to return it to the client, if the file is finished.
- You must refund your client’s trust money by trust cheque, even if it is only a few cents. If the client doesn’t cash it and it goes stale-dated, you have to re-issue a new cheque (you may stop payment the old cheque). A good way to deal with this in our current technological society, is to call your client and encourage them to use electronic deposit/online banking with their own bank which allows the client to simply take a photo of the cheque and deposit it online. This is very convenient for the client and helps to clear up these balances on the lawyer’s files. You cannot close any file until all trust funds have been cleared.
- You cannot ever write-off or transfer small trust balances to your own general account, nor prepare a billing to the client in the amount of the trust balance in order to clear it.
- There are special and detailed rules about receiving, accepting and refunding cash from/to a client ($7,500 limit rule, per client matter, aggregate over the full term of the matter). You may receive the funds but they may not be considered “accepted” under certain circumstances; which is a protection for the lawyer. This distinction is very important as to your responsibility for the funds and whether the individual is considered your client or not.
These are just a few examples. The trust rules are extensive and detailed and it is the lawyer’s responsibility to be educated on all issues surrounding trust. You are responsible and liable even if your staff members or financial institutions make the errors or fail to do something. You cannot blame it on anyone but yourself in the case of a trust audit as you will be the one disciplined by the Law Society or potentially sued by your client.
I recommend to all lawyers that they read and completely understand all of the trust rules. There is no need whatsoever to be disciplined by the Law Society or to make a serious error regarding trust funds that may end up in a legal claim (or potential claim) to your personal law practice and your law firm. These may affect your ability to procure excess professional liability insurance at a reasonable premium, if at all. It has resulted in collapsed practices and destroyed firms with significant financial consequences for the lawyer and the partners of the firm.
At minimum, please thoroughly read the trust rules (Part 3, Division 7 – Trust Accounts and Other Client Property) on the Law Society website. You may also refer to the summarized Trust Accounting Handbook, which is provided in PDF format. There are also many helpful forms and checklists on the Law Society website for your use and convenience.
It is a very good idea for every lawyer, whether new to practice or experienced, to take a trust course. You can take the one-hour online Trust Accounting Refresher course provided by the Courthouse Libraries BC. Another excellent course is the Law Courts Center Trust Accounting 101 course, which you can inquire about at http://lawcourtscenter.camp7.org/page-186943. This is an in-person all-day course (you can also attend the live course by web access). This course is particularly important for your legal accounting staff and any paralegals or legal administrative assistants who handle trust funds on behalf of lawyers. You need to ensure that your staff are as educated on trust funds as you are (or should be).
I hope that this article helps to impress upon lawyers the importance of knowing the trust rules and to understand, once again, that trust funds are the lawyer’s responsibility and liability.