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Trust Accounting in Wisconsin: A Primer

What accounting of lawyer trust accounts is required?

The accounting system that documents the trust funds can be as uncomplicated as the minimal approach described in this manual or as sophisticated as necessary within an integrated software program on a computerized accounting package. A lawyer need not be an accountant to keep proper trust account records. The lawyer should establish and maintain a system that ensures the lawyer can document:

• the amount of funds within the trust account at all times;
  
  
• the amounts within the trust account belonging to each client or third party;
  
  
• how each transaction was processed (the payor/payee).

A system that incorporates internal controls and properly documents the activity occurring in the trust account should be adequate for these recordkeeping requirements. The cash receipts journal and the cash disbursement journal can be nothing more than regular checkbook entries that identify the date and amount of funds deposited and the client on whose behalf the funds were received. While no specific accounting system is mandated, a lawyer should maintain all law firm financial records in accordance with generally accepted accounting practices.

Lawyer trust account checkbook. Each deposit transaction should show:

• the date;
• source of funds or name of person with an interest in the account, if different;
• a brief explanation;
• amount of deposit; and
• balance on hand in trust account.

Likewise, each disbursement transaction should show:

• the check number;
  
  
• date;
  
  
• payee;
  
  
• brief explanation of the transaction's purpose; and
  
  
• amount of the check and balance on hand in trust account.

This part of the accounting system by itself does not keep track of individual records as to each client or third party.

At a minimum, each individual trust account ledger sheet should reflect:

• the date funds were received or dispersed;
  
  
• description of each transaction including whom the funds were received from or paid to;
  
  
• check number;
  
  
• amount of funds received or paid out; and
  
  
• balance of account at end of transaction.

How often must a reconciliation be made?

The trust account must be reconciled monthly with the bank statement. If needed, your banker or accountant can assist you in reconciling your account. A document similar to the Lawyer Trust Account Reconciliation Sheet (included) may be used to make the necessary reconciliations.

When should lawyers make
an accounting to clients or third parties?

Periodically, the lawyer should advise each person whose funds are held of the status of those funds. An adequate description should be provided indicating what receipts and disbursements have occurred and any unexpended balance. If there is objection to any proposed disbursement, such as for earned fees, those funds must remain in the trust account pending resolution of the dispute.

What are some methods of safeguarding client funds?

The security of a trust account can be measured by the interest/attention the attorney devotes to operating the account. The following safeguards are suggested:

• Someone other than the bookkeeper should perform the monthly reconciliation and trial balances.
  
  
• An attorney should not hastily sign checks to be disbursed or deposited.
  
  
• Use prenumbered checks and periodically examine the sequential order of blank, void, and canceled checks, and question any unexplained break in numbers. For this reason, voided checks should be retained.
  
  
• Keep blank checks under someone's control during the day and secured at night, and ensure the checks are all accounted for when someone resigns or is terminated, to help reduce theft.
  
  
• When clients indicate they have paid in cash, ask if a receipt was provided. The receipt book can be examined periodically to determine if any copies of the receipts have been removed or voided, which should be questioned.
  
  
• Posting, depositing, and disbursing trust account funds should be done by different personnel in the office. If this is not possible due to limited staff, an attorney may want to audit the trust account periodically or have an independent party do so. Do not sign blank checks and do not make a check out to cash or bearer. Every client file should contain a copy of that client's trust account ledger. Check to see if the client's file contains documentation supporting disbursements.
  
  
• Ensure deposits are made in a timely manner, daily if possible. Control who opens bank statements and correspondence regarding the trust account and review periodically.
  
  
• Estate accounting should be reviewed monthly. Old or inactive estates become a prime target for embezzlement.
  
  
• Require supporting documentation of accounting reports/reconciliations (bank statements, canceled checks, deposit slips, correspondence, and so on). Check periodically to determine if only designated personnel in the office have had access to office mail.
  
  
• Prohibit ­ or at least restrict ­ removal of trust account records from the office. Question lifestyle changes of individuals with access to the trust account (increase of social activities/travel, new wardrobe, new car, and so on). Examine signature(s) on trust account checks to discover forgery attempts.
  
  
• Never transmit money without written communication. A voucher or other documentation for receipt and instruction should be prepared by the attorney instructing the person performing the bookkeeping function to deposit the funds into the trust fund account on behalf of the person or entity named in the voucher or receipt. Written communication avoids later arguments regarding deposit instructions and provides a needed audit trail.
  
  
• Each firm should decide the proper person(s) to sign trust checks. Generally, the person who prepares the checks should not have sole signatory authority. Good internal control dictates that access to the trust account checkbook be limited to authorized signatories, and that two signatures be required if practical on all trust account checks. Regardless, no individual should sign a check unless presented with written documentation that the disbursement is proper, along with notice that the original receipted funds have cleared the banking process and are available for disbursement. The lawyer's individual trust account ledger should reflect the availability of the trust funds. Disbursement procedures should be stated clearly in established rules for the firm.

Practical pointers

• Funds that cannot be traced to a client, after diligent inquiry, due to uncashed checks, unrounded cents, errors in management of the account, and so on, should be forwarded to the State of Wisconsin - Unclaimed Property Section (608) 267-7977.
  
  
• The attorney is ultimately responsible for properly managing the trust account.
  
  
• If you become aware of purposeful mismanagement of, or theft from, trust accounts, you should notify the managing attorney immediately. If that is impossible, then notify the Board of Attorneys Professional Responsibility.
  
  
• Your checkbook register can be used as the cash receipts and disbursement journals.
  
  
• Withdrawals from a lawyer trust account should be made to named payees, not to cash.
  
  
• The checks and deposit slips should be imprinted with the heading "Trust Account" or "Client's Account." This helps segregate those funds from the attorney's office and personal funds.
  
  
• A lawyer needs at least one business account as a depository for legal fees and to pay operating expenses. The checks on these accounts should designate the account, "Jones & Smith Business Account," or "Jones & Smith Professional Account," or "Jones & Smith Office Account," and so on, whereas the trust account should be designated as "Jones & Smith Client Trust Account." Also consider establishing trust account(s) at an institution other than where the lawyer's or law firm's operating account is located and selecting checks of a different color and/or size from those of the lawyer's operating account.
  
  
• Make sure that the institution has collected the money from the deposited checks before writing any check on those funds. It is important to know the financial institution's rules of when funds can be withdrawn. The time it takes for funds to become available after deposit can vary between a day and several weeks depending upon the form in which the money is deposited and the source of the funds. You should check with the financial institution to determine when it credits deposits to the account. Many banks have automated account information systems which will give the activity on an account.

Do not write a check to a client for settlement proceeds before the settlement check has cleared on the theory that there is other money in the trust account. This would put other clients' funds at risk.

• Under no circumstances should the lawyer ever disburse more funds than received in a matter, or use any trust funds for personal purposes; otherwise a wrongful taking of other client trust funds occurs, which could result in both civil and disciplinary liability. At the end of the representation involved there should not be any monies left on the individual trust account ledger.
  
  
• Avoid ATM deposits; the lawyer has a duty to account for how the trust property was handled. Writing a check from the trust account creates an automatic audit trail that makes it easy to trace who the money came from and where it went. With an ATM withdrawal, there is nothing that shows whose money was withdrawn, who withdrew it, or to whom the money was paid.
  
  
• Real Estate Transactions:Real estate lawyers who act as the closing agents for real estate transactions often want or need to immediately issue checks from the trust account on funds that have not even been deposited, much less cleared the banking process. The issue is whether there is a practical way to protect other clients' funds held in the trust account while writing checks against the account before the deposit covering those checks has been made and credited. Ethics advisory opinions from a few other states would allow the practice if the lawyer accepts and makes disbursements of only certified or cashier's checks, where the risk of noncollectibility is minimal.³ However, certified and cashier's checks can be dishonored, and if they are, the lawyer remains responsible, civilly and ethically, for any losses incurred by any other party whose funds were used to pay checks written in reliance upon the dishonored deposits.⁴
  
  
• The individual trust account ledger sheets can be organized alphabetically in two three-ring binders. The first binder would be labeled as the "Open Account" ledger, where all the separate individual trust account ledger sheets should be filed and maintained. The second binder would be labeled as the "Closed Account" ledger, where all individual trust account ledger sheets on closed matters should be kept.
  
  
• Good internal control dictates that access to the trust account checkbook be limited to only the authorized signatories.
  
  
• The individual signing the check should review the individual trust account ledger sheet before authorizing disbursement of trust funds.
  
  
• There are computer software accounting packages that easily meet the minimum accounting standards outlined here.
  
  
• In addition to records previously mentioned, every lawyer must maintain for six years after terminating representation or possession of funds, the original or copies of all client retainer and fee agreements; statements to clients showing disbursements of funds; receipts; bills rendered to clients; records showing payments to other lawyers or nonemployees for services rendered; and retainer, settlement, and closing statements. SCR 20:1.15(e). In the event of a law firm dissolution, appropriate arrangements must be made for maintaining the firm's records, either by a former partner or the successor law firm.
  
  
• The IOLTA program does not pay for the cost of printing checks, deposit slips, wire transfer fees, special accounting services, and other selected charges. A list of these fees that a financial institution cannot charge to an IOLTA account is available from WisTAF.

Before unilaterally withdrawing client funds as legal fees it is advised to get the client's written consent. Three items must be met: a) the right to look to that particular client for payment; b) an agreement as to amount due; and c) an agreement that the lawyer should be paid at that time. Review Disciplinary Proceedings Against Marine for further information.⁵

• Disputed fees are to be left in the trust account until the dispute is resolved. If the attorney has erroneously withdrawn funds from the trust account and then learns of the dispute, the attorney should immediately redeposit those funds into the trust account.

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Endnotes

¹ ABA Formal Opinion 346, "Placing Client's Funds at Interest," July 23, 1982 (the IOLTA opinion).

²59 Wis. B. Bull. 32 (Sept. 1986).

³See N.C. Ethics Ops. RPC 232 (April 11, 1996) and RPC 191 (Oct. 20, 1995); Va. State Bar Legal Ethics Op. 183 (April 1, 1996); N.J. Ethics Op. 454, 11, 4 N.J.L.J. I 10 (Aug. 2, 1984); see also Fla. Bar Rule 5-1.1(g) (Disbursement against uncollected funds) and N.C. Gen. Stat. ch. 25-4-211 ("Good Settlement Funds Act").

⁴See N.C. Ethics Op. RPC 191, at 3.

⁵ 82 Wis. 2d 602, at 610 (1978).