Lawyer Trust Accounts

The Toronto Star recently published a set of articles on their investigation with respect to lawyers who misappropriated client trust funds. An issue raised in these articles is whether the Law Society of Upper Canada should be reporting to the police those lawyers who are stealing client trust funds. Any time there are allegations of lawyers stealing or misappropriating client money, these allegations must be taken seriously. Public confidence in lawyers is essential to the success of the legal profession.

I do not propose to address what role the Law Society should have regarding reporting criminal conduct of lawyers to the police. Rather, the purpose of this article is to help the public understand what a lawyer trust account is, and the process involved from when a lawyer receives client money in trust to when that money leaves the trust account.

What is a Trust Account?

A trust account is a bank account a lawyer or a law firm has which is separate from any general account held by that lawyer or law firm. A trust account permits lawyers or law firms to deposit client money into a bank account. Any money deposited into a trust account belongs strictly to the client, not the lawyer. The money is simply held in trust by the lawyer or law firm for the client.

Lawyers and law firms are not permitted to collect any interest that is generated from a trust account. Any interest that is generated from a trust account is transferred to the Law Foundation of Ontario where it is used for purposes such as funding Legal Aid and to help compensate individuals who have been the victims of fraudulent conduct by other lawyers.

Just as lawyers cannot earn any interest generated from any trust account, lawyers and law firms cannot used any client money held in trust to cover any costs incurred from having a trust account, such as monthly bank fees. Any monthly bank fees or other expenses resulting from having a trust account must be paid from the lawyer’s general account.

Billing Clients Who Have Money in Trust

Any time a lawyer receives money from a client for work that has not been completed, that money must be deposited in a trust fund. When a lawyer has completed all or a percentage of work on a particular file, the lawyer can then send an account for the work completed. Once the lawyer has sent a statement of account to the client, it is only then that the lawyer can transfer that money from the trust account to the law firm’s general account.

Bookkeeping

Every lawyer or law firm must account for every single cent that is deposited into a trust account. Having a trust account requires that lawyers and law firms maintain a trust receipts journal, a trust disbursements journal, a client trust ledger and a monthly trust comparison.

A trust receipts journal is a record of all client money received in trust by a lawyer or law firm. A trust receipts journal documents the date the funds were received, the method by which funds were received, the person who provided the funds, the amount received, and the reason funds were received into the trust account. A trust disbursements journal is a record of all payments made on behalf of clients and it documents similar information to the trust receipts journal.

A client trust ledger is a record of the amount of money a lawyer holds in trust for each client. Most lawyers have a mixed trust account, which means all client money held in trust is deposited into a single bank account. The client trust ledger will also show when money was withdrawn from the trust account and why it was withdrawn.

Every month each lawyer or law firm is required to complete a monthly trust comparison. The purpose of the monthly trust comparison is to ensure a lawyer’s accounting records are consistent with the lawyer’s trust bank account records. Accounting errors can occur at both ends, either by the bank or by the lawyer or law firm. The monthly trust comparison allows a lawyer or a law firm to quickly identify and correct any accounting errors.