Practical Law Office Management 3 rd Edition Thomson

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Practical Law Office Management, 3 rd Edition, Thomson Delmar Learning Chapter 6 Client Trust

Practical Law Office Management, 3 rd Edition, Thomson Delmar Learning Chapter 6 Client Trust Funds and Law Office Accounting © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Client Trust Funds • A trust or escrow account is a bank account, separate

Client Trust Funds • A trust or escrow account is a bank account, separate from a law office’s operating checking account, where unearned client funds are deposited. • Ethical rules prohibit the commingling of client funds and law office funds in the same account. • The reason for the rule is that if client funds were commingled and kept in the same bank account with general law practice funds, creditors could seize these funds to repay debts of the law practice. • Only client funds can be kept in the trust account. 2 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Client Trust Funds Model Rules of Professional Conduct Rule 1. 15 Safekeeping Property (a)

Client Trust Funds Model Rules of Professional Conduct Rule 1. 15 Safekeeping Property (a) A lawyer shall hold property of clients or third persons that is in a lawyer’s possession in connection with a representation separate from the lawyer’s own property. Funds shall be kept in a separate account maintained in the state where the lawyer’s office is situated, or elsewhere with the consent of the client or third person. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of [five years] after termination of the representation. (b) A lawyer may deposit the lawyer’s own funds in a client trust account for the sole purpose of paying bank service charges on that account, but only in an amount necessary for that purpose. 3 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Client Trust Funds Model Rules of Professional Conduct Rule 1. 15 Safekeeping Property (continued)

Client Trust Funds Model Rules of Professional Conduct Rule 1. 15 Safekeeping Property (continued) (c) that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred. (d) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property. 4 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Client Trust Funds Model Rules of Professional Conduct Rule 1. 15 Safekeeping Property (continued)

Client Trust Funds Model Rules of Professional Conduct Rule 1. 15 Safekeeping Property (continued) (e) property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute. 5 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Trust Account Management 1. Have a trust account and use it for all client

Trust Account Management 1. Have a trust account and use it for all client monies. 2. Only a managing partner should sign on the account. 3. Follow the Interest On Lawyers’ Accounts (IOLTA) Rules for your state. 4. Notify the client in writing, at least on a monthly basis, regarding all deposits and withdrawals from the client’s account balance. 5. Unearned fees and unexpended costs belong in the trust account until earned or spent. Trust Source: Adapted from Foonberg, J. (2004). How to start and build a law practice (p. 576). American Bar Association. 6 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Trust Account Management 6. Do not commingle or put attorney/law firm funds in the

Trust Account Management 6. Do not commingle or put attorney/law firm funds in the trust account. 7. Reconcile the trust account monthly and maintain a written record of the reconciliation. 8. Review individual client balances monthly, and do not delay giving clients their money. 9. Maintain written, detailed records justifying every deposit and every withdrawal in the trust account, including a detailed journal of all transactions and a client ledger. 10 Retain trust records even after the matter is closed, according to state rules. Source: Adapted from Foonberg, J. (2004). How to start and build a law practice (p. 576). American Bar Association. 7 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Interest on Lawyers’ Trust Accounts (IOLTA) • An IOLTA account is an interest-bearing account

Interest on Lawyers’ Trust Accounts (IOLTA) • An IOLTA account is an interest-bearing account set up specifically to hold client trust funds. • The interest that accrues on an IOLTA account goes to a state bar foundation or other nonprofit legal organization. • Most states provide that IOLTA accounts can only be used for client funds that are a nominal amount or that are expected to be held for only a short time. • If a large amount of client funds are involved or if the amount to be held is for a long period, then the attorney should open a separate interest-bearing account for that specific client and the interest given to the client. 8 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Budgeting • A budget is a projected plan of income and expenses for a

Budgeting • A budget is a projected plan of income and expenses for a set period of time, usually a year. • Budgets are a planning tool. They allow the firm to plan for the future, to anticipate problems, needs, and goals for the firm, and to allocate and manage resources. • Steps in the budget process: • Prepare an income budget. An income budget estimates how many partners, associates, legal assistants, and others will bill for their time, what the rate or hourly charge will be, and the number of billable hours each timekeeper will be responsible for billing. 9 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Budgeting • The time-to-billing percentage adjusts downward the actual number of hours the office

Budgeting • The time-to-billing percentage adjusts downward the actual number of hours the office will bill to clients, taking into account the fact that timekeepers are not always able to bill at their budgeted levels due to sickness and unforeseen events. • Realization is what a firm actually receives in income as opposed to the amount it bills for. 10 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Budgeting • Prepare a staffing plan. A staffing plan estimates how many employees will

Budgeting • Prepare a staffing plan. A staffing plan estimates how many employees will be hired or funded by the firm, what positions or capacities they will serve, what positions will need to be added or deleted, and how much the compensation will be. • Estimate overhead expenses. The law office must make a budget of all expected overhead expenses, such as rent, utilities, equipment, and other expenses. • Set a profit margin. The last step is to set a target profit margin the firm would like to achieve. 11 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Collection • Billing large amounts of time and not getting paid is a sure

Collection • Billing large amounts of time and not getting paid is a sure way to bankruptcy for any law office. • The first step in collecting a high percentage of billings is for the attorney to carefully select and weed out what clients’ cases he or she will accept in the first place. • Another strategy is to get monies up front in a case, using deposits in the form of earned and unearned retainers. 12 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Collection • Send regular monthly billings. • Withdraw from cases as soon as possible

Collection • Send regular monthly billings. • Withdraw from cases as soon as possible and feasible, once it is determined the client will not pay. • Sue a client for the fee if there is no other option. 13 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Collection/Withdrawing from Cases Model Rule 1. 16 provides in part: (b) Except as stated

Collection/Withdrawing from Cases Model Rule 1. 16 provides in part: (b) Except as stated in paragraph (c), a lawyer may withdraw from representing a client if: (1) withdrawal can be accomplished without material adverse effect on the interests of the client; (2) the client persists in a course of action involving the lawyer’s services that the lawyer reasonably believes is criminal or fraudulent; (3) the client has used the lawyer’s services to perpetrate a crime or fraud; (4) the client insists upon taking action that the lawyer considers repugnant or with which the lawyer has a fundamental disagreement; 14 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Collection/Withdrawing from Cases Model Rule 1. 16 (continued): (5) the client fails substantially to

Collection/Withdrawing from Cases Model Rule 1. 16 (continued): (5) the client fails substantially to fulfill an obligation to the lawyer regarding the lawyer’s services and has been given reasonable warning that the lawyer will withdraw unless the obligation is fulfilled; (6) the representation will result in an unreasonable financial burden on the lawyer or has been rendered unreasonably difficult by the client; or (7) other good cause for withdrawal exists. 15 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Collection/Withdrawing from Cases Model Rule 1. 16 (continued): (c) A lawyer must comply with

Collection/Withdrawing from Cases Model Rule 1. 16 (continued): (c) A lawyer must comply with applicable law requiring notice to or permission of a tribunal when terminating a representation. When ordered to do so by a tribunal, a lawyer shall continue representation notwithstanding good cause for terminating the representation. (d) Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client’s interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled, and refunding any advance payment of fee or expense that has not been earned or incurred. The lawyer may retain papers relating to the client to the extent permitted by other law. 16 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Internal Controls 17 • Internal control refers to procedures that an organization establishes to

Internal Controls 17 • Internal control refers to procedures that an organization establishes to set up checks and balances so that no one individual in the organization has exclusive control over any part of the accounting system. • Good internal controls prevent or make it much harder for employees to embezzle money. © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Internal Controls • Never allow a bookkeeper or person preparing the checks to sign

Internal Controls • Never allow a bookkeeper or person preparing the checks to sign checks or to sign on the account. • Have careful, unannounced, routine examinations of the books. • Partners should routinely read and examine all financial reports. • All checks should be stored in a locked cabinet. • Never let the person signing the checks reconcile the account. 18 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

Internal Controls • Use check request forms. • Have guidelines for how the mail

Internal Controls • Use check request forms. • Have guidelines for how the mail is opened and for how checks will be deposited. • Use non-accounting personnel to help with internal controls. • Require two signatures on checks over $10, 000. • Stamp invoices “canceled. ” • Have an audit prepared by a CPA every year. 19 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.

No Sharing of Fees with Nonlawyers • Lawyers cannot share legal fees with a

No Sharing of Fees with Nonlawyers • Lawyers cannot share legal fees with a nonlawyer or practice with a nonlawyer. • Model Rule 5. 4(a) states: “A lawyer or law firm shall not share legal fees with a nonlawyer. . ” 20 © 2007 Thomson Delmar Learning. ALL RIGHTS RESERVED.