Financially Speaking Podcast: Introduction to managing trust accounts
Financially Speaking is the Law Society of Alberta’s podcast for responsible lawyers, focusing on financial issues that can challenge lawyers in their practice of law and management of funds, with real-world examples and solutions that you can apply to your practice today.
In the first-ever episode of the Financially Speaking podcast, Trust Safety team members Bernadette Charan and Cristina Cataman break down the basics of trust accounting – what a lawyer needs to do once they’ve been approved to operate trust accounts, the different kinds of trust accounts and how to manage trust accounts successfully.
A full transcript of their conversation can be found below.
Host: From the Law Society of Alberta, welcome to Financially Speaking, the podcast for responsible lawyers who take their responsibility seriously. I’m your host, Colin Brandt.
This is our first-ever episode of Financially Speaking, and this series will focus on financial issues that can challenge lawyers in their practice of law and management of funds, with real-world examples and solutions that you can apply to your practice today.
Now, before we start, I want to acknowledge that we are still working remotely during COVID-19, and consequently things might sound a little different. As the events surrounding COVID-19 continue to unfold, we’re carefully monitoring the latest updates and recommendations from the Federal and Provincial governments, Alberta Health Services and the City of Calgary. This truly is an unprecedented time, and we hope all you listeners out there are staying safe.
In today’s episode, we’re talking about trust accounting – what a lawyer needs to do once they’ve been approved to operate trust accounts, the different kinds of trust accounts and how to manage trust accounts successfully.
To help me unspool this important topic, I have a pair of specialists on this topic from our Trust Safety team, Bernadette Charan and Cristina Cataman. Bernadette Charan is the Supervisor, Audit and Compliance and Cristina Cataman is Trust Safety’s Compliance Specialist.
The Trust Safety team works with lawyers throughout Alberta to set up and maintain trust accounts, and helps lawyers with their fiduciary responsibilities and obligations in their law practices.
Bernadette and Cristina, welcome to the show!
Setting up a trust account
Host: For lawyers who have just been approved to operate a trust account, there are several steps that need to be followed to ensure they’re properly set up and ready to manage those accounts. What are some of the key things a new responsible lawyer should do to get ready?
Cristina Cataman: The first few steps to getting your trust accounts set up are logistical. You need to purchase approved accounting software and hire a bookkeeper who will help you record, track and reconcile trust transactions periodically.
Next, you need to set up your actual account with an approved depository or financial institution, and that requires a few things:
- Determine what type of trust account you need – Pooled or Separate Interest Bearing Trust Account
- Make sure you bring your approval letter to the financial institution
- For Pooled trust accounts, ensure that any interest earned on the account is remitted to the Alberta Law Foundation, by furnishing a copy of the letter of direction to the financial institution. This is included with your approval letter and any service charges for the account are deducted from your general account and not the trust account
Host: So, what’s the difference between a pooled account and a Separate Interest Bearing Trust Account?
Bernadette Charan: A pooled trust account is comprised of funds held for a variety of clients and is sometimes referred to as a mixed trust account or operating trust account. Like Cristina mentioned, the interest earned on these bank accounts is remitted to the Alberta Law Foundation.
A separate interest-bearing account, or SIBA, contains trust money deposited in an interest-bearing form, for a fixed period and in a separate account on behalf of a specified client.
The interest earned on a separate interest-bearing account is the property of the client, and the firm must receive and retain the client’s explicit instruction authorizing the law firm to make a transfer to/from a related SIBA. The funds can only be invested in low risk type investment vehicles.
Cristina Cataman: All separate interest-bearing accounts must be opened in the name of your firm “in trust for the client” and the account name should include a reference to the specific client to make it clear who owns the funds.
The interest collected from the SIBA must be credited to the client’s trust ledger account to ensure that the firm’s books are in agreement with the bank’s records.
Bernadette Charan: Regardless of the account type, all trust bank statements and trust cheques must clearly indicate that they are for trust transactions only. This means that all trust cheques and trust bank statements must have the word “trust” clearly printed on their face.
The trust bank account can only be used for trust monies received in connection with the law firm’s practice of law. Funds cannot be deposited into trust for matters such as staff social events and/or where no legal services are being provided in relation to the trust money in the trust bank account.
Trust Bank Account Reconciliations
Host: If you are responsible for keeping track of your funds for your general practice and your client’s trust funds, how do you make sure that these numbers add up? For instance – what if one bank statement comes at one point in the month and another for one of your trust accounts comes in later?
Cristina Cataman: That’s a great question. We recommend that you align your General and Trust account cycle and statement dates. This makes it easier to reconcile your accounts. A bank reconciliation is a key control of the law firms’ assets. It is the process by which the bank account balance of your firms’ books of account is reconciled to the balance reported by the financial institution. Certain reports must balance to the penny: the Trust bank statement (the bank’s record of all transactions impacting the bank account during the past month), the Trust Journal (the firm’s record of all transactions impacting the bank account during the past month) and the Client Trust Listing (running total of the trust account balances for each client). Performing a bank reconciliation is the only way to identify problematic transactions, accounting irregularities and identify fraud.
The trust reconciliation must be prepared within one month of the last day of each month. It is crucial for the Responsible Lawyer to review the reconciliation in detail and ensure accuracy and proper completion, pursuant to Part 5 of the Rules of the Law Society of Alberta. When all numbers are in agreement, sign and date the reconciliation.
Host: One of the Responsible Lawyers’ primary tasks is signing cheques on behalf of the firm. That signing authority is critical to help keep the business running, but what does it mean for Responsible Lawyers who aren’t able to physically sign cheques, say because of a pandemic or even simply because they are out of the office?
Bernadette Charan: If the Responsible Lawyer is away from the firm andunable to sign cheques, they can appoint another lawyer or a staff member to sign cheques in their absence for up to six months. If the Responsible Lawyer chooses to appoint another lawyer within the same firm, they do not require formal approval from the Law Society.
The payment ecosystem is changing, the firm can make the shift towards electronic banking and will alleviate the need to physically sign cheques.
Cristina Cataman: If the Responsible Lawyer chooses to appoint a lawyer working at a different law firm, they must email the Trust Safety Department and request approval. The email should include the full name of the alternate lawyer requested, the law firm with whom they practice and the dates for which the approval is required. If the lawyer requested is not a Responsible Lawyer already, they must complete two online trust accounting courses before approval can be granted.
Responsible Lawyers can also choose to appoint a non-lawyer staff member to sign cheques while they are away. The staff member must also complete the online trust accounting courses, and the firm must provide the Trust Safety Department with proof of Fidelity and Crime insurance coverage.
All copies of cheques that are signed by the staff member while the Responsible Lawyer is away, must be provided to the Trust Safety Department at the end of the signing period.
It is very important for firms to have contingency plans in place for when the unthinkable happens. The unthinkable are the accidents, illnesses and deaths that we encounter in our lives. When a lawyer who hasn’t planned for these emergencies has one, there is risk to the management of their trust accounts, their practice and reputation suffer along with their clients, staff and family. Len Polsky our Manager of Practice Management, wrote a handbook titled “When Bad Things Happen to Good Lawyers” it is on our website so please check it out.
Host: I’m glad to hear there’s some flexibility around cheque signing. It seems like a difficult task to manage in an era of social distancing and remote work!
Bernadette Charan: Trust accounting can be overwhelming at the best of times for some lawyers, and we know that these times require more flexibility for everyone. That’s why we are always happy to work directly with lawyers to help them get set up for success. Please remember that we are here for you every step of the way. We have a great best practices guide on the Law Society website and a number of resources to help, but you can always reach out to us by email at firstname.lastname@example.org or call us at 403.228.5632.
Host: Fantastic information, Bernadette and Cristina. Thanks for inaugurating the first-ever financially speaking and I can’t wait to hear more from your team. Come back anytime!
Thank you for listening to the show. We’ve got more episodes of financially speaking and our sister program Practically Speaking lined up for 2020, and we’d love to hear what you think.
If you have any topics you’d like us to discuss or ideas for upcoming segments or questions, we want to hear them. You can reach us at email@example.com or tweet at us @lawsocietyofAB.