Financially Speaking Podcast: Lifecycle of a Trust Account

November 3, 2020

In the second episode of Financially Speaking, our hosts walk through the lifecycle of a trust account, from its creation through to its closure. And, in the spirit of Access to Justice Week, we’re not only going to focus on the logistics and obligations of those trust accounts but on the key role that pooled trust accounts play in funding access to justice initiatives in our province, with a special guest from the Alberta Law Foundation (the Foundation).

The Foundation funds programs and services that improve Albertans’ knowledge of their legal rights and responsibilities, conducts legal research and proposes law reforms. Read their 2020 Annual Report now available on their website.

Trust Accounting and the role of the Foundation

The Alberta Law Foundation is committed to accessible justice for all Albertans. It does this by leading and supporting efforts to build a better justice community in Alberta, primarily through funding programs and projects that address one or more of the objectives set out in the Legal Profession Act:

  • Conducting research into and recommending reform of law and the administration of justice;
  • Establishing, maintaining, and operating law libraries;
  • Contributing to the legal education and knowledge of the people of Alberta through programs and facilities;
  • Providing assistance to Indigenous people’s legal programs, student legal aid programs, and similar programs;
  • Contributing to the costs incurred by the Legal Aid Society of Alberta to administer a plan to provide legal aid.

The funds to do this important work are generated by Alberta lawyers, who are directed by the Legal Profession Act to remit the interest which banks, credit unions, trust companies, and treasury branches pay on clients’ funds held in lawyers’ pooled trust accounts.

In the 2019-20 fiscal year, programs funded by the Foundation supported over 268,000 Albertans with legal advice, representation, education, information and referral.  In total, 56 grants with an aggregate value of $16.4 million, were allocated to organizations across the province.

In addition, the Foundation allocated $8 million to Legal Aid Alberta, as required under the Legal Profession Act, equal to 25% of the interest accrued on lawyer’s pooled trust accounts in the Foundation’s 2019-20 fiscal year. As well, a special contribution of $8.5 million was paid to Legal Aid Alberta in the 2019-20 fiscal year, as part of a 3-year commitment by the Foundation to support Legal Aid Alberta’s redesign efforts.

The Foundation receives interest only from pooled trust accounts. Interest from separate interest-bearing accounts, trust investments held for individual clients, are not remitted to ALF. What this means is that lawyers and their clients need to be sure that the funds placed in trust accounts are in the right kind of account, and that account is set up correctly with their financial institution.

Every lawyer needs to provide a letter of direction to their bank, to remit that interest to the Foundation, and must  keep a copy of that letter on file at their firm and provide a copy to the Foundation and to the Trust Safety team at the Law Society. This documents a clear record of the relationship between the financial institution and the lawyer when lawyers do their annual self-report to Trust Safety.

Reporting issues while operating a trust account

While Trust Safety does have mandatory annual filings with Self-Report, Accountant’s Report and Accounting Uploads, lawyers need to know that they are obligated to report issues with their trust accounting immediately, particularly with regard to shortages, fraud, or cash rule breaches. While most issues can be resolved quickly, you must not wait for your annual filing to report any issues. By keeping on top of your obligations in terms of both reporting and your annual filing, you are far less likely to encounter a situation where you have exposed either your firm or your client’s money to risk.

Guarding against money laundering

Effective anti-money laundering and terrorist financing rules and regulations for lawyers continue to be a priority for all law societies in Canada. While there are considerable resources on the Law Society website for support, here are three key takeaways for Albertan lawyers:

  1. Lawyers should know that can only set up a trust account for the express purpose of delivering legal services. You can’t hold or facilitate the transfer of client money in trust for any other purpose.
  2. Every lawyer should follow the protocols around client identification and verification to ensure that people are who they purport to be.
  3. Lawyers cannot accept more than $7,500 in cash from clients or prospective clients, in respect to any one client matter.

For more information on the rules around anti-money laundering, visit the Law Society website.

Closing a Trust Account

Once a lawyer has decided to close their trust accounts, it isn’t quite as simple as turning off the lights and walking away; lawyers continue to have obligations and requirements that extend beyond the life of the account itself.

When you are ready to close your account, for example if you are retiring and transferring those accounts to another lawyer, Trust Safety will need to see proof of that transition as well as submitting one final self-report.  If you are shutting the accounts down altogether (for instance if the firm is closing), you must document that all trust funds are accurately disbursed back to the client or to another firm that is taking on responsibility for those funds. Finally, you must provide a proof of closure letter from the bank to the Law Society.