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- Trust Shortage and Reporting
Last updated: October 2022
A lawyer must always maintain sufficient funds on deposit in each trust account to meet all obligations to clients (Rules of the Law Society of Alberta, Rule 119.39(1)). Even though the trust account may have a positive balance, a trust shortage can occur in a pooled trust account when more funds are paid out on a client matter than what is available to the credit of that client (Rule 119.39(2)). A pooled trust account is an account comprised of funds held for a variety of clients (Rule 119(u) and Legal Profession Act, section 126(1)). Even though the trust account may have a positive balance, it may be short regarding a specific client.
Trust money must not be withdrawn or transferred unless it meets the requirements (Rule 119.28).
Lawyers should always review the individual client trust ledger and bank balance before the withdrawal or transfer. The individual client trust ledger must show sufficient funds to cover your withdrawal. You will have a shortage if there are not sufficient funds to the credit of that client, or if funds deposited to your client’s credit have not cleared.
Service charges, credit card fees and bank errors are considered trust shortages and should not be withdrawn from your trust account. They should only be withdrawn from your general account. Law firms may maintain a float of the law firm’s money up to $500 in each pooled trust account to cover these inadvertent deficiencies (Rule 119.22(3)(d)).
What to Do If You Have a Shortage
In the event you discover a shortage:
- If you are not the Responsible Lawyer (RL), immediately notify your law firm’s RL of the shortage and the reason for the shortage (Rule 119.39(3)).
- Immediately pay enough money into the trust account to eliminate that trust account shortage (Rule 119.39(2)).
- The RL must immediately report any trust account shortage, if the trust account shortage is:
- less than $2500 and is not corrected within seven days of the time the shortage arose; or
- exceeds $2500 regardless of when the shortage is corrected (Rule 119.39(4)).
- As required in step 3, report a trust shortage to the Law Society by completing the Trust Account and Client Ledger Shortages. Once the form is completed, attach the client trust ledger card, bank statement and any other applicable documents evidencing the correction of the shortage and send the information by email.
Documents to support shortage correction:
- Trust bank statement: A printed record of the amounts that have been paid into and withdrawn from the trust account. It must contain the name of the law firm and account number.
- A client trust ledger card: This is maintained for each client matter in the pooled trust account. It records receipts and withdrawals for each client file.
- Proof of correction:
- Copy of cheque with a document issued by the bank, verifying that the cheque has been deposited into a bank account, confirmed with a bank stamp; or
- Screenshot of electronic transfer from general to trust showing that the shortage from the trust account has been replenished.
Regardless of the amount of the trust shortage, you are obligated to report any fraud or theft from your trust or general accounts (Rule 119.40).
Tips to Prevent a Shortage
The following are recommendations from the Trust Safety department that may help prevent a trust shortage:
- Reconcile your account(s) on time: The RL should review and approve the bank statements and bank reconciliations for all bank accounts (including trust and general accounts) monthly (Rules 119.36 and 119.37). As part of this review, they should examine negotiated cheques for potential concerns (e.g., tampered cheques, forged signatures, unusual vendors, etc.).
- Review your online bank account regularly: The RL is required to reconcile their accounts by the end of the next month. In many cases this is too long to catch shortages. A weekly check of your online bank statements is recommended to ensure funds are where they should be.
- Marking trust documents clearly: All bank statements and cheques created for a pooled trust account must clearly indicate that the type of account is a trust account. This can be done by using different coloured cheques, using a stamp, or when cheques are printed have trust marked in bold.
- Provide up-to-date banking information and instructions: Provide accurate bank account information to clients.
- Check your bank’s clearance rules: Ensure that you receive funds well in advance of closing dates so that they can clear.
Test Your Knowledge
The following are two scenarios to help you identify when a trust shortage could occur.
Client A gives you $10,000 in trust, Client B gives you $21,000 in trust and Client C gives you $18,000 in trust. If these are the only three clients, you now have $49,000 in trust. Client B asks you to make a payment out of trust in the amount of $25,000 and you do so. By doing this, you have now created a shortage under Client B’s trust ledger in the amount of $4,000.
Why? Because Client B only had $21,000, yet you paid out $25,000. So, even though you still have a positive balance in your trust account of $24,000 ($49,000 – $25,000 = $24,000), it is considered a shortage because Client B did not have enough funds to make the payment and you ended up using some of Client A & Client C’s funds towards Client B’s payment.
Client A has received an invoice from you for $500 and gives you a cheque for $5,000 to pay for future fees. You deposit this into your general account to pay the invoice. By doing this there is now a shortage under their client trust ledger of $4,500.
Why? The $4,500 has been paid in advance of legal services and is therefore trust money. The $5,000 received from the client should have been deposited into the trust account. Since $500 was payable to the law firm, it can be transferred to general as the law firm is entitled to that money for legal services already performed.