Maintaining Trust Compliance While Switching Banks

Trust accounts are known for having a large number of rules and regulations that lawyers must follow when managing them. With such a high bar for maintaining compliance, migrating a trust account from one bank to another is a lot more complicated than moving all the funds to a new account and closing the old one. Following the proper steps to make sure each record is properly recorded and funds appropriately transferred, can quickly become an involved process, but because switching banks is a regular part of a business, it’s important to know various migration options and to watch out for unique situations. 

The Basics of Trust Accounts

Trust accounts provide a way to track client funds while keeping them separate from a law firm’s or lawyer’s personal funds. These accounts help limit liability and reduce the risk of mismanagement of funds, while also serving to keep funds segregated in the event of a seizure by the law firms’ creditors or personal financial problems of the firm or lawyer. The rules in place surrounding legal trust accounts vary from state to state, but the general theme is the same – lawyers are responsible for explicit bookkeeping which tracks funds in trust accounts down to the penny. 

Modeled by the American Bar Association (in the United States) but monitored by the state bar associations, law societies, or local ethics departments, these accounts are bound by strictly enforced rules and regulations. While trust accounts are commonplace, they’re also a primary source of ethics violations and sanctions, including disbarment. Lawyers are held personally responsible for trust accounts – bar associations and disciplinary committees do not accept “not having knowledge” of particular rules or requirements as an excuse, so you want to make sure you’re informed and prepared if you’ll be changing banks.

Generally, client trust accounts are placed into one of two types of accounts:

Regular Trust Accounts where all client funds are pooled into a single trust account

or

Individual Trust Accounts where each client or matter has its own, unique account

The most common setup between these two options is regular trust accounts where lawyers place all the funds into a pooled account unless the amount of an individual matter has the ability to earn a considerable amount of interest that would benefit the client. Regardless of the type of account the process, the due diligence requirements for compliance are the same. 

To track these funds, lawyers are required to keep several records. An example is outlined in Attorney Trust Accounting Checklist published by Abo Cipolla Financial Forensics, LLC. Some of the key documents are: 

• Individual Client Ledgers: Detailed records showing all deposits and withdrawals for each client matter.
• Trust Account Ledger. A record showing all trust account activity including receipts, disbursements, and voids. 
• Disbursements Journal. A record tracking all outgoing payments and disbursements.
• Receipts Journal.  A record showing all deposits and payments received. 

As part of following trust accounting rules, no law firm funds should be placed into the trust fund account to avoid the commingling of funds.  It’s important to remember the funds in trust accounts do not technically belong to the lawyer. Additionally, funds should never be pulled from one matter to cover another without proper authorization and legal reasons, even if they share the same primary trust account. 

Trust accounts also require monthly three-way reconciliation. This type of report is similar to the usual two-way reconciliation you’ve most likely performed comparing the bank statement to the bank book but also includes the client ledger balance, while simultaneously accounting for uncleared funds. When the total balances of all three parts are equal, it’s apparent all entries have been made correctly. If there are inconsistencies, it’s a sign of an error, and it’s necessary to go back to find the mistake and correct it.  

For more information on three-way reconciliations and how to make sure they’re completed correctly, check out What Is A Three-Way Reconciliation?.

These reconciliations will also help make sure the transition from the old bank to the new bank was completed accurately. Having these essential pieces in place prior to switching banks means only accurate data is being migrated to the new account, which makes the entire process easier as there’s no need to go back and clean up the books. Correct balances and a properly set up system mean lawyers simply need to execute the proper sequence to move trust accounts, with less worry about how incorrect records from the old bank will affect the new bank records. 

Switching Trust Account From One Bank to Another

Law firms change banks for a number of reasons including acquisitions, mergers or location changes. The amount of funds in client trust accounts often provides lawyers with leverage when negotiating terms with banks, so some firms choose to switch when they’re able to obtain a better offer. Other firms open up a commercial mortgage or line of credit with a particular bank and as part of the loan are required to switch all bank accounts to the new bank. 

Whatever the reason for a change, it’s imperative the transition happens in a way that provides a seamless switch for the law firm’s trust accounts. There should be a clear trail as to what funds were left in the original bank account and what was transitioned to the new bank. The bookkeeping throughout this process has to be kept precise, staying in compliance with trust accounting rules and compliance. 

When switching banks, be sure to check your governing body’s rules. Some bar associations and law societies have approved lists of banks that lawyers must choose from. Others require the bank to be located in the same state/province or a defined proximity to the lawyer’s office. Before going through all the work of switching, make sure the bank is an approved financial institution. 

Preparing For The Switch

Before moving any funds, there are several pieces to address. The first is making sure a detailed record exists of each matter’s trust account balance. This record differs from the general bank record as it includes items that may not have yet posted to the bank, including deposits, payments, and withdrawals. 

These individual client ledger balances are required to comply with trust accounting rules. Prior to opening a new account, the current account should have proper records. If these individual client balances and ledgers are not already in place, creating this should be the priority. 

The second part is to select a cutoff date, preferably a month ending date. On that date trust funds will be transferred to the new bank. All future activity will then take place out of the new trust account.

Setting a date provides a hard deadline for when the necessary preparation should be completed and helps eliminate bookkeeping errors by making sure the entire firm knows when to begin using the new trust account. Picking a month-end date makes it easy to reconcile old accounts as well as new accounts as it often ties with the bank statement end-date. 

To make sure the new account is the only one being used after the cut-off date, consider getting the new checks in a different color than the checks from the previous account. Any computer or laser checks and deposit slips should be properly titled to reflect the new account information. With a full caseload and busy firm, it can be easy to make errors during the transition so a few proactive steps will go a long way toward preventing any issues. 

Transferring Funds & Closing Out Accounts

Transferring the Funds

When the day of the cutoff date arrives, be prepared with the book balance of the account. This is the amount that should be transferred to the new account. Writing a check or wiring funds for the total current bank balance will lead to problems if there are any remaining uncleared items (e.g. items which are in your books but not cleared at the old bank yet). 

Pre-Transfer

Post Transfer

Even though one single funds transfer will take place via a check or a wire, the books must still show how much was transferred for each client matter. Rather than risk the possibility of incorrectly creating this record, some lawyers opt to write individual withdrawal checks for each matter. 

Closing the Account

The old account should not be used after the cutoff date. However, it is important to continue to reconcile the account monthly until all prior transactions have cleared and it’s completely closed.  This account can only be closed once the book balance and bank balance are both zero. 

Any outstanding transactions must be given time to exceed their expiration date, such as checks which have not yet been deposited. Once this date has passed the funds should not be simply transferred over to the new account. Instead, you’ll need to go through the escheatment process, where unclaimed funds are remitted to a state agency. In the U.S., specific rules for each state on how to handle escheatment can be found under the state’s Rules of Professional Conduct. 

Software & Bookkeeping Tasks

Moving the accounts is not enough to call the process complete. Backing up the transition with accurate bookkeeping is just as important. Correctly completing this piece will make it easy to look back and see what funds were transferred. 

IF YOU’RE KEEPING YOUR CURRENT SOFTWARE

If you’ll be keeping your current software, ensure that new clients are assigned to the new bank account. 

For current clients, there’s more work involved. Each existing matter will need to be reassigned to the new account. Depending on what your software does or doesn’t allow, there are two ways to go about switching the bank assigned to the matter. 

If your trust accounting software allows you to switch the bank assigned to the matter within the program or allows multiple trust banks per matter:

Switching the bank within the software is the simplest method. In this situation complete the following steps for each matter:

• Enter a withdrawal in the individual client ledger balance from the old account for the total amount, creating a zero book balance
• Assign the matter to the new bank account
• Deposit the same individual client ledger balance you withdrew in the first step to the new account, bringing the total account balance back to the original amount

If your software doesn’t allow you to switch the bank assigned to the matter within the program:

If you cannot make the change within the system, you’ll need to open a new matter for each existing one. The process can be time-consuming but it is necessary to make sure all matters are now connected with the proper bank account. 

In this instance the steps to take vary slightly from those taken above. You’ll need to complete the following for each matter:

• Enter a withdrawal in the individual client ledger balance from the old account for the total amount, creating a zero book balance
• Create an additional matter to now be associated with those funds
• Assign the new matter to the new bank account
• Deposit the same individual client ledger balance you withdrew in the first step to the new account, bringing the total account balance back to the original balance

For both of these processes, once these steps have completed for every single matter, a balance report should then be created. The total amount should equal the initial total deposit into the new account. 

From this point forward remember to conduct all trust account activity out of the new account, leaving uncleared transactions under the old account for monthly reconciliations. 

IF YOU’RE GETTING NEW TRUST ACCOUNTING SOFTWARE

For new clients, these matters will need to be created in new systems and assigned to the new bank account. 

Current clients will need to be addressed in both the old and new systems to make sure each entry matches correctly. Within the old system you’ll need to enter a withdrawal from the old bank account equal to the book balance of its individual client ledger for each matter, making each balance zero. It’s important to keep uncleared transactions listed under the old account for reconciliation purposes while also maintaining all bank activity records, client ledgers, and reconciliation reports. 

In the new system, current clients will need a new matter created for them. For each of these, deposit the book balance originally withdrawn from the old account into the respective matter in the new system, associating it with the new bank account. 

At this point it’s critical to run a balance report, making sure the total of all individual client ledgers is equal to the amount deposited into the new account. If the numbers add up correctly,  the new system should be used for all future trust activities. If the numbers aren’t equal, go back and check for any discrepancies between the original withdrawal from the old system and the deposit into the new system. 

The Takeaway

In the normal course of business, it may become necessary to switch banks and therefore bank accounts. Migrating trust accounts to a new account can involve hands-on work, but it may be necessary for a lawyer or law firm.  In the event you need to transfer trust accounts, be sure to take note of what steps you’ll need to complete to maintain proper bookkeeping and compliance. 

Throughout the process, you’ll want to leave a clear audit trail of accounts funds, where they’ve been moved to and how the transactions took place. If an auditor were to look back, your books should tell a clear story of your account migration with no further explanation needed. The extra work put in during the switch will make moving forward with the new bank much easier.