Should I Deposit a Retainer into an Operating Account or a Trust Account?

Retainers vary across practice area, purpose, and locality—they don’t all operate in the same way. In fact, as retainers vary, so do the ethical requirements for how a law firm should handle them.

While it’s common to think that every retainer should automatically be deposited in a trust account, the reality is more nuanced. So, should you deposit that retainer in a trust account? The answer, like so many other things in life, is, It depends.

What is a trust account?

Trust accounts are bank accounts set up specifically to hold client retainers. Trust accounts are held in the law firm’s name, but the money in them belongs to the client.

Common reasons to use trust accounts are:

• Advanced fee retainers: the client is putting up funds in advance for work the law firm will perform
• Security retainers: the client puts up money for the law firm to hold in case the client doesn’t pay an invoice
• Settlement funds: money awarded may be deposited with the law firm and then paid out to one or more parties

The idea behind security and advanced fee retainers is that the law firm knows the client can pay for legal work—and that they have an active investment in the legal work’s success, creating a greater sense of teamwork between the lawyer and client.

Simultaneously, the client knows the money in the trust account is still theirs and is protected from the law firm accessing it prematurely by strict ethics standards. The client also knows that if they decide to cut ties, they can get back any money that hasn’t already been earned by the law firm.

What is an operating account?

An operating account, on the other hand, is the account from which the firm expenses—such as salaries, utilities, and rent—are paid. It’s also the account into which firm profits are deposited.

Therefore, it’s typically not an account used to hold client retainers because that money is client money and hasn’t yet been earned by the law firm.

Moving retainer funds from the trust account to the operating account

In most cases, retainer funds can’t be moved from the client trust account to the law firm’s operating account until the law firm has performed work for the client, sent the client an invoice, and waited enough time for the client to have a reasonable opportunity to raise questions or concerns about the bill.

In this manner, retainer funds are only moved as the law firm earns them. For many clients, this safeguard provides important peace of mind as they allow the law firm to put their money in a bank account they can’t access.

When can retainers be deposited into the operating account?

However, there are certain instances when retainers can be deposited directly into a law firm’s operating account.

When the word “retainer” is used to apply to a fee paid by the client to ensure the law firm will be available for a specific period of time, on a specific matter, then this type of retainer may be deposited into the law firm’s operating account.

The reason for this is that this kind of retainer isn’t an advance payment for future legal work or a deposit against the failure to pay an invoice. Instead, it is money that belongs to the law firm and so it can go into the law firm’s account.

There’s one last exception to the rule that client retainers must go into trust accounts—and that’s an exception based on local bar regulations. Some states allow law firms to place advance fee retainers into operating accounts, if outlined in the initial agreement between the client and the law firm.^[1] Others allow advance fee retainers to go into operating accounts if they’re under a certain amount.^[2]

It’s up to you to know your local regulations. However, it’s also important to remember that even if you are legally allowed to deposit a client retainer into your operating account, the client is generally protected in their right to get their money back if they end the working relationship before you’ve done enough work to deplete the retainer.

How should I handle retainers?

As mentioned above, different jurisdictions handle retainers differently. However, there are certain common guidelines that apply no matter where you practice.

Keep individual ledgers

It’s important to keep track of individual client funds. If you’re ever subject to a trust audit, you’ll need to produce this information. But regardless, it’s a smart practice that helps you maintain accurate bookkeeping.

Keep a separate ledger for each matter, including the balance and all transactions.

Avoid overdrafts

Keeping track of individual matter balances can also help avoid overdrafts. One of the most straightforward ways to do this is to use legal-specific accounting software. Not only should this allow you to see the balance of an individual matter whenever you need to, but it should also come with safeguards in place that notify you when the balance is getting low.

In this manner, you can avoid doing legal work for which the client hasn’t already put up funds— and thereby avoid a potentially unpleasant collections situation. Likewise, your practice management system should give you the option of automatically sending a reminder to the client for retainer replenishment.

Conduct regular reconciliation

Reconciliation helps you catch errors early in the accounting process. In many states, it’s also a required part of the trust account bookkeeping process.

Reconciliation and three-way reconciliation get a bad rap because they make for a tedious process if done by hand. But your legal accounting platform can do this for you with accuracy and efficiency.

Use tools to manage retainers

While charging and accepting retainers may come with certain ethical requirements that can be both detailed and time-consuming to adhere to, retainers help law firms get paid and the ethics requirements reflect the responsibilities lawyers are entrusted with.

And managing retainers is getting easier for law firms that leverage tech tools like legal-specific accounting and practice management programs.

If you haven’t already, we suggest taking some time to learn about the different practice management systems available to you. In the same way, you would put time into learning more about retainers, trust accounts, and operating accounts, understanding and using professional tools can change your firm’s daily operations for the better.

References

1. Ethics Opinion 983: New York State Bar Association
2. Rule 4-1.15: Trust Accounts and Property of Others