The funds contained in the trust account are not owned by the legal practitioner – they are only controlled by the legal practitioner by virtue of a fiduciary relationship for the client. The protection of the audit trail is crucial, therefore, no overdrafts may be used for the trust accounts. It is prudent to link the business account to the trust account to prevent it from overdrawing as it allows bank fees and other charges of the trust account to be redirected to the practice’s business account. The trust account should only reflect the trust monies – fees and interest need to be settled against the business account and not from the trust account (FNB “Legal Practitioner’s S86 (2) Trust account: Manage + hold funds in trust” (www.fnb.co.za, accessed 29-05-2022)).
The purpose of the practitioner’s trust account is to protect client funds to ensure professional conduct. It is the practitioner’s professional responsibility to manage these accounts with the utmost good faith since failing to stay in line with the law could put the practitioner at risk of sanctions (The National Law review ‘Managing the Attorney Trust Account: Best Practices and More’ – May 29, 2022 (www.natlawreview.com, accessed 29-05-2022)).
Open a trust account with the Bank with which the Legal Practitioners Fidelity Fund (the LPFF) has made an arrangement and must be specifically designated as such with your bank (Legal Practice Act 28 of 2014 (LPA) – s 86(2). Once you open the account, you may want to structure your unearned and earned fees in a way that leads to minimal use of the said trust account. The use of automated monthly transfer functionality enabling the automatic transfer of surplus credit interest earned on the trust account to automatically be paid to the LPFF is apposite. The portion of fees not offset against the interest will be directed to the business account.
It is important that the practitioner knows the rules regarding what a practitioner can and cannot do with fees paid in advance of legal fees. Practitioners who fail to comply with the rules will risk facing sanctions, and in some cases, even disbarment. For this reason, it is incumbent upon practitioners to know the consequences of failing to adhere to the rules regarding trust accounts. Until the funds are considered “earned”, the practitioner may not under any circumstances borrow funds from a trust account. Prematurely withdrawing funds from the trust account is not allowed. Borrowing money from the trust account is a no-no under any circumstances, even if paid back within five minutes. You may not pay for operating expenses out of the trust account, even if they are considered earned fees. You must first remove your fees to the business account to pay for operating expenses.
It is the practitioner’s responsibility to track each incoming and outgoing transaction with detailed notes, accounting for every single account, no matter how small. At the end of the month, the practitioner is required to reconcile the account to ensure that everything is accurate. This is known as a three-point reconciliation. Generic, non-industry-specific accounting software can be a headache to use for three-point reconciliation, whereas legally-specific software takes the specific rules of trust accounting into consideration, making it easier to track, collect, and reconcile all funds in your client trust account, providing safeguards to guarantee that funds are considered earned before you draw them.
A trust account practice shall be deemed to have complied sufficiently with this rule if it:
- makes transfers from its trust banking account to its business banking account at least once a month; and
- ensures that, when making a transfer from its trust banking account to its business banking account:
(i) the amount transferred is identifiable with and does not exceed, the amount due to the firm;
(ii) the trust creditor from whose account the transfer is made is identified; and
(iii) the balance of any amount due to the firm remaining in its trust banking account is capable of identification with corresponding entries appearing in its trust ledger.
A practitioner cannot ever write off or transfer small trust balances to the practice’s business account, nor prepare a billing to the client in the amount of the trust balance in order to clear it. The trust account rules are extensive and detailed and it is the practitioner’s responsibility to be educated on all issues surrounding the trust accounts. A practitioner is responsible and liable even if staff members or financial institutions make errors or failure to do something. In order to relay accurate information (thus building trust) about how the client’s money is going to be handled legally and ethically, practitioners first need to understand the ins and outs of client trust accounts. Some of the best practices to remain compliant with client trust accounting are:
Step 1: Track each and every transaction whether it’s a deposit or a disbursement.
Step 2: Keep a separate ledger for each client.
Step 3: Add detailed notes for each transaction.
Step 4: At the end of each month, you must reconcile the account. This helps you ensure accuracy, the goal being to match all activities going into and coming out of trust.
The client intake process can be incredibly time-consuming, so it is wise to utilise tools to make your and your clients’ lives easier during the process. Trust account comes with plenty of rules. Step out of line with these rules, and you could find yourself severely reprimanded. If you are just starting a legal practice or you are afraid you may have mismanaged your trust account, contact a professional who specializes in trust account record-keeping and maintenance.
A client has only a limited right to control the trust funds. The client has no right to instruct the legal practitioner to pay all of the money to the client in disregard of a third party’s entitlement to the funds. If the practitioner does give all the trust money to the client, and the client fails to pay the third party, the third party may look to the practitioner for recovery. Obligations attached to trust accounts are the responsibility of each individual trust account legal practitioner, whether they are practising (or deemed to be practising) for their own account, either alone or as a partner, or as a member or director of a juristic entity, or as a trust account advocate.
A trust account legal practitioner must always be aware of their duty to comply with the requirements of the LPA and the rules. The legal practitioner must implement reasonable measures and controls to ensure compliance with such obligations. If a practitioner receives an amount consisting of both trust funds and non-trust money, which cannot be practically divided, he or she must pay the whole amount to the trust account. It is important that non-trust funds are removed from the trust bank account as quickly as practicable. A legal practitioner must ensure that trust funds are held by the practice in a way that protects the interests of the persons for whom funds are held. Once a trust account irregularity occurs, it needs to be dealt with immediately, and in a transparent way, as required by the legislation (see rule 54.14.10 of the Legal Practice Council Rules made under the authority of ss 95(1), 95(3) and 109(2) of the LPA). If a practitioner is unsure about how to maintain a legal practice trust account, transferring of funds, or generally running of the accounts department, it is prudent to engage the Regulator, i.e. Legal Practice Council (LPC).
S 87 of the LPA provides that permanent records must be kept in respect of all trust funds received by the practice. The regulations mandate specific procedures for recording the receipt, depositing, transfer and withdrawal of trust funds, and for the maintenance of the relevant cash book. The fundamental requirement to keep a record is prescribed by the LPA. There must be supporting documents to show that, at least monthly, reconciliation has been made of the cash balance derived from cash receipts and cash disbursement journal totals, the chequebook balance, the bank statement balance and the client trust ledger. All trust transaction journals must contain sufficient descriptions including the client’s last name and identifying a file or matter number.
The practitioner must keep a separate client trust ledger, providing sufficient information regarding the case and matter, indicating the source of all deposits, names of all persons for whom the funds are held and the description, and name and amounts for all funds disbursed from the trust account. Practitioners must refund unearned legal fees or unspent advanced costs. Practitioners have an ethical responsibility to do so whenever the practitioner completes or withdraws from representation or the attorney is discharged by the client. The LPC has the responsibility for examining records maintained by legal practices to ensure they properly account for the funds received which are held on behalf of another person (s 87 of the LPA). This involves trust account investigators visiting legal practices in order to detect and prevent opaque practices.
The Legal Education and Development (LEAD) assists legal practices in complying with the legislation through the provision of education and assistance. As soon as practicable after a legal practitioner of a legal practice becomes aware that there is an irregularity in any of the law practice’s trust account(s) or trust ledger accounts, the law practice must give written notice of the irregularity to the LPC. Serious irregularities including misappropriation, fraud, theft of trust funds, and placing a trust account ledger or trust bank account into a deficit or overdrawn position, may need immediate action and must be reported immediately to the LPC.
| Please note that our blog posts are informal commentaries on developments in the law at the time of publication and not legal advice |
