QuickBooks for Law Firms: Trust Transactions

The methods suggested here are designed to comply with state reporting requirements, however you should verify with your state since each state is different and may have unique requirements. We have not verified our recommendations with each state.

Please also check with your state regarding the need for paper copies of records related to the Client Trust Account. In most states paper or PDF copies are acceptable but please make sure you maintain copies in a format acceptable to your state.

IOLTA – Interest on Lawyer’s Trust Account. This account is designed to hold funds that will not be held long enough or are not of a large enough amount to separately allocate interest. All interest is removed by the bank and transferred to the state for legal purposes. If an amount will be held for an extended period or is large enough to specifically receive interest, it is a trust account. Some firms will use the term Retainer. It is important to distinguish a Retainer “trust” account from a General Retainer. General Retainers are allowed in some states and is money that is deposited into the operating account but may show as a credit on a client bill.

Receiving and Depositing Money to the Trust Account

The law firm must deposit all funds received or held for the benefit of a client, including advances for costs and expenses, directly into the Client IOLTA bank account. While there may be some allowance for a general retainer, this is usually more of an exception than the norm.

All funds received should be deposited immediately upon receipt using the following steps.

1. Select Make Deposits from the Banking menu.
2. Enter the appropriate Client IOLTA account in the Deposit to field at the top of the form.
3. Enter the Client name (Customer), and the Matter (Job) in the received from column, regardless of whom actually provided the money.
4. Enter the appropriate Client Trust Liability account in the From Account.
5. Enter any other information desired in the Memo field. If the money originated from someone other than the Client, that can be entered into this field.
6. Enter the Check No and Payment Method if desired.
7. Record the Deposit by clicking Save & Close or, Save & New if you have another deposit to record.

Check with your state for rules on how long checks should be held in the Trust Bank account before being considered cleared and available for withdrawal on behalf of the client. This will prevent problems with Trust Balances due to accidentally bounced checks.

Entering Bills to be Paid from the Trust Account

Although we prefer directly writing checks, some firms find that the use of the QuickBooks Bills and Pay Bills functions allows for streamlining day-to-day bookkeeping tasks. In our example, we’ll use the special Trust A/P account to record Bills that will be paid directly from the Trust Checking account. As soon as we enter these Bills, they “transfer” the funds out of the Client Trust Liability Account and into the Trust A/P Account. When we pay the Bills, the balance in the Trust A/P Account will decrease. Since we track our Client Funds balances from the liability account we will not “spend” trust money that is reserved to pay these bills.

To record Bills to be paid by the Client Trust Checking Account, use the Enter Bills screen and select the Trust A/P account at the top of the Bill. Be careful when entering bills. Because our setup has multiple A/P accounts, each time you enter a Bill, you’ll need to pick the Accounts Payable account into which the Bill should be entered.

Make sure to enter the Client and Matter in the Customer:Job field. Use the Item tab to enter the expense being paid and choose the Client Trust Liability account. Make sure the entry under Billable is blank. If using Class Tracking you can enter the appropriate class.

All bills entered into the Trust A/P account must have Non-Billable line items. This is because all charges in the Trust A/P account will be paid using the Client Trust funds. Therefore, we don’t want to pass these expenses through to invoices; otherwise, we would double their effect.

Paying Bills from the Client Trust Account

When paying the trust bills always use the Client Trust Bank account.

Select Pay Bills from the Vendors menu, then select Trust A/P for the A/P Account field. Select Client Trust Checking in the Payment Account field.

In the Pay Bills window only the Bills that were entered into the Trust A/P account appear. To pay the Firm’s bills you’ll have to change the A/P account and the Payment Account. Don’t forget this two-step bill-paying process each time you pay bills.

Using Trust Funds to Pay Invoices from the Firm

On a regular basis the law firm should create invoices for fees and expenses paid from the Firm Operating Account. These invoices can then be paid from funds held in the Client Trust Account. To pay the Client’s invoice using the Trust Account, and to insure proper documentation, use the following steps:

PART 1 – Remove Money From Trust

1. Create an Open Invoices report to see the invoices from each client for the month. (Reports / Customer & Receivables / Open Invoices). This will show you all clients with open balances and will help you identify any clients who might have money in trust that you have earned and can move to the Operating account, regardless of when the money came into the Trust account or when the invoice was run.
2. Create a Client Trust Balances report to verify that there are sufficient funds in the Client’s Trust Account to cover the invoice.
3. Note the amount of money available from each client as you will “transfer” the lesser of the amount available or the amount of the invoice.
4. Go to Banking / Write Checks and choose the Client Trust account in the Bank Account window.
5. The Pay to the order of will be the Firm Vendor account. You can skip the amount field and go directly to the Expenses tab.
6. The Account will be the Client Trust Liability account. Enter the amount and the Customer:Job. The billable box should NOT be checked.
7. You can combine the payments from multiple Customer:Jobs on one check by adding a new line for each Customer:Job.
8. Verify the total amount and Save the check.
9. Re-run the Client Trust Balances report to make sure you have not overdrawn a Client’s Trust account by mistake.
10. Print the check. If you do not need a physical check we recommend printing on plain paper with a dummy check number for your records.

PART 2 – Record Payment of Invoice

1. For each client whose invoice was paid, select Customers / Receive Payments.
2. Enter the Customer:Job in the Received From box and enter the Amount Paid. Note that if the amount paid is less than the full amount of the invoice the payment will be allocated proportionately across the line items, you cannot control how the payment is allocated against a specific invoice.
3. Enter the Date and the Check # if a physical check was used. Some firms precede the check number with a letter T to indicate the invoice was paid using a Trust Check. You can also setup a new payment method “Trust Check” for enhanced tracking.
4. Accept the invoice default or un-check the assigned invoice and check the invoice being paid.
5. Click Save & New and enter the next Customer:Job payment. When all payments have been recorded click on Save & Close.

PART 3 – Record Deposit

1. Select Banking / Make Deposits. The Payments to Deposit window will open.
2. Select the items that were part of the check being taken to the bank Operating account. You can also select other items that are being taken as part of the same deposit, if applicable.
   
3. Choose the Firm Operating account in the Deposit To box in the Make Deposits window and select the date you will be making the deposit at the bank.

Some states have rules requiring that the money withdrawn from the Client Trust account must be processed on the date it is written, so you may want to be careful with the date of the check and the date of the actual deposit. In no case should the check have a date after the date the deposit is actually made.

At this point you may want to run an Accounts Receivable report (Reports / Customers & Receivables / A/R Aging Summary) to see what clients currently owe you and to make sure you did not accidentally overpay a client balance. Overpaying a client balance would generate a General Retainer which, if allowed, should be properly recorded in the Suspense account.