Trust Accounts and Trust Accounting
A foundation article
It is all about proper management of trust money….
In this foundational article, we are focusing on an aspect of effective practice management which is fundamental to your practice.
In fact, an attorney under the Legal Practice Act 28 of 2014, would not be able to receive money or hold funds or property belonging to any person, nor may they take a deposit on account of fees or disbursements in respect of legal services to be rendered, without this.
What are we talking about – trust accounts and trust accounting.
As we have said before (something we believe bears repeating) – how you think of managing your legal practice needs to change. Legal practitioners across the board, need to start managing (and running) their legal practice in the same way they would manage or run any project (within any business). Because again, that is what your legal practice is – a business.
The same business principles will therefore apply to both project and practice management – achieving the desired outcome within an agreed timescale and according to the projected or agreed budget. And those principles will ring true, whether it is for a law firm or a business. Time, cost, and quality are the building blocks of every project, business and legal alike. Remember that.
Central to these concepts of time, cost, and quality in a business (and in a project) comes down to understanding the financial side that make up the performance of the business/project/legal practice. And in this particular instance, we will be focusing on the legislative “financial” obligations of a legal practitioner.
As we go through this topic, we would like you to keep the following quote in mind –
“Law is not a profession at all, but rather a business service station and repair shop” – Adlai E Stevenson
A cornerstone of the Attorneys’ profession is the client-centric approach taken on all matters involving the public, their clients, and the Law.
A lot of this stems from being able to trust (excuse the pun) your attorney to handle both your money and your affairs in a manner befitting someone in their position. Trust accounting therefore fits squarely within this realm of both trust and serving the public, their clients, and the Law responsibly and legally.
What is a trust account?
A trust account refers to the bank account opened by a legal practitioner (who is in possession of a fidelity fund certificate) to receive or hold funds or property belonging to a person, a deposit on account of fees or disbursements in respect of legal services to be rendered. The attorney acts as custodian of these funds and invests the money in accordance with their clients wishes. The funds are only accessed by the attorney once legal services have been provided or expenses have been incurred on behalf of their client.
Turning to the legislation under the Legal Practice Act
Under Chapter 7 (Handling of trust monies)
Section 84 (Obligations of legal practitioner relating to handling of trust monies
(1) Every attorney or any advocate referred to in section 34(2)(b), other than a legal practitioner in the full-time employ of the South African Human Rights Commission or the State as a state attorney or state advocate and who practices or is deemed to practice—
(a) for his or her own account either alone or in partnership; or
(b) as a director of a practice which is a juristic entity, must be in possession of a fidelity Fund certificate.”
Section 86 (Trust accounts) –
(1) Every legal practitioner referred to in section 84(1) must operate a trust account.
(2) Every trust account practice must keep a trust account at a bank with which the Fund has made an arrangement as provided for in section 63(1)(g) and must deposit therein, as soon as possible after receipt thereof, money held by such practice on behalf of any person.
(3) A trust account practice may, of its own accord, invest in a separate trust savings account or other interest-bearing account any money which is not immediately required for any particular purpose.
(4) A trust account practice may, on the instructions of any person, open a separate trust savings account or other interest-bearing account for the purpose of investing therein any money deposited in the trust account of that practice, on behalf of such person over which the practice exercises exclusive control as trustee, agent, or stakeholder or in any other fiduciary capacity.”
Turning to the Legal Practice Act: National Forum on the Legal Profession: Rules
Trust moneys not to be less than trust balances
54.14.8 A firm shall ensure that the total amount of money in its trust banking account, trust investment account and trust cash at any date shall not be less than the total amount of the credit balances of the trust creditors shown in its accounting records.
Trust accounts not to be in debit
54.14.9 A firm shall ensure that no account of any trust creditor is in debit
Reports to Council of non-compliance
54.14.10 A firm shall immediately report in writing to the Council should the total amount of money in its trust bank accounts and money held as trust cash be less than the total amount of credit balances of the trust creditors shown in its accounting records, together with a written explanation of the reason for the debit and proof of rectification.
54.14.11 A firm shall immediately report in writing to the Council should an account of any trust creditor be in debit, together with a written explanation of the reason for the debit and proof of rectification.”
But what does this mean?
The Legal Practice Act requires every legal practitioner to effectively operate a trust account, which must be kept at a bank with which the Legal Practitioners’ Fidelity Fund has made an arrangement (Section 63(1)(g).
Note: A legal practitioner may not deposit money, nor invest money in accounts held at a bank which is not a party to an arrangement as provided for above, unless prior written consent of the Fund has been obtained.
The legal practitioner must deposit any money (held by such practice on behalf of a person) as soon as possible after receiving same, into their trust account. In addition, they may (of their own accord) invest in a separate trust savings account or other interest-bearing account any money which is not immediately required for any particular purpose. Or, if instructed to do so by the payee, open a separate trust savings account or other interest-bearing account for the purpose of investing any money deposited in their trust account (the proviso being that the legal practice exercises exclusive control as trustee, agent, or stakeholder or in any other fiduciary capacity).
If any interest is accrued on the trust bank accounts, the legal practitioner is obligated to pay over any and all interest generated or accruing on the separate trust savings or other interest-bearing account opened by the legal practitioner to the Fidelity Fund. Additionally, 5% of the interest generated on an investment account opened on the specific instructions of a client is payable to the Fidelity Fund. The balance of this interest must be paid to the client.
- But it must be kept in mind that a legal practice must ensure that the total amount of money in its trust banking account, trust investment account and trust cash at any date shall not be less than the total amount of the credit balances of the trust creditors shown in its accounting records.
If a legal practitioner is not in possession of a Fidelity Fund Certificate, they (or any person employed by that legal practitioner) may not receive or hold funds or property belonging to any person, nor may they take a deposit on account of fees or disbursements in respect of legal services to be rendered.
So, it is safe to say that having both a Fidelity Fund Certificate and operating a Trust Account are fundamental to both operating and effectively managing a legal practice.
Note: the capital amount deposited by a client into the trust account of an attorney remains the property of the client. The attorney merely is a custodian of the funds and invests the money in terms of the clients wishes. The attorney will only be entitled to access the funds held in trust once he has provided legal services to the client or has incurred expenses on behalf of the client.
Getting a Fidelity Fund Certificate
In our article Going out on your own – Part One, we discussed the basic principles of completing a legal practice management course in order to receive a fidelity fund certificate. They go hand-in-hand (as if that was not already obvious).
In short –
Legal practitioners practicing for the first time must complete a legal practice management approved course (referred to as practice management training or PMT) as offered by Legal Education and Development (L.E.A.D), within the period of one year after the date on which he or she was required for the first time to be in possession of a Fidelity Fund certificate. Payment of a fee as determined by the Legal Practice Council (Section 85(1)(b) read with Regulation 27(1)) will also need to be made. In the case of a first-time applicant (requiring a fidelity fund certificate), they will need to submit proof to the Legal Practice Council that they have indeed completed the legal practice management course (proof of completion must accompany the application for the fidelity fund certificate).
If an applicant was in possession of a fidelity fund certificate the previous year, the certificate of an auditor – who undertook an audit of the trust account bank accounts for the year ending immediately prior to the application – must have been submitted (or proof of such submission) must accompany the application.
Note: a fidelity fund certificate is valid until 31 December of the year in respect of which it was issued.
Accounting on a Trust Account
“Section 87 (Accounting) –
(1) A trust account practice must keep proper accounting records containing particulars and information in respect of—
(a) money received and paid on its own account;
(b) any money received, held, or paid on account of any person;
(c) money invested in a trust account or other interest-bearing account referred to in section 86; and
(d) any interest on money so invested which is paid over or credited to it.
(2) (a) The Council or the Board may, itself or through its nominee, at the cost of the Council or the Board, inspect the accounting records of any trust account practice in order to satisfy itself that the provisions of section 86 and subsection (1) are being complied with.
(b) If on an inspection it is found that these provisions have not been complied with, the Council or the Board may write up the accounting records of the trust account practice and recover the costs of the inspection and the writing up of the accounting records from the trust account practice concerned.
(3) For the purposes of subsections (1) and (2), ‘‘accounting records’’ include any record or document kept by or in the custody or under the control of any trust account practice which relates to—
(a) money held in trust;
(b) money invested in terms of section 86(2), (3) or (4) and interest thereon;
(c) any estate of a deceased person or any insolvent estate or any estate placed under curatorship, in respect of which an attorney in the trust account practice is the executor, trustee or curator or which he or she administers on behalf of the executor, trustee or curator; or
(d) the affairs of the trust account practice.
(4) (a) Any money held in the trust account of a trust account practice in respect of which the identity of the owner is unknown or which is unclaimed after one year, must, after the second annual closing of the accounting records of the trust account practice following the date upon which those funds were deposited in the trust account of the trust account practice, be paid over to the Fund by the trust account practice.
(b) Nothing in this subsection deprives the owner of the money contemplated in paragraph (a) of the right to claim from the Fund any portion as he or she may prove an entitlement to.”
A legal practitioner must be in a position to immediately report and account (in writing), to the Legal Practice Council the total amount held in a trust account bank account and money held as trust cash.
Equally, and unless prevented by law from doing so, every legal practitioner is required to report to the Legal Practice Council any dishonest or irregular conduct on the part of a legal practitioner in relation to the handling of or accounting for trust money on the part of a trust account.
It therefore (again) makes sense that a proper (and dependable) accounting programme for your legal practice is an absolutely necessary and crucial tool. At AJS, our legal tech is designed specifically to assist you with both your trust and business accounting concerns. We have three amazing software solutions that can be tailor-made to suit your practice –
- AJS Express – a web-based, flexible, full featured system that allows for document management, time recording, contracts management, FICA management and an asset register, to name but a few things;
- AJS Pro – a web-based, flexible full-featured accounting and practice management system geared towards mid-size firms, that also includes an impressive integrated process automation, user task and notification tool, and
- AJS Enterprise – a comprehensive legal and professional accounting software package serving mid-size, large and major international firms with an impressive integrated process automation, user task and notification tool.
It should be noted that in addition to the extremely capable software offered by AJS (as per the above), part of our standard offering includes a “7 column ledger system”. Our offering is made up of trust debit, trust credit, trust balance, business debit, business credit and business balance columns, all resulting in an “overall balance” overview.
This, inevitably, gives users the ability to view trust and business balances simultaneously and on any given matter (how handy is that?)
Our ingenious ledger system allows for added system integrity and accuracy and is favoured by auditors of the Legal Practice Council due to the added integrity it offers.
AJS has a wide range of products that effectively assist with both business and trust accounting for your legal practice.
Being an efficient, affordable, and reliable legal practice has never been easier. And has never been more necessary.
As Thomas A. Edison said –
There’s a way to do it better, find it
Just because it is a foundational principle, does not mean it cannot be improved upon. So, do that. Seek to continually improve your legal practice – incorporate legal tech to become more efficient, accurate and affordable and make an effort to boost your revenue, your productivity and client retention in order to build a successful operation.
If you have questions on business and trust accounting (or how you can make your legal practice more efficient), get in touch with AJS today to see how we can support you.