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Want to Lower the Cost of Legal Services? Let’s Ditch Trust Accounts.

Last month over at Attorney at Work, practice management consultant Peggy Gruenke shared her Mini-Checklist for Trust Account Management. Gruenke’s list is an exhaustive compilation of the do’s and don’ts and best practices for trust account management and therein lies the problem. Because in a digital age when most firms accept electronic payments and credit cards, aren’t the protections afforded by trust accounting utterly obsolete and ridiculously burdensome?

Just to clarify, my critique concerns situations where trust accounts are used to hold advance payments from clients for legal services – and not funds from third parties, such as proceeds of settlements or large escrow payments.  In these types of situations, all or the bulk of the funds held belongs to the client – and under existing ethics rules, lawyers have an obligation to safeguard client property. Moreover, settlement proceeds and escrow often involve large amounts of cash, so the formality and added safeguards, such as bar oversight, of trust accounting in these circumstances makes sense.

But requiring lawyers to deposit retainers or other advance payments of fees by clients simply doesn’t make any sense in today’s world. For starters, many clients often use credit cards to pay for legal services – which in theory, should be a convenience not only for clients, but for lawyers. Yet trust accounting requirements add layers of complexity to an otherwise simple transaction: to accept credit cards for advance payments, lawyers need to set up not only a trust account but a separate operating account to cover fees associated with credit card charges and chargebacks. So complex are trust accounting rules that they delayed the use of credit cards for legal services and continue to deter some lawyers form accepting credit card payments.  

Yet here’s the irony.  Credit cards and digital payments offer better protection against ne’er do well attorneys than trust accounts. How so? Consumers dissatisfied with legal services can seek a charge back or lodge a request for dispute resolution with most credit card companies or digital payment platforms. By contrast, all the trust account rules in the world won’t stop unscrupulous lawyers from stealing client money.

Trust accounts also complicate – and minimize the benefits associated with flat fees, which more clients are demanding.  In some jurisdictions, flat fees are considered “earned on receipt” and may be deposited into a lawyers’ operating count and spent immediately. This is so even if the lawyer, for example, accepts a $50,000 flat fee for a complex matter that may take two years to resolve.

By contrast, in the majority of jurisdictions, flat fees are not considered earned until all work is completed – meaning that the lawyer charging $50,000 for a complex but protracted matter technically must put the funds into a trust account and hold them for two years until the case is over. Of course, there are ways around; as I recommend in Twenty-First Century Retainer Agreement, lawyers can establish milestones in their representation agreements where fees are deemed earned on receipt (e.g., 40% of the fee is deemed earned after first meeting, 30% after preliminary hearing and 30% upon resolution of the matter). So essentially, jurisdictions that hold that flat fees are not earned until a matter is completed encourages lawyers to create the legal fiction of milestones to enable them to recover payment as work is performed and avoid cash flow problems of tying up dollars until the case is complete.

Trust accounting imposes administrative burdens and adds extra costs to solo and small firm lawyers. To be sure, practice management systems facilitate trust accounting to some extent, but lawyers are still responsible for the minutia of three-way reconciliations and accounting for clients’ balance described in Gruenke’s list. And then there’s the added cost of maintaining multiple accounts to process credit cards or using one of the lawyer-specific credit card services that take care of segregating accounts but also charge a higher fee than commercial services.  Finally, bars bear the cost of monitoring trust accounts, with the cost of oversight passed on to lawyers in the form of higher bar dues.

Given that trust accounting is so incredibly onerous and expensive, why hasn’t anyone called for an end to this largely outdated practice? To be sure, inertia partly explains why trust account requirements have overstayed their need. But the larger problem is self-interest of the vendors – lawyer credit card services, consultants, grievance lawyers and even some banks – that profit from trust accounting requirements.

Then there’s IOLTA (interest on lawyer trust accounts) programs, which siphon off the interest from client trust accounts to provide aid for legal services programs. With interest rates at an all time low for several years, funds from IOLTA programs for legal services programs have been substantially reduced – and if trust account requirements were eliminated for all but settlements and escrow, these amounts would decline even more.  Even so, ensuring adequate funding for legal services is the responsibility of the profession at large, and not just the solo and small firm lawyers who suffer most from the added hassle and cost of trust accounting requirements.

To be sure, today’s LPM platforms coupled with the rise of innovative credit card processing services have made it easier than ever before for solos and smalls to comply with trust account rules. But these new developments don’t go far enough because they merely mitigate the burdensome effects of trust accounting rather than getting rid of the problem at the source – which is a direction worth exploring.  What do you think?