By Sharon Blake and Katherine Lau -
For many solicitors, particularly those setting up their own practice, the idea of managing a trust account can feel daunting. There’s a perception that trust accounting is overly complicated, time consuming or simply ‘not worth the hassle’.
But in reality, operating a trust account is not only manageable, it’s one of the most effective ways to run a client focused and financially secure law practice.
Law practices that can secure costs in advance of providing legal services are in a far more advantageous position during the costs recovery process than legal practices that cannot or have not. In contrast, solicitors who must rely on receiving payment after the work is done often find themselves chasing unpaid invoices and absorbing unrecoverable losses.
From improving your cashflow to driving more efficient service provision to your clients, having a trust account opens the door to a more flexible and professional way of working. It also helps ensure you stay firmly on the right side of your ethical and legal obligations.
In this article, we break down the benefits of having a trust account, address common myths and share the tools and support available to make trust accounting more accessible than ever.
Benefits of Operating a Trust Account
- Focus on client work: following up on unpaid invoices can consume valuable billable time, particularly for law practices that operate without the support of dedicated accounts teams. Maintaining a trust account can help alleviate this challenge by allowing solicitors to focus their time on delivering legal services rather than debt recovery.
- Practice flexibility: trust accounts make settlements, disbursements and interim costs transactions smoother.
- Builds client trust: for matters where there are anticipated disbursements, such as filing fees or expert reports, clients may want the convenience of depositing money into their solicitor’s trust account in advance to cover these expenses. Having a trust account not only offers clients convenience, but they can be assured their money is properly accounted for and managed in a regulated system.
- Cashflow control: having a trust account enables you to receive advance payments for costs and disbursements, reducing your debt risk and improving cost recovery.
- Legal tools like liens: possessory lien rights apply when funds are properly held in trust, allowing you to control the funds during a dispute about legal costs and secure payment when the dispute resolves.
- Professional safeguards: As will be explored later in this article, trust accounting rules can still be breached even if you do not have a trust account. A trust account protects you from inadvertent misconduct, such as comingling client money and office funds, and therefore minimises regulatory risk.
Myth Busting – what trust accounting is not
Here are some common misconceptions about trust accounts and the truth behind them.
1. “It’s not worth the compliance effort”
The reality: For many practices, operating a trust account makes running matters significantly smoother, and provides significant protections for the legal practice.
Without a trust account, a solicitor may forfeit important legal tools. For example, in the event of a dispute about legal costs, a solicitor without control of trust money may not be able to assert a possessory lien over the funds, making costs recovery more difficult and time consuming. Far from reducing risk, not having a trust account can create more problems than it avoids.
2. “I can just ‘rent’ another law practice’s trust account”
The reality: If you do not operate a trust account, you cannot hold or receive trust money. Similarly, you cannot accept money as trust money unless it is in connection with a legal service that your practice provides. Put another way, a third party law practice cannot be used only for access to their trust account.[1] Section 129 of the Legal Profession Uniform Law (the Uniform Law) defines trust money as “money received by the law practice on account of legal costs in advance of providing the services”.[2]
3. “I don’t handle enough money to justify setting up a trust account”
The reality: A trust obligation arises as soon as you receive any amount of trust money, in connection with legal services, even $100 in advance on costs. Whether you should hold a trust account depends on the type of transactions your matter may require, not the size of your practice.
If a law practice receives trust money but does not operate a trust account, it still bears the full responsibility of compliance and potential regulatory consequences, for example:
- failing to properly deal with an overpayment of an invoice, or
- depositing trust money into an office account instead of a trust account.
A single matter may trigger trust obligations and, accordingly, the need for a trust account.
“With the right systems in place, managing a trust account becomes simple, secure, and highly beneficial. It enables you to serve clients more effectively, manage your finances with confidence, and uphold the highest standards of professional conduct.”
4. “It’s too complicated”
The reality: While there are compliance requirements, accredited trust accounting software has made the process straightforward. Certified systems simplify receipting, reconciliation and reporting.
When evaluating software, solicitors should consider whether it:
- complies with the trust accounting requirements
- is certified by the Law Society of NSW, and
- meets your law practice needs (e.g. costs, data security, record retention).
The Law Society of NSW’s website publishes a list of trust accounting software packages that have been examined and certified as compliant systems.
5. “I can just use my office account”
The reality: This is a breach of the Uniform Law. Any money that is considered trust money under section 129(1) of the Uniform Law must be deposited into a trust account.[3] This includes money received by a law practice on account of costs in advance of providing legal services.
Mixing client money with office money, even temporarily, is not permitted. The office account is never an acceptable substitute for a trust account.
6. “Only big law practices need trust accounts”
The reality: The size of the practice is irrelevant. What matters is the type of transaction. Even small or low volume practices may regularly encounter trust money, such as when they:
- receive an advance on fees
- handle settlement proceeds
- manage client reimbursements for filing or court fees
- deal with overpayments
7. “Refunds don’t count”
The reality: Even temporary receipt of client money can give rise to trust obligations. Whether the money is held for 10 minutes or 10 weeks, it qualifies as trust money, if it is:
- received before legal services are provided, or
- intended for disbursements or costs that are yet to be invoiced.
Failure to properly deposit, receipt or record these funds, even if ultimately refunded, may still amount to a breach.
Key takeaways
- Operating a trust account enables more flexible, client-focused legal services and may simplify many transactional processes.
- Trust obligations apply regardless of whether a solicitor operates a trust account. Avoiding using a trust account does not remove compliance responsibilities.
- Certified trust accounting software can make compliance straightforward and affordable.
- A trust account supports improved cashflow, more secure client relationships and greater control over costs recovery.
With the right systems in place, managing a trust account becomes simple, secure, and highly beneficial. It enables you to serve clients more effectively, manage your finances with confidence, and uphold the highest standards of professional conduct.
Tools & Support
- Accredited trust accounting software automates compliance and recordkeeping. The Law Society of NSW website publishes a list of trust accounting software packages that have been examined and certified as complying systems.
- The Legal Accounting Handbook which is a practical guide written specifically for NSW solicitors with step-by-step explanations of trust requirements, examples and best practices.
- Use the online Trust s.154 Irregularity Report form to notify any trust irregularity quickly and discretely.
- The Trust Lodgement Portal streamlines your annual Part A, B and external examiner report process.
- Expert practical advice from the Trust Accounts Department on the day-to-day management of a trust account. Contact them via email: trust@lawsociety.com.au.
- Confidential and complimentary guidance is available from the Professional Support Unit (PSU) for broader practice management questions including costs, ethics and compliance.
