A Solicitor’s Trust Account: What Is It and How Does It Work?

Introduction

If you have ever engaged with us or another legal professional, you may have been asked to deposit or make payment into a solicitor’s trust account. For many clients, this can raise several questions such as:

1. What is a trust account?
2. How does it work?
3. Why is it necessary?
4. How does it protect me?

Understanding how a trust account works can give you confidence and peace of mind when engaging and dealing with a solicitor.

This article will answer common questions asked regarding a solicitor’s trust account. For reference, this article will focus on how trust accounts are used by solicitors based in NSW and who are subject to the Legal Profession Uniform Law (NSW) and the Legal Profession Uniform General Rules 2015 (NSW).

How Does It Work?

Money is paid into and held by a trust account for various different reasons including:

1. Upfront legal costs – in this instance, money is paid for a law firms anticipated fees and expenses and is held to secure the law firm’s services;
2. Settlement funds – money is held by the trust account so it can be disbursed on settlement when purchasing a property or money can be received into the trust account from the other party when selling a property. Money can also be transferred in the same way when making a settlement payment to resolve a dispute; and
3. Disbursements – money is received and set aside for third party payments such as for the payment of court filing fees, barrister fees, expert reports, relevant searches etc.

The purpose of a trust account is to ensure transparency, accountability and the protection of client funds.

The general process for operating a trust account is as follows:

1. When client funds are deposited into the trust account, the solicitor must issue a trust account receipt to the client to show that the funds have been received and to show the balance of the monies held in the trust account;
2. Every deposit and withdrawal in the trust account is detailed in trust ledgers. Each client matter has its own trust ledger that shows the exact amount of funds held in the trust account on their behalf and details how those funds have been used/transferred;
3. Funds can only be withdrawn in accordance with client instructions, in response to a legal obligation or once fees have been billed and authorised. Clients need to authorise the use of trust funds to pay invoices. However, regulation 42 of the Legal Profession Uniform General Rules 2015 (NSW) does allow solicitors to withdraw trust funds to pay legal costs if no objections have been raised by the client within 7 business days of them receiving the relevant invoice and a request to transfer the funds;
4. If there are any surplus funds held in a trust account at the conclusion of a matter, they will be returned to the client;
5. At the end of the matter and once there are no funds remaining in the trust account, a solicitor must issue a client with a trust account statement for their records. This statement details all the transactions made throughout the course of the matter; and
6. Solicitors must reconcile their trust accounts regularly, submit annual external examinations and are subject to random audits by the NSW Law Society. Specifically, at the start of each new financial year, if there is money remaining in a trust account, a solicitor must provide a trust account statement to the client for their records.

In relation to interest earned on general trust accounts, we note that these funds do not go to the solicitor or client. Rather any interest accrued is paid into the NSW Law Society’s Public Purpose Fund which supports the regulation of the profession, legal aid and other community legal services within NSW.

However, if a large sum of money is to be held in a trust account for a significant period of time, solicitors can request that it be placed into a controlled money account, where interest is earned and then paid to the client (or another party, as agreed).

Why Is It Necessary and How Does It Protect Me?

The trust account system was developed and designed to protect clients. By using a trust account, clients can be confident and assured that:

1. Their money is kept separate to the solicitor’s business funds;
2. The solicitor cannot use the money for any other purposes;
3. Detailed records are kept and provided to the client; and
4. Independent audits are conducted to ensure transparency and accountability.

Misuse of trust money is a serious matter that can lead to disciplinary action and/or criminal charges against a solicitor and/or the relevant law firm.

Conclusion

The purpose of a solicitor’s trust account is to act as a safeguard for clients. It ensures that client funds are handled responsibly, securely and in line with the law.

Due to the nature of trust accounts and the significant regulation around them, clients can feel confident that any money they deposit into a solicitor’s trust account in NSW is protected until it is needed for their matter and that they will be provided with continued updates regarding its status and use.

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