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  • Mary Anne Harris

Don't let your firm's accounts overwhelm you.

Escrow accounts, client trust accounts, etc. add complexity to managing title agencies and law firms

One of the challenges of being a title agent or a lawyer who handles real estate transactions is the sheer complexity of the accounting end of the business.

For most small businesses, accounting can seem pretty basic. You provide a product or a service to a customer and charge a particular price or fee, you pay your employees and your expenses, and the rest is profit.

But for professionals who handle real estate transactions, you have the extra accounting headache of managing the escrow account for the transaction.

It’s even more complex for attorneys who have a variety of clients, or even practice in multiple states.

What account does that go in?

Attorney fees can vary depending on the scope of the work. You may charge a fixed fee or standard fee for routine work like drawing up a simple will or you can charge by the hour for work that is going to be of an unknown quantity. This kind of income is accounting 101 and not very complex.

But when you charge retainer fees for anticipated work, manage an escrow account for a real estate closing, or handle settlement or judgment funds, that's where it all gets very tricky. Many client fund accounts have different legal requirements for how they are handled. That can vary from state to state as well.

Although title agency owners and attorneys rarely have dual degrees in accounting, it is critical that you understand the various types of accounts and their proper uses and management.

Escrow accounts

Escrow accounts are created for the purpose of holding funds required to complete a real estate transaction. These funds must remain separated from all other funds the title agent or attorney handles and are monitored and audited by both title insurance underwriters and state regulators.

Client trust accounts

Client trust accounts can be created for a variety of reasons, for instance to handle settlement checks or advance payments for expenses related to a legal matter. Client funds must be assigned to their own individual account since the interest earned belongs to the client.

IOLTA accounts

Interest on Lawyers’ Trust Accounts (IOLTA) are set up to pool smaller amounts of client funds, especially funds that are held for such a short period of time as to make the interest earned negligible for the client. The interest earned on these accounts is funneled into a statewide account used for nonprofit legal services, since attorneys are not permitted to earn interest on client funds.

Retainer fee accounts

Most retainers are non-refundable so can be counted as income. But if the retainer agreement allows for funds not spent to be refunded, then these fees must be protected in a client trust account and not commingled with operating funds.

Dos and Don’ts

When handling client funds for any reason, it is important to ensure you are placing the funds in the appropriate type of account according to legal requirements.

This does require some education and understanding of the nature of the funds.

Whether you are managing funds for a client’s real estate escrow, a settlement, court fees or retainer, it is important to remember that the purpose of separating out these funds is to avoid commingling them with your operating accounts.

In addition, since these accounts are subject to auditing requirements, following your state’s rules about setting these accounts up properly to begin with and monitoring them appropriately has to be the number one priority.

At Positively Balanced, we understand the challenges of meeting all of the requirements pertaining to your escrow accounts. Our reconciliation services offer the most updated and secure procedures to keep you compliant. Call us today to learn more!



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