Small and solo
With trust accounts, the devil is in the details
Next to the right and obligation to keep our clients’ secrets sits the right and privilege to take and hold money in trust as a significant and defining aspect of what it means to be a lawyer.
Note: This article originally appeared in the August 29, 2014, issue of The Lawyers Weekly.
Next to the right and obligation to keep our clients’ secrets sits the right and privilege to take and hold money in trust as a significant and defining aspect of what it means to be a lawyer. The public places a special trust in our profession to hold on to and have the ability to use money belonging to our clients or third parties involved in a transaction a lawyer is acting on. I do not know of a real estate lawyer who does not use a trust account in the representation of his or her clients and who has not heard about fraud in the context of real estate transactions. Sadly, we do know that there are members of our profession who have been duped by fraudsters who come up with often clever and hard to detect fraud schemes, but, that is not the focus of this article. On a more day to day basis, trust funds can also be mismanaged because of inadequate monitoring of trust accounts by lawyers.
Real estate lawyers deal with large amounts of money, but it is often the small amounts of money that cause the difficulties; for example, wire transfer fees. Mortgage funds are often deposited by wire transfer directly into the lawyer’s trust account. The amount transferred is the mortgage advance less the corresponding wire transfer fee. Usually, the lender will advise the lawyer in advance of what the wire transfer fee will be and so the lawyer should have all of the numbers in advance, but that is not always the case. As such, if you rely on a deposit confirmation from the lender that does not show the wire transfer fee and you record that as the amount of the deposit in your book keeping system, you might end up overdrawn in your trust account. This is because wire transfer fees range from $10 to $25 or thereabouts and are deducted from the mortgage advance. It is a major trust accounting error to be overdrawn in your trust account and a breach of your trust accounting obligations. You could avoid this recording error by first verifying the deposit on-line: the deposit - less the wire transfer fee - is what should show as a deposit to your trust account. It is a standard practice in many real estate offices for the lawyer responsible for the trust account to verify each and every deposit for each and every client before posting the deposit to the client’s trust ledger. I myself think that this practice is a good one.
If you do find yourself in a situation where you have missed accounting for the wire transfer fee and you do not verify your deposits on-line or by calling your bank, you may not discover the error until after the transaction has closed and you do your next month’s bank reconciliation. You will have a shortage in your trust account which will show up when you correct your incorrectly recorded trust deposit. You will need to pay the shortage from your general account since you will effectively have used another client’s money to pay the shortage. Note that in B.C. or Alberta, lawyers are permitted to keep a small amount of their own money in their mixed trust account, and in those provinces the shortage would be dealt with differently. No matter which province you are in however, you will have breached your trust accounting obligations. You will have to deal with the error and you may also have to report yourself to your law society.
Where you are a lawyer who has multiple closings on the same day, it is possible to have sufficient funds in your trust account so that the bank would be prepared to certify your trust cheque, but also for the funds for your particular purchaser not to have been deposited, leaving you short on another purchase. Whether you are using direct deposit or delivering a certified cheque to the vendor’s lawyer by courier or in person, once the funds are certified, the cheque is as good as cash and almost impossible to get returned to your account. For that reason and also because of course it is part of your obligations in managing your trust accounts, each and every deposit to your trust account must be verified and accurately matched to the particular client on whose behalf the deposit was received. Each deposit must then be accurately recorded to the particular client’s trust ledger.
Trust accounts are special. They must balance to the penny. They must be properly monitored. Funds in the mixed or pooled trust account where funds for most residential real estate transactions are deposited must be properly and accurately allocated to the correct client ledger in a timely way meaning immediately, but not in advance. The reputation of our profession and the trust of our clients and our colleagues depends greatly on the proper use and accurate monitoring of our trust accounts.