Simply put, accounting for an advance fee is predicated on actual ownership of the funds. For most purposes, an advance fee remains client property until it is actually earned by the lawyer. Thus, it should be deposited in a trust account and withdrawn as it is earned. Of course, once the fees become the lawyer’s property, they belong in the firm’s business account.
Here’s how the accounting typically works:
- Clients pay you in advance for your fee and anticipated expenses.
- You deposit these amounts in your trust account and record them as coming from a client trust liability account for that particular client.
- As you earn a fee or are reimbursed for an expense, you write yourself a check from the trust account, showing the funds coming from that client trust account.
Deposit vs. Retainer
Here’s where confusion reigns — much of it due to an imprecise understanding of exactly what constitutes a retainer. In its classic usage, a retainer is something of an option contract the client enters into with an attorney — basically, paying a fee for the right to employ the attorney. The retainer, in this case, is therefore earned upon receipt and does not belong in a trust account.
By contrast, an arrangement where the client pays a deposit against future fees is not a true retainer. These are funds given to the lawyer to apply against charges incurred in the future. Because this money has not yet been earned, it must be held in the trust account. Once work is performed, the attorney can transfer an amount equal to the billable hours to his or her business account.