Let’s be real – as a lawyer, crunching numbers and keeping tabs on the financial side of your practice probably isn’t why you went to law school. But proper legal accounting? That’s non-negotiable if you want to stay in business and out of hot water. Pay close attention because effectively managing client retainers is paramount for keeping your firm compliant and financially healthy.
First, you need to understand exactly what a retainer is. It’s an upfront fee paid by the client to ensure you’ll be available to provide legal services over a period of time. It gives your firm working capital and the client some skin in the game. But retainers aren’t just cash in your pocket – they come with strict rules on how they must be handled.
There are different flavors of retainers, each with its own nuances:
Advance Fee Retainers
Advance Fee Retainers are prepayments that you’ll draw down from as you provide billable services to the client over time. These need to be carefully tracked, and any unearned portion refunded if the representation ends.
General Retainers
General Retainers are flat fees paid solely to ensure your availability during an engagement period, whether you end up doing work for the client or not. These are usually non-refundable.
Special Retainers
Special or Security Retainers are funds held in trust as a security deposit of sorts against future bills. The money remains the property of the client until you’ve earned it through services rendered.
IOLTAs & Retainers
No matter the retainer type, those funds can’t just go into your standard bank account. They need to be deposited into a trust account specifically for client funds. In most jurisdictions, this needs to be an IOLTA (Interest on Lawyers Trust Account) where any interest earned goes to legal aid and other public services.
As you bill against a retainer for work completed, you need to promptly transfer the appropriate amount from the trust account to your firm’s operating account. But don’t get sloppy here – never commingle funds by leaving earned and unearned money swimming together.
Keep an eagle eye on your retainer accounting and provide detailed statements to clients showing any retainer drawdowns or transfers. Retainer balances are client money until you’ve earned it, so that transparency is critical for maintaining trust.
On the tax side, you can’t claim retainer money as income until it has actually been earned and transferred to your operating account. If a client fires you and there’s an unearned retainer balance remaining, that money has to be promptly refunded. No ifs, ands, or buts.
Best Practices for Legal Retainers
To masterfully juggle the accounting demands of retainers, follow some best practices:
- Use rock-solid engagement letter templates that clearly define the retainer terms like amount, type, refund policy, and how the funds can be used.
- Reconcile your trust accounts frequently and provide detailed invoices to clients showing activity.
- Set reminders to keep clients updated if additional retainer funds will soon be needed to continue the engagement.
- Use modern legal billing and accounting software to automate the tracking, separating, and reporting of retainer funds.
- If you have to refund unearned money when an engagement ends, do it quickly and include an accounting. Few things soil a firm’s reputation faster than holding onto a client’s cash.
At the end of the day, the core principle around retainers is simple – it isn’t your money until you’ve legitimately earned it through services provided. Acting otherwise is unethical and a fast path to a legal malpractice claim.
Proper legal accounting around retainers requires diligence, clear policies and documentation, and a commitment to doing things by the book. It may not be the most glamorous part of your job, but it protects your firm, upholds your reputation, and ensures you can keep representing clients effectively.