MAINTAINING LAWYER TRUST ACCOUNTS WITH QUICKEN 2002 BASIC

1 MAINTAINING LAWYER TRUST ACCOUNTS WITH QUICKEN 2002 BASIC Provided By Minnesota Lawyers Professional Responsibility Board and Office of Lawyers Professional Responsibility 1500 Landmark Towers 345 St. Peter Street St. Paul, Minnesota 55102 April 2002

2 I. OPENING A NEW ACCOUNT WITH QUICKEN Open the Quicken program Navigate to the My Finances screen Click the Create New Account button under the Set Up Banking Accounts heading Select Checking as the type of account to create. Click on the next button.

3 In the windows provided enter the name of the trust account, the financial institution name and a description for your trust account. Click the Next button The Checking Account Setup screen will ask you to enter the date and ending balance for you last statement. Ignore the Statement Date and make sure the Ending Balance window is zero. Click Done. Open the account you have created by double clicking on the account name. It is now necessary to enter existing balance information into your Quicken records.

4 II. INITIAL SET-UP USING QUICKEN WITH A TRUST ACCOUNT ALREADY IN EXISTENCE Adjusted Bank Statement Balance. If you are converting to Quicken to record transactions on an existing trust account, you will first need to take the ending balance from your most recent bank statement and adjust it for any outstanding checks or deposits. Therefore, the best time to convert your records to Quicken is immediately after you receive a monthly statement. Determining Ownership of Existing Funds. After adjusting the bank statement, it is then necessary to determine, to the penny, the ownership of the funds, including any law firm funds that are in the account to pay service charges and other related fees as well as accrued IOLTA interest, if any, that exists in the account at month end. If you are already maintaining manual records, the ownership of client funds is reflected on the client subsidiary ledgers. Accrued IOLTA Interest Remaining in the Account. Many banks credit and debit the interest on IOLTA accounts during the same month, thereby causing identical offsetting interest entries that do not affect the month ending balance. If your bank credits and then debits the IOLTA interest earned during the same statement period, you do not need to adjust the bank statement balance for IOLTA interest during this initial set up. Other banks accrue IOLTA interest in the account for 30 days or longer and then debit the account at some later point when the interest is paid to the Lawyer Trust Account Board. These types of accounts will not have identical offsetting interest amounts within the same statement period. Nevertheless, they may still reflect interest being both credited and debited to the account during the same statement period. This occurs when the bank deposits the interest into the account during one statement period and pays the interest to the Trust Account Board during a later statement period. In these types of accounts the accrued interest (i.e. interest credited to the account but not yet paid to the Lawyer Trust Account Board) will affect the monthly statement ending balance. When converting these types of accounts the amount of IOLTA interest paid out or debited to the account on your last statement can be ignored in setting up the account. However, the accrued interest credited (e.g., electronically deposited) but not yet paid to IOLTA must be recorded in your Quicken records. For example, assume at month s end the bank statement for your trust account, after being adjusted for outstanding checks and deposits, had a balance of $1,001.50. The bank statement also shows that $1.50 of IOLTA interest was credited to the account during the month and $1.35 of IOLTA interest was paid from the account by the bank to the Lawyer Trust Account Board during the month for the interest earned in the previous month. The lawyer s subsidiary ledgers for the existing account show that the remaining $1,000 belongs to the following: 1. Law firm funds to service account - $100 2. Client Johnson - $400 3. Client Ortiz - $300 4. Client Thomas - $200 5. IOLTA interest - $1.50 6. Total - $1,001.50. Entering Existing Balances. The existing balances are entered into the newly created Quicken account by making a deposit entry for each client, the law firm funds and the accrued IOLTA interest, if any, in the check register. For each entry, you should enter

5 information in the following fields: 1. Date, Num and Deposit: the date in the Date field, pull down the menu and select deposit in the Num field, and the amount of the deposit in the Deposit field; 2. Paid By: This field should identify the source of the deposit (e.g., issuer of the check being deposited). 3. Category: The identity of the client, or in the case of interest or law firm funds, IOLTA Interest or the law firm s name of the in the category filed. Note: in order to determine whether IOLTA interest should be recorded in a separate IOLTA ledger or on the Law Firm Funds ledger, you must first determine whether your IOLTA account imposes regular monthly service charges. This issue is further discussed in Section III of this brochure under the heading Recording Automatic or Paperless Transactions That Only Appear on the Bank Statement. 4. Memo: A notation about the purpose for the deposit should appear in the memo field (e.g., settlement funds, retainer, escrow proceeds etc.) After you have completed the fields for each entry, click the Enter button. Creating new categories for each client. The first time a client name is entered, the program will prompt the user to set up or add a new category for any client not previously registered. These categories constitute the individual client subsidiary ledgers. When setting up the category for each new client, you should add a file number or some other unique identifier in addition to the client s name. You should also type the word active after each entry in the name window of every newly created category.[1] This will assist you later in preparing and printing monthly reports. You may also include a description of the legal matter. Make sure that all categories are established as income Type categories.

6 You should create a new category for the law firm funds in the account as well as IOLTA interest. Do not forget to add the word active in the name window for these categories as well. After you have set-up a new category, subsequent transactions can be attributed to that client in the category column by pulling down the window in the category column of the Quicken check register. After you have completed entering all the existing balances into the register (including accrued IOLTA interest to be paid and any nominal amount of law firm funds on deposit to service the account), click on the Reconcile menu located at the top of the register. Enter the ending balance from the register in the Ending Balance window that appears. Click OK.

7 Check through the list of deposits and verify that each amount is correct by clicking in the CLR column. After you have checked all of the transactions, the difference should be 0 -- If it is 0 click Finished. If you like, you can prepare a hard copy reconciliation report at this time by selecting the Yes button. You are now ready to enter new trust account transactions as they occur. III. ENTERING NEW TRANSACTIONS Recording Daily Transactions After you have set up the account using the Quicken program, each transaction (e.g. disbursement or deposit) should be entered into the check register as it occurs. Remember the following:

8 Always record the identity of the client in the category column and use the same identity every time a transaction occurs for that client. When creating new category accounts for clients, always include the word active in the account name window. The identities entered in the category column can either be names, numbers or a combination of both. Using a combination of name and number allows multiple ledgers to be established for a single client with unrelated multiple representations involving trust account activity (e.g. a real estate and a personal injury representation involving the same client). After a category name has been established for a client, using the pull-down menu in the category column to select the client will help to eliminate errors. Recording Automatic or Paperless Transactions That Only Appear on the Bank Statement. Each month when the bank statement is received, all transactions that appear on the bank statement but have not been entered into the checkbook register should be entered into the Quicken register. In most instances, this will be IOLTA interest credited and debited to the account and in some cases may include service charges. Other items that typically appear on the bank statement but do not appear in the checkbook register are check return fees, wire transfer fees, overdraft fees, check printing charges and other administrative-type expenses. IOLTA interest and these other charges should be entered into the Quicken checkbook register as outlined below. A. For IOLTA Accounts with No Regular Monthly Service or Transaction Charge: Record all IOLTA or Lawyer Trust Account Board interest credits and debits appearing on the bank statement in a category created and entitled IOLTA Interest. [2]

9 Check printing charges, overdraft fees or check return charges, if any, are recorded in the category established to record the law firm funds (e.g., Law Firm Funds) deposited into the account [3] to pay administrative charges on the trust account that are not offset or paid by interest. B. For IOLTA Accounts That Do Assess a Regular Monthly Service or Transaction Charge: Interest and service charge amounts must both be recorded in the category established to record the law firm funds deposited into the trust account to pay service charges. See Rule 1.15(a)(1), Minnesota Rules of Professional Conduct. For accounts that impose regular service charges, the service charge is paid in whole or in part by the interest earned. In any month where service charges or transaction fees exceed the interest earned, the excess or net service charge must be paid with, or covered by, law firm funds and not client funds. If possible, an attorney should attempt to obtain a trust account that does not assess regular monthly service charges or transaction fees. [4] All other fees or charges including, check printing charges, overdraft fees, wire transfer fees and stop payment charges should be posted to the category established for law firm funds. [5] Sample entries for Trust Account with service charge that exceeds IOLTA interest earned during the period. Sample entries for Trust Account service charge that does not exceed IOLTA interest earned for the period.

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11 Splitting a Check Between Different Clients. Quicken will permit the writing of a single trust account check to be split or allocated among one or more clients by using the Split function appearing at the bottom (left) of the category column pull-down menu. The Split function allows the law firm to write a single check at the end of the month or billing cycle for the entire amount billed to trust account clients during that month or billing cycle. To split a transaction among clients, enter the check (payee and amount) in the register and instead of selecting a client in the category window, click on the Split button that appears at the bottom of the pull-down menu in the category column. The screen below will appear and allow you to enter the transaction by dividing it among any number of clients in the appropriate amounts. You can assign clients from your established categories by using the pull-down menu in the category column in the Split Transaction Window. IV. RECONCILING THE BANK STATEMENT WITH THE CHECKBOOK REGISTER

12 After you have entered all of the automatic or paperless transactions (e.g. any transaction not already appearing in your Quicken checkbook register) which appear on the statement into the register, select the reconcile function from the toolbar. Enter the opening balance from your bank statement (it should already be there) and also the ending balance from the bank statement you just received. Click OK. Ignore the entries for service charges and interest earned categories. The next screen that appears requires you to record the cleared and uncleared transactions. Go through the list of payments and checks to determine whether the transaction has cleared (i.e. it appears on the bank statement). If the transaction is reflected on the statement, click in the CLR column to indicate that the item has cleared and appears on the bank statement. Do the same for the deposits column for any deposits or credits that appear on the bank statement. Do not check items that do not appear from the statement to have cleared (e.g., Dr. Expert and Mrs. Ortiz checks and the buyer check deposit). After you have checked all the transactions that have cleared, the difference should be zero. If the difference is not zero, an error exists somewhere in that month s records. This error needs to be detected and corrected before the reconciliation can be completed.

13 If the difference is zero, click Finished and Yes and the next screen indicating you would like to create a reconciliation report. On the next screen label the report Reconciliation Report and print the Reconciliation Report by selecting the print button. The firm lawyer responsible for the trust account supervision should review the hard copy of the two-page Reconciliation Report. The Report should be maintained for the required six-year period provided for in Rule 1.15 (h), Minnesota Rules of Professional Conduct. The Reconciliation Report. Page one of the Reconciliation Report provides a summary of the transactions that have cleared the bank and appear on the bank statement and a summary of uncleared transactions that are not reflected on the statement. Reconciliation Report Law Firm IOLTA Trust Account Page 1 4/5/02 Reconciliation Summary BANK STATEMENT -- CLEARED TRANSACTIONS: Previous Balance: 1,001.50 Checks and Payments 5 Items -6,851.50 Deposits and Other Credits 5 Items 8,203.00 Service Charge 0 Items 0.00 Interest Earned 0 Items 0.00 Ending Balance of Bank Statement: 2,353.00 YOUR RECORDS -- UNCLEARED TRANSACTIONS:

14 Cleared Balance: 2,353.00 Checks and Payments 2 Items -800.00 Deposits and Other Credits 1 Item 1,000.00 Register Balance as of 4/5/02: 2,553.00 Checks and Payments 0 Items 0.00 Deposits and Other Credits 0 Items 0.00 Register Ending Balance: 2,553.00 Page two of the Reconciliation Report provides an itemized report with the details of all uncleared transactions if any. Reconciliation Report Law Firm IOLTA Trust Account Page 2 4/5/02 Uncleared Transaction Detail up to 4/5/02 Date Num Payee Memo Category Clr Amount Uncleared Checks and Payments 3/12/02 117 Dr. Expert Expert Report Olson 02-16... -350.00 3/28/02 119 Mrs Ortiz Tax Refund share Ortiz 02-07... -450.00 Total Uncleared Checks and Payments 2 Items -800.00 Uncleared Deposits and Other Credits 3/29/02 DEP Buyer Check Earnest Money Jones 02-11... 1,000.00 Total Uncleared Deposits and Other Cr... 1 Item 1,000.00 Total Uncleared Transactions 3 Items 200.00 V. DOING THE SUBSIDIARY LEDGER TRIAL BALANCE 1. First Time Set Up of Client Subsidiary Ledger Trial Balance Report NOTE: The trial balance report is most often the report or procedure that is missing or not performed for tru accounts with undetected shortages or commingling. Unless the trial balance is regularly performed the law firm cannot be confident that the trust account contains sufficient funds. The following first time set up steps need only be performed for the initial trial balance report. Pull down the Reports menu from the main toolbar, select the Spending arrow and then select Itemized Category Reports.

15 Then select the Customize button at the top left of the screen. Display Tab. On the display tab make the following selections: report dates: select earliest to date sort by: select Acct/Date organization: select income and expenses show: check the boxes cents and amounts and totals only The Display Tab settings are shown below.

16 Accounts Tab. Make sure the name of the account that you are attempting to reconcile or balance is the only account that is checked in the left hand column (i.e. your IOLTA account). The report dates window should already be set to earliest to date. Include Tab. Click the Mark All button and type active in the Category Contains window. The Include tab settings are shown below.

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18 Advanced Tab. The Advanced tab settings are shown below: Once you have made these selections click Create. This will generate your subsidiary ledger trial balance report and the report must balance with the checkbook register and reconciled bank statement report. This report should not include any negative values for the clients or categories listed. If negative values appear or the report total does not match the reconciliation report, an error(s) exists and must be corrected before the reconciliation and trial balancing process can be completed. Negative values may indicate that a shortage exists. In the example on the previous page the -$100

19 figure for client Olson indicates that the firm disbursed $100 more than it should have in the Olson personal injury matter. If the report total balances with the reconciled bank statement report total, and there are no negative values included, you should print the report and attach it to the reconciliation report. Memorizing the Report for Future Use After you have printed the report, click on the Memorize button above the report and in the Title window (next screen) type Subsidiary Ledger Trial Balance. When you have named the report click OK. In future months you can automatically prepare this report by accessing it as a Memorized Report found by pulling down the Reports menu on the main toolbar. VI. VIEWING AND/OR PRINTING AN INDIVIDUAL CLIENT LEDGER. Quicken will permit you to view or print an up-to-date subsidiary ledger for any client who has, or has had, funds in the trust account. To view an individual client ledger, pull down the Reports menu from the main toolbar to Memorized Reports and select the Subsidiary Ledger Trial Balance report previously created. See screen on prior page. The Subsidiary Ledger Trial Balance report will appear. Click on the Customize button in the upper left hand corner of the report.

20. On the Display tab, type in the client identification in the Title window and uncheck the Totals Only box. The remainder of the settings should appear as below: Remember to reset the columns by selecting the Reset Cols button, make sure the Totals Only window is not checked, and the Reports Dates window is set to earliest to date. On the Accounts tab make sure only the trust account in which the client s funds are deposited has been checked (i.e., IOLTA Trust Account in the example below). On the Include tab clear all of the categories by selecting the Clear All button, and then check only the client name or identification for the client ledger you wish to access from the names or identifiers which appear in the large categories window as has been done below. Remove the word Active from the Category Contains window so that it is empty.

21 On the Advanced tab the settings should appear as follows. To generate the individual ledger report appearing below, select the Create button at the bottom of the window.

22 To print the individual client ledger, pull down the File menu from the main toolbar and select Print Report. VII. GENERAL TIPS FOR USING QUICKEN 1. Every transaction, including deposits, checks, wire transfers (in or out) service charges, check printing charges, check return charges, overdraft fees, interest earned and interest paid to IOLTA, and any other transaction which appears on the bank statement must be entered into the checkbook register and assigned to a category. You may pre-set Quicken to remind you to always assign a category to each transaction by pulling down the Options menu on the register and selecting Register

23 Options. On the Miscellaneous tab check the box Notify Before Recording Uncategorized Transactions. 2. When assigning a category to a transaction you must use the exact same name and/or number for transactions that relate to a specific client. If you do not, Quicken will prepare a second ledger for that client. For example, if the initial transaction for George Smith is assigned to a category entitled George Smith, and subsequent entries for George Smith are assigned to a category typed in as G. Smith, Quicken will create two different ledgers for George Smith. 3. The Register Ending Balance amount on the reconciliation report and the total of the subsidiary ledger trial balance report must be reconciled regularly. These reports should be printed and saved in hard copy form for the six-year period prescribed by Opinion No. 9 of the Lawyers Professional Responsibility Board for electronically maintained trust account records. 4. The subsidiary ledger trial balance report must be reviewed regularly to ensure that there are no negative values contained in the subsidiary ledger trial balance report total. A negative value that appears on behalf of any individual client represents that a

24 disbursement in excess of that client s funds has been made from the trust account. 5. Individual client ledgers can be de-activated after all of the client s funds have been disbursed and the representation has terminated. Deactivating closed client ledger accounts will simplify the Subsidiary Ledger Trial Balance Report by eliminating unnecessary information relating to closed client accounts from the monthly reports. To de-activate a client ledger account or category, pull down the Finance menu from the main toolbar and select Category & Transfer List.

25 Click once on the client account that you want to deactivate and then click on the Edit button on the upper left corner of the list. In the Name window remove the word active and select OK. The deactivated account will no longer appear on the Subsidiary Ledger Trial Balance Report but will be available in the future should you need to access it. To run a report that includes all open and closed client accounts, simply customize the existing report by removing the word Active from the Categories Contains window on the Includes tab of any report. 6. Simplify your income categories by removing the existing income categories (e.g., dividends, employee stock options etc.,) that exist in Quicken. If you choose to do this, you will not be able to use Quicken for any functions other than maintaining your trust account if those functions require recording income from the existing Quicken categories.[6] Existing categories can be deleted from the Categories & Transfer List under the Finance pull down menu. Endnotes: [1] Adding the word Active to the account name allows for distinguishing between client accounts that are open and active and those that are closed or reflect a zero balance. Without some distinguishing characteristic such as Active

26 or open, the reports over time become cluttered with information pertaining to clients with closed accounts that are irrelevant to the reporting period. Closed accounts are eliminated from the reporting process by simply removing the word Active from the account or category name when representation has been concluded. At the same time the closed account is still available for future access if necessary. See pages 23 and 24 concerning de-activation of client accounts. [2] Even though lawyers are not responsible for the electronic transfer of interest to the Lawyer Trust Account Board, it is advisable to record interest (even offsetting entries which occur during the same statement period) to a ledger. Occasionally banks make errors in crediting and debiting the interest to IOLTA. If the interest transactions are not entered into Quicken, it is difficult to discern these errors using the Quicken reporting process. Moreover, unrecorded interest errors can cause problems in reconciling Quicken accounts. [3] See Rule 1.15(a)(1), Minnesota Rules of Professional Conduct (the amount of funds deposited into the trust account by the law firm should be no more than is reasonably sufficient to pay service charges and other charges associated with the account). [4] A number of Minnesota banks have agreed to either (1) waive monthly service charges on IOLTA accounts; or (2) waive service charges to the extent service charges exceed interest earned on the IOLTA account. Lawyers should check with their respective financial institutions to determine whether they are willing to waive monthly service charges on IOLTA accounts. [5] Banks imposing monthly service charges automatically offset those service charges against the interest earned on the account, and pay any net interest remaining to IOLTA. Other types of charges, such as check printing fees, overdraft fees or wire transfer charges, must be paid by the law firm or assessed to the individual client responsible for the charge being incurred. [6] While Quicken can be used to maintain the data of more than one bank account (e.g., law firm business account, personal accounts or separate interest-bearing trust accounts for individual clients), a number of lawyers prefer to use Quicken Basic only for the IOLTA account. By limiting the application to the IOLTA account, the opportunities for incorrect entries and incorrect reports that include data taken from other accounts being maintained in Quicken Basic are eliminated. Many of these lawyers then use other Quicken products such as Quicken Deluxe or QuickBooks to record information concerning business accounts.