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You have just paid a deposit, or an advance on fees, to your lawyer. The money has left your bank account. So where is it now, and who can touch it?
The short answer is that it does not become the firm’s money. Often it must be kept in a separate bank account, called a trust account, until it is used for the purpose you paid it for. Here is how that works in New Zealand.
What is a trust account?
A trust account is a bank account at a New Zealand bank that a law firm uses to hold money for clients and other people. It is clearly designated as a trust account and kept separate from the firm’s own money.
Think of the firm as a safe pair of hands rather than the owner. If you transfer $1,000 to your lawyer for a legal matter, the firm cannot treat that $1,000 as its own. It must keep it separate and use it only for the purpose it was given, following the rules that apply to the firm.
Those rules come from the Lawyers and Conveyancers Act 2006 and the Lawyers and Conveyancers Act (Trust Account) Regulations 2008. The New Zealand Law Society Te Kāhui Ture o Aotearoa oversees how law firms follow them.
What kinds of money are held in trust?
What must be held in trust depends on your legal matter and the New Zealand rules for law firms. Common examples include:
- Money paid in advance for fees, and any money paid before an invoice has been issued
- Funds received in connection with a property transaction
- Settlement funds
- Money provided for expenses or disbursements
- Funds that need to be held until a condition has been met or an event has occurred, such as settlement of a property purchase
What happens to your money, step by step
- You pay. You transfer money to the firm for a specific purpose.
- The firm receives and records it. It notes whose money it is and why it was paid.
- It stays in the trust account. Your money sits in the trust account, apart from the firm’s own money, until it is needed.
- It is used or paid out for its purpose. For example, it is paid towards your transaction or applied to an invoice.
- The records are updated. The firm updates its records to show exactly what happened.
At every stage, the firm must know why the money is there, who it belongs to and when it can be used.
If the money is for fees, the rules are strict. A firm can only take its fees from the trust account once an invoice has been issued, either before or immediately after the money is moved. Money paid to a firm before an invoice is issued must stay in the trust account until it is paid out or applied to the firm’s fees.
If money is still held for you after 12 months, your firm must give you a statement of the trust money held for you, and then repeat this at least every 12 months.
How your money is kept safe
Trust accounting is much more than moving money between bank accounts. Several checks work behind the scenes:
- Separation: client money is kept apart from the firm’s own funds, so it can be found, tracked and counted correctly.
- Records: there must be a record of what money was received, who it belongs to and what happened to it.
- Monthly reconciliation: every month, the firm checks that its records match the money actually in the bank. If something does not match, the firm must find out why and fix it. It is a simple but powerful way to catch mistakes early.
- Reporting and review: the firm’s trust account supervisor reports to the Law Society each month and each quarter, and the Law Society can review a firm’s trust account to check that the rules are being followed.
If you are ever unsure
Most clients never need to think about trust accounts, and that is how it should be. But if you have been asked to pay money and want to know where it will be held, or when it will be used, just ask your lawyer. We are always happy to explain.
Article written by Gerly Gajo
