Newbie question - Trust Account

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On Fri, 27 Feb 2004 21:14:15 +1000, Benjamin 
<benjamincarlyle at optusnet.com.au> wrote:

>
>
> ----------  Forwarded Message  ----------
>
> Subject: Re: Newbie question - Trust Account
> Date: Fri, 27 Feb 2004 09:13 pm
> From: Benjamin <benjamincarlyle at optusnet.com.au>
> To: gnucash-user at lists.gnucash.org
>

> I am not an accountant, and I'm definitely not an accountant in your 
> legal
> jurisdiction. That said, I don't even understand your question :)  ... so
> I'll try to help.

That is great!  Thanks.
>
> The first question is "what are you trying to do?". Who are your clients? 
> Are
> you a lawyer? Are you being payed for services you are yet to render, or 
> are
> you just keeping the money on behalf of your clients?

Yes I'm a lawyer. Just an illustration:-

I have a client (Mr X) who wishes to purchase a house form Mr Y for 
$100,000. The practice hereis is to pay a 10% deposit of the total price to 
the Seller (Mr Y). As a lawyer representing Mr X, I'll usually advise Mr X 
to first pay the 10% deposit into my or Mr Y's lawyer's 'Client's Accounts' 
(which is in effect just a normal checking account that I maintain in a 
Bank) and will only release the deposit to Mr X signing of the Agreement. 
As preparing the Agreement may take 1 to 2 days at least, Mr X will also 
feel insecured if the money is still not paid to him but he on the other 
hand is tied down by this initial arrangements that he will not be able to 
have further negotiation with any other interested purchaser. So the 'best' 
person to keep the deposit will be the lawyers in this special account 
until the agreement is signed (If the lawyer actually absconded with 
client's money, his insurer will pay those agrieved clients).

In short the money that is kept in the clients' account is NOT money 
belonging to my law firm but money held my the firm on behalf of client for 
the time being. In contrast, we also maintain an 'Office Account' which 
holds money belonging to the firm.

>
> If my understanding of what you're doing is correct, you're setting up a
> trust account for your clients where they give you a bunch of money and 
> you
> have to give it back to them sometime later. In the mean-time you might
> invest it, and I guess you would have to give them the money back at the
> end.

Yes, we may invest it in fixed (or sometimes called timed deposit, that is 
to place the money into an interest bearing account for a fixed period of 
time that will generate interest. The interest generated by such deposit 
belongs to clients unless they agreed that the firm take the interest to 
off set with our professional fees.


> The first answer I would give you is "go talk to your accountant". The 
> second
> answer I would give is that if its not your money you might be safest
> creating a whole new gnucash account for them.. but I'm not an 
> accountant.
> The third answer I would give is that at the very least you must account 
> for
> them giving you the money. It's not your money, but it's in your 
> possession:
> 1) Create a liability account for your client
> 2) Record the deposit into your bank account as a transfer from this
> liability account.


I've created a liability account just as you described, but the label of 
(debit/credit or expense/rebate) is very confusing instead.


> e.g. record a deposit of $10000 to Current Assets:Cash at Bank from
> Liabilities:Trusts:Big Bird
>
> As to what you do then, it probably depends on whether you're keeping 
> your
> customer's accounts in with your own or not. No doubt if you're a lawyer
> you'll be reasonably aware of your legal obligations in the matter as to 
> what
> you invest in and who bears the cost of a bad investment vs who bears the
> benefit of a good one. In fact, I'd be pretty sure that a trust needs to 
> keep
> its own taxation records so I'd be pretty sure you need a separate 
> gnucash
> file for them. If that's the case you probably don't want it showing up 
> in
> your file at all. Just deposit their money directly into an account in 
> the
> trust's name, not into your account.

A seperate account will not be viable unless these 2 sets of accounts can 
be linked and updated automatically. Just for example,

Mr X also pay me $5,000.00 as part of my professional fees and charges. Of 
this amount, (say) $2,000.00 is going to my fees and the balance $3,000.00 
is for disbursement purposes (eg money that is to be paid out on Mr X's 
behalf for fees, tax and charges connected to the completion of the 
transaction). The general practice (or at least as far as my firm is 
concerned, I will place the money ($5,000.00) into the Client's Accounts 
first and utilise it until the compleation of the entire transction then 
only I transfer the balance into my office accounts.

Sometimes, Mr Y's portion of money in the clients' money may have been 
untilised in full and for the transaction to go on, I need to pay out 
$20.00 to buy some special forms needed for this transaction, I'll advance 
the sum of $20.00 from my Office Accounts to my clients' account for that 
purpose. I'm not worry that Mr X fail to pay me as he willnot get the 
transaction completed if he actually did not reimburse me the short fall of 
$20.000. Moreover the initial sum that I took ($5,000.00) is only part 
payment towards the fees and disbursement payable, there are still balance 
to be paid by Mr X or else I'll not be able to completed the entire 
transaction.


>
> So... here's my second attempt, assuming that the trust has completely
> separate accounting records to your own records:
>
> 1) Create a new gnucash file
> 2) Create an Owner's equity account that shows the initial deposit (this
> isn't income, just Owner's equity) as a transfer to whatever asset the 
> money
> is put into.
> 3) Whenever the owner draws money from the trust, record it under a 
> separate
> Owner's equity account. Whenever units of investment are bought or sold 
> do
> whatever's appropriate... and for that matter, just hire a damn 
> accountant
> who knows about this! :) Investments attract tax, and wherever there's 
> tax
> you need to either really know what you're doing or you need to hire a 
> damn
> accountant. If you don't you're probably not fulfilling your legal
> obligations as manager of the trust.
>
> You see... it's not an easy question to answer :)
> Bite the bullet and hire someone in your legal jurisdiction to tell you 
> how
> to set the whole thing up. Every year, at tax time, hire them again to do
> the taxes.
>

Well there are actually customised software in the market that runs only on 
MS Windows, errrrgh! I like linux and my office is running Mandrake 9.2 ;).


Anyway Thanks for your insight.

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