By: Keith Hill Jr.
As we approach the end of the year, it's typical for a firm to reflect on potential changes for the upcoming year. Among these considerations, the idea of closing a trust account might come to mind. Whether it's an inactive account or perhaps you're establishing a new business entity and need to transition funds to the trust account of your newly formed business.
Whatever the reason, before you decide to close a trust account, it's important to follow specific guidelines. This article provides you with the guidelines to help ensure regulatory compliance when closing a trust bank account.
1. Ensuring a Zero Balance
The primary consideration when closing a trust account is ensuring the account reflects a zero balance. Ensuring the account reflects a zero balance guarantees that all funds have been distributed.
Finalizing Account Closure
After ensuring the disbursement of all funds, you can provide directives to your financial institution to formally close the account. Following this, it is recommended that you obtain written confirmation from the financial institution that the account has been closed.
2. Handling Service Charges
Managing Closure-Related Fees
When certain charges, such as service fees, come into play, you should be aware of how these expenses are managed. Specifically, these costs should be addressed and settled using your general account, not the trust.
Preserving Trust Account Integrity
Under no circumstances should you authorize the deduction of these charges directly from the trust account. Adhering to this safeguard maintains the trust's integrity; this aligns with the guidelines of the Law Society of Ontario.
3. Record-Keeping Requirements
Before finalizing the closure of your trust account, be aware that you may lose access to its online details and monthly statements. This loss is important to be cognizant of since you will still have record-keeping obligations under By-Law 9.
For compliance, retain official monthly bank statements before account closure. Keep the original statements, not just photocopies or printouts. According to the Law Society of Ontario, trust account records must be kept for at least ten years from the last transaction.
4. Addressing Unclaimed Funds
Challenges in Disbursing Funds
For various reasons, the disbursement of funds that belong to a client can be challenging. If this is the case, these funds can be transferred to the Law Society's Unclaimed Trust Fund. This ensures the protection of the funds and the possibility for the rightful owner to claim them in the future.
Transferring Unclaimed Funds
Section 59.6 of the Law Society Act states that if you possess unclaimed trust funds for a minimum of two years due to an inability to identify the rightful owner or, despite making reasonable attempts, cannot locate the entitled individual(s), you might qualify to transfer those funds to the Law Society of Ontario. For further details, please visit:
5. Notifying the Law Society
Reporting Trust Account Closure
When closing a mixed trust account, timely reporting to the Law Society is required. Subsequently, the Law Society communicates this information to the Law Foundation of Ontario.
Report a Closing Trust Account
The reporting process includes the completion of the "Report on Opening or Closing a Trust Account” form of By-Law 8. To access a copy of the form, click here:
6. Five Common Mistakes to Avoid When Closing a Trust Account
Not Ensuring All Transactions Are Cleared: Before closing an account, ensure that all cheques and payments have cleared. Closing prematurely can result in bounced cheques and other complications.
Failing to Notify Relevant Parties: This includes both the Law Society and clients who might still have an interest in the funds or need to know about the account's closure.
Closing Accounts Impulsively: Before making the decision to close, consider whether there might be future transactions that will require the account to remain open. This is especially important if you're not closing your practice but only transitioning accounts.
Not Reconciling the Account: Before closure, ensure the account is reconciled, and there are no discrepancies.
Overlooking Outstanding Liabilities: Ensure that all liabilities associated with the trust account, such as fees, are settled before the closure.
Various scenarios might prompt the closure of a trust account. No matter the reason, adherence to the above guidelines ensures Law Society compliance and helps prevent potential complications or disputes down the line.
For more information on closing a trust account, visit:
Keith Hill Jr. is the Principal at Bookkeeping Matters Inc (BMI). For over a decade, Bookkeeping Matters has fulfilled the bookkeeping needs of lawyers throughout Ontario and other provinces. As a former Legal Accounting professor, Keith has also positioned BMI as a premier online legal accounting training provider. Specializing in several practice management software, Keith and his team can be contacted at: email@example.com / 1-800-893-2820 / www.BookkeepingMatters.ca