Trust Accounts Basics
A trust, in the context of a bank account and legal world, is an arrangement made with a bank in which that bank (and to the extent this is a person outside the legal field who manages the accounts in relation to a settlement or a judgment, a third party) will hold the funds you are depositing on behalf of your clients, executives, or other respective parties, to be made available to those designated parties- or those securing a right to the funds under law- for use in an appropriate manner. The attorney-client trust account is used for the sole purpose of holding money in this manner, rather than for the general personal use of an attorney. These accounts are designated as trust accounts because they are usually put in separate accounts from the general funds of the attorney and are handled in a specific way governed by rules , regulations and law. These accounts are often specified to have a particular function. It can also be used to show that you have the money, or that the funds can be made available to those who have an entitlement to them, even if the money does not directly pass to them. For instance, in the case of a settlement, it is common for the attorney to disburse funds from the trust account to pay out a third party for a debt claimed to be owed. The attorney thus avoids being accused of handling the personal funds of the general public who may have settled or litigated against him/her. Because there are such a wide variety of uses of the client trust account, it makes consistently using this account and following the rules surrounding it difficult to master.
Key Trust Account Regulations
A systematic approach, strong organizational skills and an eye for detail are critical to complying with trust account rules and avoiding costly mistakes. Fortunately, most state bar rules governing attorney client trust accounts are straightforward and can be summed up in the following four requirements:
- Maintain separate trust accounts – Attorneys must maintain a dedicated attorney client trust account for holding client funds and a separate operating account for business and personal use.
- Make records available – Attorneys must keep client trust account records and documents and make them available on demand for examination by the state bar.
- Proper documentation – Lawyers must keep detailed records documenting what funds were received, by whom, when, why and what happened to the funds. Trust account disbursements should be supported by detailed written statements.
- Risk management – Trust account books and records should be available for a regular system of checks and balances. A system might include review by an accountant of quarterly reconciliations and/or an annual review of all financial records by an independent third party (such as an accountant or lawyer not associated with the practice) to check for discrepancies and verify that there is a matching number of records for numbers of funds received.
Most clients are accustomed to financial transparency and expect that their funds will be managed with additional diligence and accountability.
How to Establish a Trust Account
As a lawyer, you have a lot of things on your mind. Finding clients, billing them and spending the money are probably three of the biggest areas you think about and worry about every day. However, one of the biggest (or most important) things you need to do when you get or start any new legal cases is set up a trust account. While this sounds simple, it is something that can become very complicated if you do not do it right the first time around. Without setting up a trust account, you run the risk of commingling funds, putting yourself at risk for a disciplinary complaint and making a mistake that could end up being very costly to you.
What is a Trust Account? Basically speaking, a trust account is a bank account that is where you keep your client’s funds. A trust account should be set up as a completely separate bank account that you only deposit client funds. Even a check you receive as a retainer should go to a trust account, which is something that will be discussed in more detail below.
How Do You Go About Setting Up a Trust Account? The first step is to find a financial institution that you want to set up your trust account with. While lawyers typically just join whatever bank their firm chooses, it is better to set up a trust account with a bank where you can speak to someone in person (or at least by phone) if you ever have an issue. You also want to use a bank that will issue you, free of charge, checks printed with your name and your firm’s name. Some banks will issue you checks with just your firm’s name on it (which is not what you want and some banks may not even let you deposit those checks). Then you want to set up your trust account. Upon doing this you want to open a business type checking account which is interest bearing and has an maintenance fee if you are below $3,000 with an Ivy bank reference code. You should keep a minimum balance of over $3,000 so that you do not have fees.
What if I Had a Personal Bank Account Prior? If you had an account prior that you used as a personal account, there are ways to deal with this. Your former bank is required to help you opening up a brand new business type account. Of course, if you have questions about setting up a trust account, you can always speak to your paralegal for advice, or you can even ask a colleague. You want to remember though that while it is important to properly set up your trust account, it is also your responsibility to learn the rules and requirements yourself.
Client Money Management
Handling client funds comes with a list of requirements that each Firm must work within. Something that I have noticed is that some of the things that are required seem to go against other rules. For example, attorneys may be required not to keep copies of some of the documents that are involved in the withdrawal process, yet those documents are required for the Firm’s other procedures for record keeping.
1. Receiving funds
As soon as you receive any money for the purpose of paying a third party, you must deposit those funds into your IOLTA account. By receipt of funds I mean receipts in any method: a check from a client, a check payable to the Firm, a wire transfer, a credit card payment monies being electronically deposited into your accounts, etc. Some Firms will receive funds from the client and place them into the operating account and then immediately transfer them to IOLTA. What you must remember is that placing money into the operating account is the same as receiving funds. You may think that the money wasn’t received until it was transferred into IOLTA and you have no intention of using it for anything other than your client. Nonetheless, this methodology is restricted under the rules.
2. Maintaining accurate records
While required to deposit funds into the IOLTA account immediately upon receipt, you are immediately (within 48 hours) required to update your ledgers and book of accounts. Generally you can have one account set up for IOLTA, but you must have a clear record of each client and transaction. This includes balances, deposits, withdrawals and receipts. A detailed ledger must be kept for IOLTA payments and should be easily accessible for review.
3. Disbursing funds
For the most part, you will only be able to withdraw funds that are disbursed to the client. Meaning, the funds are either owed to the client or for services not covered. For example, if a client gives the Firm $1000.00 and has incurred total fees of $500.00, the balance of the account would be $500.00. They request an amount be withdrawn so they may purchase something. You may disburse funds up to $500.00; check policy permits. The exception to the above has to do with medical provider payment. If you are certain that the provider has filed a lien and is owed funds, you may withdraw funds on behalf of the provider. Your Firm will need to have already fulfilled a few requirements before doing so. See provisions below. Upon receipt of your instructions, you should look carefully at the following items before withdrawing funds:
- Fee agreement under which Funds were paid
- Billing Statements
- Lien Filed by provider
- If your client had insurance – ensure you do not owe any charges to the insurance carrier
You may also be required to do such things as send a copy of your ledger showing the payment to the provider, and a form for the provider to sign to indicate satisfaction of Lien once they receive the funds. As you can see, these rules are very precise. That said, they are only a small part of the requirements. Best to check with your Firm’s rules and attorney requirements before proceeding with any disbursement.
Common Pitfalls
Any attorney that has handled trust accounts for a period of time has undoubtedly made some mistakes. Keep in mind that the purpose of this blog is to help attorneys identify the common mistakes that can be made either, or both, in connection with obtaining trust account compliance lapses, or in working to avoid or resolve such lapses.
It is easy, while trying to comply with the various client trust account requirements, to get into bad habits. If you have been guilty of any of the following practices, do not feel that you are alone. Rather, commit to avoiding these habits and consider employing methods to modify your practices so that you are less likely to make these types of trust account missteps.
Occasionally Making Trust Account Withdrawals From Your Operating Account Florida Bar rules require that deposits made by attorneys into an account are deposited into a trust account. However, trust money can be converted to operating funds only at the moment services are performed. This conversion must be properly documented by a trust account distribution slip at that time. A common mistake in accounting for trust money is converting client money to operating funds before services have been performed. While issuing a refund from a trust account may be permissible in certain circumstances, it is important to first contact the recipient to determine whether or not the money was in fact overpaid to you. Refunds from trust accounts should be documented with a trust account distribution slip.
Issuing Personal Checks Instead of Trust Account Checks Issuing personal checks instead of checks drawn on the trust account is not permitted. Before considering issuing a personal check, first verify whether there is trust money available in the trust account to pay whatever the obligation is. Generally, if there is money in trust available, the attorney should issue a properly prepared trust account check for that amount. In the event that a trust account check cannot be issued, then the attorney should investigate whether the matter can be paid from the operating account.
Mikerman and Assoc. Fin. Corp. v. Appell, 989 So. 2d 18 (Fla. 3d DCA 2008) A Title Company, Appell conducted almost all of its closings through two accounts only, a demand deposit account and an IOTA account. Appell used the accounts as a joint operating, or general fund, and trust account for all closings. Appell performed no reconciliation between the accounts nor did it maintain individual ledgers and trust account distribution slips for each client it represented. Appell issued checks from the operating account to third parties including loan brokers, mortgage companies, revenue stamps, title insurance, surveys, inspection fees, new owner documents, and disbursement statements. Appell also issued checks from the IOTA account to all persons whose funds were deposited in the account, including checks issued to lender-clients and checks issued to seller-clients for excess funds. Appell also deposited funds belonging to lender-clients into the IOTA account, and never attempted to distinguish which money belonged to the lenders and which to the purchaser-clients. Appell essentially conducted all of its business through either of its two accounts. Appell disbursed the funds deposited in the IOTA account, before closing the sale, to pay mortgage payoffs, title companies, and other fees. Appell also issued checks from the IOTA account, to the buyers for excess funds. On its tax returns, Appell described the IOTA account as a "settlement trust." Appellant maintained that the account was a "settlement trust" account. The appellate court carefully reviewed the Fla. Bar rules, and ultimately determined that Appell had commingled operating funds and trust account funds in the IOTA account, and had failed to pay lenders from the IOTA account. The court also referred to a pending Bar investigation into Appell’s ethical misconduct.
Implications of Violation
On a more serious note, the consequences of non-compliance can be severe and devastating. The most common result of a Docket Inquiry is a Complaint being filed with the Office of Professional Responsibility. The OPR will investigate the matter and evaluate the extent of the violations and the breach of an attorney’s fiduciary duty to clients. A Recommendation is then issued by the OPR Director to Disciplinary Counsel, the Bar Counsel or Bar Counsel’s designee. At that point, the attorney has the option to admit to the violations charged and settle the matter or contest the allegations and request a hearing before the Board of Overseers. If I can quote from Edwin Cleary, managing partner of Professional Fiduciaries of California, that "either way, things are about to get really expensive". As Edwin further explains, "the initial retainer for representation before a State Bar Court Judge is the same amount you could expect to pay for a divorce case in San Francisco and much of it will be paid to investigators and their expert witnesses . "
Bar Counsel may elect to offer an Amended Petition or Petition on Consent agreeing to less severe discipline than originally sought. This requires a Petition for Reinstatement. In order to be readmitted to the Bar, the attorney has to present evidence that he/she has been rehabilitated and has learned the error of his/her ways. Many times, Bar Counsel will request an admission as a precondition to moving forward with reinstatement.
In the typical disciplinary proceeding, the Bar Counsel will seek Public Admonition, Censure, Suspension for a period of time or permanent disbarment. In some cases, the violation is so egregious that the first step in enforcement action could be an Immediate Interim Suspension which suspends the attorney from practice and freezes the attorney-client trust account. In the most serious cases, the attorney-client trust account becomes part of a Restraining Order and the attorney could be disbarred immediately.
Best Practices in Trust Account Management
One of the biggest sticking points for many attorneys is having enough time in a day to service clients and still stay on top of their client trust account management duties. Record keeping, audits and ongoing reconciliation can easily fall by the wayside for the busy lawyer if he or she doesn’t take the right proactive approach. It’s important to remember that the number one reason for bar grievances is mishandling of funds, and so effectively managing your trust account with practices that protect both you and your clients should be your number one priority.
Some best practices for trust account management include:
● Streamlining record keeping by setting aside a specific time, at least once a month, to review current matters in your trust account, and then adjusting any allocation of funds that is necessary.
● Conducting periodic random audits of your account to uncover any discrepancies while they are still easy to clean up.
● Reconciliation of your account with your bank and your trust software so you know you are on the right track. Use a reconciliation template from our office to help manage this function.
● For larger firms with multiple attorneys managing client funds, a written policy or procedure for your staff to follow is a great asset.
● Utilizing state-of-the-art legal accounting software to keep your trust accounts on track.
State-Specific Rules
To assist legal professionals further, the American Bar Association (ABA) and individual state bar associations have developed guidelines and best practices for the use of attorney client trust accounts. However, every state also has specific rules, regulations, and interests when it comes to how these accounts are used.
For example, 3 of the 4 states Hemmi has covered so far require law firms to perform periodic reconciliations of their client funds on a set basis (daily, weekly, monthly, quarterly, etc.) and submit their records to be audited at least once a year. In contrast, Wisconsin bars attorneys from entering into any contract regarding the deposit of client funds into interest-bearing accounts unless they’ve received informed consent from clients and provided them with the opportunity to opt out. For more detailed information on trust account rules in your state, the best source is your state bar association as they usually have a section of their website dedicated to the subject.
Conclusion and Legal References
Conversely, the Attorney Client Trust Account rules can prove burdensome at times and occasionally seem unnecessary. But set in a broader context, they intend to help protect vulnerable members of society as well as the legal system as a whole. With that said, having a working understanding of Arkansas’s Trust Account rules is an indispensable component of legal practice. All Arkansas attorneys are required to know the applicable law and stay informed of updates to the law governing their practice.
As a final point , the following list is not an exhaustive directory of resources for managing attorney client trust accounts but contains the most widely used and respected ones. Those interested can always refer to the Arkansas Supreme Court for anything not included:
Ethics Hotline: www.arkbar.com/public/ethics.aspx
Attorney Assistance Program (assigned counsel funding): www.arkbar.com/public/aap.aspx
Trust account accounting rules: www.arkbar.com/public/resources.aspx
Legal Assistant Association of Arkansas: www.laaa.org
Comprehensive Trust Accounting System: www.codiassociates.com
National Center for State Courts: www.ncsconline.org
American Bar Association: www.americanbar.org
Law Practice Today: www.abanet.org/lpm/lpt/home.html