Practice Pointer: Managing Your Trust Account
by Kate A. Toomey
Every attorney knows that lawyers in private practice who handle client money must do so in a manner prescribed by the Rules of Professional Conduct. But the nuances of the requirements often prompt calls to the Office of Professional Conduct's Ethics Hotline. I've discovered that many attorneys share a near-phobic aversion to the whole concept of trust accounts and handling other people's money. Here are some answers to the most common questions.
The first basic principle is that you must hold property that belongs to someone else, either a client or a third person, separate from your own. See Rule 1.15(a), R. Pro. Con. This includes money, in which case it must be kept in an account separate from your own - a trust account. Id. Unless your client agrees otherwise, the trust account must be in the state where you have your office. Whether your client agrees or not, the trust account must be in a financial institution that will report to the OPC any instances of checks being written against insufficient funds ("NSF checks"). Id.
There are a few things you should know with respect to financial institutions notifying the OPC about NSF checks. First, the OPC doesn't provide financial institutions with forms or instructions concerning the reporting requirement. It's up to you to inquire about whether your financial institution already complies, and if not, to make its compliance a condition of your doing business there. Most large financial institutions have procedures in place for making the appropriate notification; if your financial institution doesn't, you must either motivate it to comply, or find a financial institution that will. Second, overdraft protection is great because it keeps an NSF check from actually bouncing, but it doesn't insulate you from the financial institution reporting the check to the OPC, and it doesn't protect you from violating the trust account rules.
Your trust account must be separate from your other accounts, including your general office account. Although attorneys commonly use the same financial institution for all their accounts, the accounts must be designated by separate numbers, and the trust account must be identified as such.
If the amount of interest from a single deposit is likely to be significant, you might consider opening a separate trust account for that client. As you know, interest belongs to clients, and lawyers are not allowed to keep the interest generated by trust accounts. Your client might want the benefit of the interest, and having a separate account is an easy way to accomplish this without having to separate one client's interest from another's. The money in most attorney trust accounts is there for such a brief period that accounting for and paying over the interest to individual clients isn't feasible. This is where the Interest on Lawyer Trust Accounts program comes in handy, because the interest on your trust account can be collected and administrated by the Utah Bar Foundation for worthwhile public interest legal projects such as the Community Legal Center. For more information, check out the Bar Foundation's website at www.utahbarfoundation.org.1
Use clearly labeled checks, check registers, and deposit slips that identify the account as an attorney trust account. Lawyers sometimes mistakenly write a check against their trust account when it should have been written against an operating account. Using the same financial institution for all your accounts amplifies this risk because the paper associated with the accounts tends to look the same. One easy way to try to avoid this mix-up is to use a different color or shape for your trust account checks so you can tell at a glance which check you're using.
Maintaining your trust account is up to you, and it's a non-delegable responsibility. The trust accounting rule doesn't provide much detail about how to manage it, but the best-practice principles are basic: keep a separate ledger for each client, and some sort of account journal for the entire account. I'm told that user-friendly bookkeeping programs are available for maintaining trust account records on computers, and this is a solution that more and more attorneys are adopting. Be sure to keep back-up digital records, just in case - you don't want to have your answer to an informal bar complaint about your trust account impeded by a system crash! The other thing you might consider is hiring a bookkeeper.
If you're a solo practitioner, you should be the only signatory on the account. If you're in practice with others, it's a good idea to limit the number of attorneys with signatory power. Don't keep a signature stamp, and never ever let a non-attorney be a signatory, however convenient this might be. This includes your office manager, your bookkeeper, and your spouse. You can imagine what can ensue when an attorney's trust is betrayed, and although you may not have to answer for rule violations if you've taken all the proper precautions, you could find yourself mortgaging your house in an effort to pay back your clients. Don't make it easy for a would-be thief to steal from your trust account.
Proper trust account management includes opening and reviewing monthly statements, and reconciling them at regular intervals. A small problem can quickly become a big problem if you're not on top of the accounting. If someone performs the reconciliation for you, be sure to review it yourself, comparing the actual transaction documents against the ledger.
You must keep the trust account records concerning a particular client for a period of five years after the representation of that client terminates. See Rule 1.15(a), R. Pro. Con. As a practical matter, because it's difficult to isolate the records for any given client, prudent attorneys keep all of their trust account records much longer than that. The five-year rule is useful for attorneys who retire from active practice, though.
The most common reason for bouncing a check is an attorney's failure to wait until a deposit is credited to the account before writing a check against the account. It's not good enough to deposit a check into the account, then write a check three days later relying on the fact that this is usually how long the financial institution takes to credit your account. What you need to do is confirm that the deposit has been credited, either by verbally checking, looking at your on-line account records, or waiting until you receive your monthly statement. I know that clients sometimes pressure attorneys to release settlement money immediately, but you have to hold the line on this. You might even consider including a provision in your fee agreement explaining that you won't disperse any money until you've verified that a deposit has cleared.
Your trust account can't be used for your own money, and if your fees are to be drawn from money in trust, remove the earned fees promptly to avoid co-mingling. Likewise, do not use your trust account for office funds, employee payroll, or anything other than client money and money belonging to third persons. I remember a case in which an attorney used a trust account to avoid having his own money garnished by the IRS; I hope it goes without saying that this isn't allowed.
What should you do about flat fees paid in advance and denominated "earned upon receipt"? Many attorneys, especially criminal defense attorneys, put them directly into their operating accounts, and technically the rules permit it. In my opinion, this isn't the best practice, though. Until you've actually done the work, you're subject to disgorging all or part of it if the representation terminates before the legal matter has been concluded.2 It's cleaner to put the fee into your trust account, periodically drawing it down as your work progresses, or collecting it in a lump sum when you've completed the representation. Taking this extra administrative step can save you trouble later.
Conversely, if you collect a flat fee after you've done the work, don't put it in your trust account. That's co-mingling!
The rules require you to "promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive." Rule 1.15(b), R. Pro. Con. So what should you do if the ownership of the money you're holding is disputed? Continue to hold it in trust, and get some help in resolving the dispute. One suggestion is to explore fee arbitration; the Bar offers an inexpensive program that can help you with this.3 Another suggestion is to seek declaratory relief in court.
An additional word of caution concerns accepting cash payments from clients. Don't do it if the sum is large or if you have any reason to question the legitimacy of the source. The trust accounting rules don't require you to decline payment in cash, but you should remain alert to the fact that clients sometimes use their attorneys as tools in money-laundering schemes.
What about paying for the charges associated with managing your account? Callers to the Ethics Hotline often ask whether there is a specific amount of their own money that an attorney can keep in the account to pay for administrative fees. The OPC can't set a dollar amount on this, among other things because financial institutions differ in the amount they charge, but you can keep a minimal sum in the account for this purpose. The best practice is to have the financial institution charge your general account; I've heard that this works well.
On a final note, I suggest that you review the rule itself from time to time. Remember that even though it has sub-parts, Rule 1.15 must be understood as a dynamic whole. If you have questions, call the OPC's Ethics Hotline at 801-531-9110.
1. The website has detailed instructions for attorneys and financial institutions concerning how to convert client trust accounts into IOLTA program accounts, and lists financial institutions that already participate.
2. Remember that even if you call a flat fee "non-refundable," or "earned upon receipt," it isn't really. All fees are subject to a reasonability analysis under Rule 1.5(a), and pursuant to Rule 1.16(d), must be refunded if not earned upon the termination of the representation.
3. For information about the fee arbitration program, call Christine Critchley at 297-7022.