A Lawyer’s 7-Point Plan For Trust Account Management
LexisNexis Law Firm Practice Managament WHITE PAPER SERIESA Lawyer’s 7-Point Plan forTrust Account Management:How to reduce liability and avoid sanctionswith good trust accounting practices.SUMMARYBy: Steven J. Best, Esq., Affinity Consulting Group, LLC, Alpharetta GAMany jurisdictions require attorneys to maintain lawyer’s trust accounts, and those accounts, and jurisdictionalrules, come in many shapes and sizes. As a lawyer, it’s your job to act as a fiduciary or virtual “trustee” of client funds,and as such, you must scrupulously follow stringent standards of good faith and transparency. While most of usassociate this fiduciary obligation only with money, your duty extends to the protection of ANY client property .Though there may be some debate about the exact event that led to the creation of trust accounts, the purposeis clear: to safeguard and protect client funds, while also protecting the lawyer from the perception of improper, orillegal behavior. In order to avoid any appearance of impropriety, lawyers are typically required by state, provincial orbar rules to segregate client funds from business funds.Considering the potential for confusion about all the regulations governing trust accounts – and the extremelyserious consequences for violating them – it’s worth taking the time to refresh your memory to make sure your firmstays lock-step in line with every requirement.
A Lawyer’s 7-Point Plan for Trust Account Management1. Avoiding the appearance of impropriety:Keeping trust funds separated from firm fundsA lawyer trust account is essentially a business checkingaccount or its equivalent, established by the firm to holdclient funds. FUNDS DEPOSITED INTO A TRUST ACCOUNTARE NEITHER YOUR PROPERTY, NOR YOUR FIRM’S.Depending on the jurisdiction, a law firm must adhere to oneof two standards:1. Maintain a single account to hold all client funds orproperty, with the lawyer responsible for keeping up withfund ownership.2. Keep individual trust bank accounts so that one client’sfunds are not commingled with another’s.No matter which scenario is mandated, it’s only underthe very rarest of circumstances that client funds may becommingled with a lawyer’s business funds. In the vastmajority of cases, client funds must be deposited into aseparate attorneys’ trust checking account and designated assuch. Trust account funds may not be utilized by the law firmuntil they are earned. This further ensures accurate recordkeeping, as well as the integrity of the firm.2. Watching over the institutions watching overyour clients’ trust fundsMany states and provinces require that lawyer’s trustaccounts be maintained in approved financial institutionswithin the borders of the state or province where the lawyer’soffice is located. For example, the rules regulating the GeorgiaBar are very clear about banking institution type and location:Required Bank Accounts: Every lawyer whopractices law in Georgia, and who receivesmoney or other property on behalf of a client orin any other fiduciary capacity shall maintain, inan approved financial institution as defined bythis Rule, a trust account or accounts, separatefrom any business and personal accounts. Fundsreceived by the lawyer on behalf of a client or in anyother fiduciary capacity shall be deposited into thisaccount. The financial institution shall be in Georgiaor in the state where the lawyer’s office is located,or elsewhere with the written consent and at thewritten request of the client or third person .Other states have very similar requirements. Note specificallythat Georgia requires that a lawyer maintain an account in “anapproved financial institution”.Comment one on the same reference states: “Each financialinstitution wishing to be approved as a depository of clienttrust funds must file an overdraft notification agreement withthe State Disciplinary Board of the State Bar of Georgia. TheState Bar of Georgia will publish a list of approved institutionsat least annually .”Similarly, the Law Society of Manitoba requires that aManitoba lawyer’s trust account must be opened withinthe borders of the province at a chartered bank, at a trustcompany authorized by law and insured by the CanadaDeposit Insurance Corporation, or at a properly incorporatedcredit union .Thus, it is inherent in the rules that you know WHERE you mayopen and maintain an attorneys’ trust account.3. Knowing the rules for fees earned in advance:When in doubt, go with the trust accountFees earned in advance can create a very slippery slope forlaw firms. When in doubt, put client retainer funds into yourproperly maintained attorney trust account.In limited circumstances, some jurisdictions may permit alaw firm to deposit monies paid by a client in advance into thefirm’s operating account. For example, the New York Rules ofProfessional Conduct do not mandate what a lawyer shoulddo with retainer funds paid in advance of legal fees, althoughthere are ethical opinions providing guidance.N.Y. State Bar Opinion 570 (1985) noted that the draftersof the Code of Professional Responsibility did not consideradvance payments of fees to be client funds necessitatingtheir deposit in a trust account. The opinion observed that:
A Lawyer’s 7-Point Plan for Trust Account ManagementNormally, when one pays in advance for services tobe rendered or property to be delivered, ownershipof the funds passes upon payment, absent anexpress agreement that the payment be held intrust or escrow, and notwithstanding the payee’sobligation to perform or to refund the payment. Thelawyers who drafted the Code should not lightly beassumed to have overlooked these fundamentalprinciples in choosing the language of DR 9-102(A) .New Jersey takes a similar position: Absent a clearunderstanding that the retainer fee be separately maintained,the funds need not be deposited in an attorney’s trustaccount .Compare New York’s and New Jersey’s position with that ofthe Florida Bar, which clearly states that:Earned fees, including ‘true retainers’, must not beplaced in the trust account. Unearned fees andadvances for costs must be placed in the trustaccount. Nonrefundable fees are permissible,but remain subject to the rule regarding clearlyexcessive fees. When charging a flat fee (a portionof which will be used to pay costs), the lawyermust deposit into the trust account any unearnedfee, as well as the estimated amount of costs. Anattorney who charges a flat fee, a portion of whichwill be used to pay costs, must deposit into the trustaccount any unearned fee, as well as the estimatedamount of costs .Further, the 2010 amendment to this rule requires thatnonrefundable fees be confirmed in writing.Bottom line, be absolutely certain that the account intowhich you place retainers, fees in advance, flat fees andnon-refundable fees is permitted in your state, and do so withcaution. If there is ANY doubt, place the funds in your attorneytrust account.4. Where the interest goes:Understanding Interest on Lawyer TrustAccounts (IOLTA) regulationsThe Interest on Lawyer Trust Accounts (IOLTA) program wasfirst established in Canada and Australia in the late 1960s andearly ‘70s as a method to generate funds for indigent legalclients. In the late ‘70s, the Florida Bar established the first U.S.IOLTA program. In 1981, after the Florida legislature permittedthe establishment of interest-bearing checking accounts andthe IRS gave its blessing, the Florida Bar Foundation launchedthe first IOLTA program. California, Maryland and Idaho soonfollowed.Today, all 50 states, the District of Columbia and the U.S.Virgin Islands operate IOLTA programs. Forty-four statesrequire lawyers to participate in IOLTA. Lawyers can opt outof participation in 4 jurisdictions (Alaska, Kansas, Nebraska,Virginia), and participation is voluntary in two others (SouthDakota and the Virgin Islands) .So, what does it mean if you are in a state with a mandatoryIOLTA program? IOLTA.org explains as follows:A lawyer who receives funds that belong to a clientmust place those funds in a trust account separatefrom the lawyer’s own money. Client funds aredeposited in an IOLTA account when the fundscannot otherwise earn enough income for the clientto be more than the cost of securing that income.The client - and not the IOLTA program - receivesthe interest if the funds are large enough or will beheld for a long enough period of time to generatenet interest that is sufficient to allocate directly tothe client.
A Lawyer’s 7-Point Plan for Trust Account ManagementEvery state, along with the District of Columbia andthe Virgin Islands, operates an IOLTA program. In2009, the U.S. IOLTA programs generated morethan 124.7 million nationwide. These funds,together with state and federal appropriationsas well as private grants and donations, enablenonprofit legal aid providers to help low-incomepeople with civil legal matters such as landlord/tenant issues, child custody disputes and advocacyfor those with disabilities.5. What you don’t know CAN hurt you:Covering your back with legal-specificaccounting softwareConsidering the options available to law firms today, it canbe foolhardy to even think about maintaining an attorneytrust account without legal-specific accounting software.Accounting software made for law firms includes threepoint trust account reconciliation you can’t get from genericaccounting software without jumping through hoops.Maintaining trust accounting in generic business accountingprograms is flirting with disaster if your firm is audited, or if oneof your clients complains to the bar association.Before you commit to any accounting software, make surethat it allows for:1. Three-Point Trust Account Reconciliation – Simply put,your trust account must be maintained in such a way thatyou can, at any time, decipher three points of financialdata in a very balanced way.a. Point one: What is the balance in the trust bank?b. Point two: What is the balance in your trust liabilityaccount on your balance sheet? Does point twomatch point one at all times and for all dates?c. Point three: Can you break down the balance in thetrust bank on a client-by-client basis?2. Client Trust Ledgers – You must be able to track alltransactions related to your client from the initial depositto trust through the last disbursement from trust. Yoursoftware should be able to do this filtered by client,matter, date range and transaction type.3. Easy movement of trust funds – You should be ableto easily move trust funds to your operating account inpayment of an outstanding invoice and/or to reimburseyour firm for disbursement work in progress (WIP). Insome jurisdictions, it is permissible to transfer funds fromtrust to operating accounts immediately before billingso that the transaction can be reflected on your client/matter invoice.4. Easy production of trust reports – Nothing would beworse than to have to scramble to provide simple, basictrust account reports when you have a state bar trustaccount auditor standing in front of you demandingthem. But more importantly, it is important to alwaysknow your trust balances on a matter by matter basis andensure that the total balance (matter by matter) equalsthe balance in your IOLTA or trust bank account for thesame date range.In addition, you must be 100% sure that the funds depositedon behalf of your client have actually been cleared by thebank BEFORE disbursement. If funds are disbursed beforethe check clears, you have effectively allocated trust fundsthat didn’t belong to the client, and this violates most bar andlaw society regulations.What’s more, it is very important to recognize that “available”funds are not the same as “cleared” (100% collected) funds.When a check or other transaction is made to a financialinstitution, it may take the bank several days before thefull amount of the deposit is collected and you may ONLYdisburse funds from trust accounts that have been collected.
A Lawyer’s 7-Point Plan for Trust Account Management6. Banking fees:Make sure you know the rules even when yourbanking institution doesn’t7. The lawyer discipline system:Understanding the consequences of notunderstanding every ruleInterestingly, many banking institutions that qualify as“approved” by their respective states and provinces don’tactually understand the nuances of an attorney trustaccount. For example, under rare circumstances (andWisconsin is one of the rare states permitting this), attorneysare allowed to commingle firm funds and client funds in trust,while most states and provinces PROHIBIT such allowancesno matter the circumstances.Lawyers who fail to strictly adhere to the rules regulating themaintenance of lawyer’s trust accounts are likely to becomepart of the lawyer discipline system administered by theirstate bar association. Lawyers may face severe sanctions,including disbarment.The onus is on you, the attorney, to ensure that his or her bankadheres to the rules of the state or provincial bar association.This includes prohibiting banking fees, check printing feesor even credit card merchant account fees on an attorney’strust account. Because the attorney’s trust account holdsfunds that DO NOT belong to him or her, a bank drafting theaccount to cover such fees and charges violates the rulesregulating attorney’s trust accounts.ATTORNEY BEWARE: Banks that are approved by the statebar may still unwittingly violate the rules governing bankingtrust account regulation. Ultimately, YOU ARE RESPONSIBLEFOR MAKING SURE THAT TRUST ACCOUNT RULES AREFOLLOWED TO THE LETTER. If necessary, spend the time toeducate your banking institution. Direct that any fees on trustaccounts should instead be drafted from the firm’s operatingaccount. That includes bank charges, overdraft fees, checkor deposit slip fees, printing fees and credit card merchantaccount fees. (And yes, you may find that the credit cardmerchant requires your direction as well.)Trust account rules and regulations are in place to protect thepublic from lawyer misconduct. It’s imperative that lawyershave the information they need to adhere to the disciplinaryrules and protect themselves from the grievance process.Every state and province maintains internal procedures toaudit attorney trust accounts, oftentimes unannounced.One example is the Law Society of Alberta’s new Trust Safetyprogram, which was implemented in January of 2011. Thenew regulations address concerns about rising threats to thesecurity of trust funds by lawyers. Alberta employs certaincontrol techniques that may require a lawyer to transmit his orher trust account records to the law society to demonstratecompliance.Similarly, the State Bar of California issues a handbook onclient trust accounting that is over 100 pages long. Attorneysin California must be aware of and adhere to the rules. Forexample, maintaining personal funds in a California AttorneyTrust Account as a cushion against overdrafts is NOTallowed and will expose an attorney to disciplinary measures.(However, maintaining a small ”firm” balance in trust, ispermitted in many jurisdictions)
A Lawyer’s 7-Point Plan for Trust Account ManagementPCLaw and Juris from LexisNexis :Making it easy to make trust manageableOne of the best things about legal-specific software such asPCLaw and Juris from LexisNexis is that both programs arebuilt to provide easy-to-manage-and-maintain attorney trustaccounting that can save your firm from sanctions down theroad. Both PCLaw and Juris provide robust trust accountingfunctionality, including three-point reconciliation, easy-toread and understand client trust ledgers, simple trust transferfunctionality (including functionality that will prevent anyonein your office from overdrawing a client’s trust funds), as wellas myriad reports that will satisfy even the most persnicketytrust account auditor .Key trust account functions included with PCLaw The State Bar of Wisconsin, like the majority of states andprovinces, requires that attorneys maintain trust accountrecords for at least 6 years, including a chronological trackingof all deposits and disbursements (transaction register);individual client ledgers, including a chronological record ofdeposits and disbursements on a matter-by-matter basis;and a ledger of any fees and charges on the trust account.Additionally, Wisconsin (like its neighboring states) requiresmaintaining reports such as monthly bank statements,along with reconciliation and deposit slip reports. Further,Wisconsin mandates that the CLIENT/MATTER and REASONfor the disbursement be noted in the memo field on the faceof every trust check disbursed.PCLaw and Juris include this functionality and much more, yetthere are still lawyers out there who don’t use client-specificaccounting software. For example, QuickBooks – a wonderfulbusiness accounting program from Intuit, Inc. – does notinclude any features that help your firm comply with trustaccount rules by default.QuickBooks users are often guided to the programbecause it’s what their accountants and/or CPA’s request.Unfortunately, those accountants are not always educatedin the nuances of trust accounting and its requirements.Programs like PCLaw and Juris typically do EVERYTHINGthat QuickBooks can do, AND they automatically keep you incompliance with trust account regulations.
A Lawyer’s 7-Point Plan for Trust Account ManagementConclusionWhile some of these topics may on the surface seemfrightening, all that’s really required to stay in compliancewith trust accounting rules is a healthy respect for thoserules, along with legal-specific accounting software from areputable company. With programs such as PCLaw and Jurisworking for you, there’s no need for stress concerning trustaccount regulations. LexisNexis has you covered.About the AurhorSteven J. Best is an attorney as well as a certified law officesoftware consultant. He is the managing partner of AffinityConsulting Group’s Atlanta office. With an educationalbackground in law, accounting and economics, Steve consultswith law firms throughout the United States on legal officesoftware, as well as sophisticated practice managementsolutions.Best is a graduate of Rutgers University and Emory UniversitySchool of Law. He is a member of the Florida and GeorgiaBars and is also a certified consultant/trainer, maintainingcertifications in several of the top practice management,time/billing/accounting, document management anddocument assembly applications, including LexisNexis PCLaw and Time Matters . Steve also consults with lawfirms on workflow management, financial management, trustaccount management and migrating to a paperless officeenvironment. Steve is also a frequent lecturer at a variety ofCLE and technology programs on topics surrounding legaltechnology, practice management, cloud solutions anddocument management/workflow. He co-chairs the annualGeorgia ICLE program on legal technology. Steve has twiceserved on the LexisNexis Consultant Advisory Panel andis currently serving on the PCLaw Product Developmentadvisory committee. He is a member of the ABA TechShowplanning board for 2013-2015.
A Lawyer’s 7-Point Plan for Trust Account ManagementAbout LexisNexis Legal & ProfessionalLexisNexis Legal & Professional (www.lexisnexis.com) is aleading global provider of content and technology solutionsthat enable professionals in legal, corporate, tax, government,academic and non-profit organizations to make informeddecisions and achieve better business outcomes. As a digitalpioneer, the company was the first to bring legal and businessinformation online with its Lexis and Nexis services. Today,LexisNexis harnesses leading-edge technology and worldclass content, to help professionals work in faster, easierand more effective ways. Through close collaboration withits customers, the company ensures organizations canleverage its solutions to reduce risk, improve productivity,increase profitability and grow their business. Part of ReedElsevier, LexisNexis Legal & Professional
Similarly, the Law Society of Manitoba requires that a Manitoba lawyer’s trust account must be opened within the borders of the province at a chartered bank, at a trust company authorized by law and insured by the Canada Deposit Insurance Corporation, or at a properly incorporated credit union .
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Here, Dare sees the lawyer as the instrument of the institution of law. Postema disagrees: 'The lawyer must recognise that the institution acts only through the voluntary activities of the lawyer and client. The lawyer is not the instrument of the institution, rather the institution is the instrument of the client and the client engages the .
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the lawyer’s letterhead, business cards, office sign, fee contracts, and with the lawyer’s signature on pleadings and other legal documents. (f) A lawyer shall not use a firm name, letterhead, or other professional designation that violates Rule 7.02(a). Comment 1. A lawyer or law firm may not practice law using a name that is misleading as .File Size: 137KB
A lawyer’s letterhead or a business card may include the name of a non-lawyer assistant if the assistant’s ca-pacity is clearly indicated and the document is otherwise neither false nor misleading. 10. A lawyer may use a non-lawyer, non-employee f
questions and how well the lawyer listens to you. You also want to pay attention to how easy it is to understand the lawyer's explanation of your legal problem, and how you feel about the lawyer's abilities. During the interview, you may ask questions about the lawyer's background, qualifi-cations and experience, such as:
The ethical obligations for those who set up lawyer trust accounts are rooted in the principle that a lawyer who holds funds of a client or third person in trust, even for a . those assets from the lawyer's personal and business assets. Oregon Rules of Professional Conduct (ORPC) 1.15-1 and ORPC 1.15-2 set forth the ethical duties and
