A Lawyer’s Guide To Client Trust Accounts State Bar Of Texas
Table of ContentsIntroduction .2A Lawyer’s Guide toClient Trust AccountsRule 1.14 of the Texas DisciplinaryRules of Professional Conduct .2State Bar of TexasWhen to Use a Trust Account .3Individual Interest-Bearing Trust Accounts vs.Interest on Lawyers’ Trust Accounts (IOLTA) .5Financial Institutions .7This material is intended for educational andinformational purposes only and intended only to addressdisciplinary issues under the authority of the State Bar of Texas. Itdoes not constitute legal, accounting or professional advice, andno liability is assumed in connection with the information,suggestions, opinions, or links mentioned herein.Opening, Maintaining and Closing Trust Accounts .8Duty to Notify, Pay Promptly and Provide Accounting . 14Disputed Funds . 15Enforcement . 16Thank you to the Washington State Bar Associationfor permission to use its illustrations from Managing Client TrustAccounts – Rules, Regulations, and Common Sense.Other Rules . 19Additional Resources . 19Updated April 15, 2014Appendices . 21Endnotes . 411
Introductionshall be kept by the lawyer and shall be preserved for a periodof five years after termination of the representation.Rule 1.14 of the Texas Disciplinary Rules of Professional Conductis titled, “Safekeeping of Property”, and commonly referred to asthe trust account rule. The purpose of this information is to discussthe proper handling of monetary funds, belonging entirely orpartially to a client or third person, and which are required by thisrule to be kept separate from the lawyer’s own funds by depositingthe funds into a trust account. A trust account may be one or moreinterest-bearing trust accounts or Interest on Lawyers’ TrustAccounts (IOLTA), 1 the appropriate use of each are discussed laterin this material.(b) Upon receiving funds or other property in which a client or thirdperson has an interest, a lawyer shall promptly notify the clientor third person. Except as stated in this Rule or otherwisepermitted by law or by agreement with the client, a lawyer shallpromptly deliver to the client or third person any funds or otherproperty that the client or third person is entitled to receive and,upon request by the client or third person, shall promptly rendera full accounting regarding such property.(c) When in the course of representation a lawyer is in possessionof funds or other property in which both the lawyer and anotherperson claim interests, the property shall be kept separate by thelawyer until there is an accounting and severance of theirinterest. All funds in a trust or escrow account shall bedisbursed only to those persons entitled to receive them byvirtue of the representation or by law. If a dispute arisesconcerning their respective interests, the portion in dispute shallbe kept separate by the lawyer until the dispute is resolved, andthe undisputed portion shall be distributed appropriately.Rule 1.14 of the Texas Disciplinary Rulesof Professional Conduct1.14 Safekeeping Property 2(a) A lawyer shall hold funds and other property belonging inwhole or in part to clients or third persons that are in a lawyer’spossession in connection with a representation separate from thelawyer’s own property. Such funds shall be kept in a separateaccount, designated as a trust or escrow account, maintained inthe state where the lawyer’s office is situated, or elsewhere withthe consent of the client or third person. Other client propertyshall be identified as such and appropriately safeguarded.Complete records of such account funds and other property(See Appendix 1 for Rule 1.14 and comments.)Policy Behind the RuleThe policy behind Rule 1.14 is to protect funds that do not belongto the lawyer. When a lawyer holds funds that belong to a client orthird party, these funds must be protected from the lawyer’screditors or personal financial problems. Acting as a fiduciary,2
lawyers are required to treat the property of others with the higheststandards of accountability. 3 Accordingly, Rule 1.14 details alawyer’s duties to clients and third persons when acting in thisfiduciary capacity.2. Funds which belong in part to the client and in part to thelawyer3. Funds of the client that are being held for disbursement at alater time4. Funds of third parties to be distributed at a later timeAlthough Rule 1.14 also mentions the duty to safeguard “otherproperty”, the purpose here is to discuss safeguarding funds, andnot personal property, such as jewelry or stock certificates.Examples of funds that must go into a trust account (i.e. funds thatbelong to a client or third party) Advance fee/expense deposits Settlement monies Overpayment of billsThe obligation to keep the property of others in a separate trustaccount in accordance with Rule 1.14 is absolute and not waivable. 4Examples of funds that must not go into trust account (i.e. fundsthat belong wholly to the lawyer)When to Use a Trust Account In connection with a representation, if a lawyer holds any fundswhich do not belong to the lawyer, then the funds must be held in aseparate account designated as “trust” or “escrow”. 5Fully earned feesReimbursements for cost advancesLawyer’s personal or business transactionsIn receiving monies, the lawyer may accept many methods ofpayment, including cash, check or credit card. 6This must be done whether the funds belong in whole or in part toclients or third persons.Unearned Fees, True Retainers and Advanced Payments ofExpensesTherefore, any lawyer who will handle funds that belong to a clientor a third person will need a trust account.Any unearned fee or advance payment of expenses should bedeposited into a trust account. Use of a trust account is appropriatewhether it involves an hourly fee, flat fee, contingent fee orprepayment of an expense.Types of FundsFunds that belong in a trust account:1. All advances for fees and most retainers received fromclients until they are actually earned by the lawyer3
Examples of unearned fees include:none of the fee is earned until the end of the representation when allwork has been completed to meet the client’s objective. Since inmany cases a lawyer cannot complete the representation, either dueto termination by the client or from voluntary withdrawal, thelawyer will often face a situation where some work, but not all hasbeen completed. 12 In these cases the lawyer faces the problem ofdetermining what portion of the flat fee is earned. A lawyer canavoid this problem by stating in the fee agreement at what rate thefee is earned. This is often done at an hourly rate or by setting aschedule of work to be completed, prorating the fee and designatingat each step what portion of the fee has been earned. Advance deposit or retainer for lawyer’s fees which will bedepleted as the lawyer bills the client on an hourly basis. 7(See Appendix 2 for Ethics Opinion 611.) Flat fees that have not been earned, regardless of whether thefee is deemed “nonrefundable” in the fee agreement. 8(See Appendix 3 for Cluck v. Comm’n for Lawyer Discipline.) Settlement funds which have not been distributed in accordancewith the contingent fee requirements in Rule 1.04 (d). 9(See Appendix 4 for Rule 1.04 (d).)A true nonrefundable retainer is a fee to secure a lawyer's services,and remunerate him for loss of the opportunity to accept otheremployment. If the lawyer can substantiate that other employmentwill probably be lost by obligating himself to represent the client,then the retainer fee should be deemed earned at the moment it isreceived. Thus, only a true retainer may be nonrefundable. 13 As anearned fee, a true nonrefundable retainer should not be placed inthe lawyer’s trust account. 14The types of fee arrangements between lawyers and their clientscontinue to change for a variety of reasons. For example, “valuebilling” is based on the results delivered to the client. Regardless ofthe name tag placed on the billing arrangement, the rule is simple:until the fee is earned, it must be segregated from the lawyer’s ownfunds in a trust account. This rule applies to any practice area,whether it is criminal, family, or corporate law.A true nonrefundable retainer, however, is not a payment forservices. If a lawyer will perform services for the fee, then the fee isclassified as a deposit or prepayment for services.Adeposit/prepayment for services is always refundable until it hasbeen actually earned through the performance of legal services. 15 Alawyer cannot make a deposit/prepayment for servicesnonrefundable simply by declaring that it is a nonrefundableretainer. 16 Since this deposit or prepayment of fees remains theclient’s property, it must be placed in the lawyer’s trust account.Thus, an advanced deposit or prepayment retainer is whollydistinguishable from a true nonrefundable retainer.Unearned fees are always subject to refund until earned and cannotbe deemed nonrefundable by agreement. 10 As such they belong inthe lawyer’s trust account. Distinguishable are fully earned fees.For example, when a client pays the exact amount on the lawyer’sinvoice for work already performed, that money is earned andshould not be deposited into the trust account.A common problem that arises in the context of flat fees is thequestion of when the fee is earned. Labeling a flat fee asnonrefundable or earned upon receipt does not make it so. 11Therefore a flat fee should be deposited into the lawyer’s trustaccount. Without contract terms that specifically define at what ratea flat fee is earned, lawyers should operate under the premise thatIt is much easier to identify what constitutes an advance payment ofexpenses as opposed to an unearned fee. For example, court costs4
There is often confusion about whether funds must be placed in anIOLTA (Interest on Lawyers’ Trust Account) account. The termsIOLTA account and trust account are not synonymous. An IOLTAaccount is merely a certain kind of trust account. All IOLTAaccounts are trust accounts, but not all trust accounts are IOLTAaccounts.are often paid as part of an advance payment of fees. Until thecourt costs, such as filing fees, are paid to the courthouse clerk,these too, belong in a trust account. The same is true of anticipatedtravel expenses. Until the airplane ticket is purchased by thelawyer, or the lawyer reimburses himself, the money for thisexpense remains in the trust account.Commingling and Funds for Account MaintenanceRule 1.14 requires that funds of a client or third person be heldseparate from the lawyer’s. 17 Therefore a lawyer should notcommingle or mix his own or the law firm’s funds with the client’s.Funds that belong in whole to a lawyer should not be deposited intoa trust account.An exception exists to the general rule that funds belonging to thelawyer or law firm may not be deposited in a trust account. Thisexception permits the deposit of funds “reasonably sufficient to payfor fees or obtain a waiver of fees or to keep the account open.” 18A trust account may either be an individual interest-bearing accountor an IOLTA account. The difference between the two types of trustaccounts involves to whom the interest earned on the principalfunds will be paid.Individual Interest-Bearing Trust Accounts vs.Interest on Lawyers’ Trust Accounts (IOLTA)Individual Interest-Bearing Trust AccountsThis type of trust account is set up for the benefit of the person towhom the funds belong. In practice this is usually the client, suchas when an advance payment of fees is paid to a lawyer. Thegeneral rule is if the funds can reasonably earn interest for thebeneficiary, then they should be placed in an individual interestbearing trust account where the interest will be paid to thatbeneficiary. 20 Alternatively, if the funds cannot reasonably earninterest for the beneficiary, the funds go into an IOLTA trustaccount. 21It is clear that a lawyer may not keep the interest earned from a trustaccount because the interest, just like the principal funds, belongs tothe beneficiary of the trust account. 19 In setting up the trustaccount, the lawyer must first determine whether the trust accountshould be set up as an individual interest-bearing trust account or anIOLTA trust account.5
short period of time must be held in an IOLTA trust account. 26These types of funds cannot reasonably earn interest for the client.It is important that the lawyer use the beneficiary's social securitynumber or EIN to open an individual interest-bearing trust account.For IRS reporting purposes, the lawyer should not use his own taxID number on this type of account.IOLTA Trust AccountsRule 1.14 makes clear that funds belonging to others must be heldin trust. In some situations, however, use of an individual interestbearing trust account for each person for whom the lawyer holdsfunds would be very burdensome. A lawyer might try to solve thisproblem by placing multiple beneficiaries’ funds in one trustaccount, but calculation of interest and account expenses for eachwould prove to be difficult and time-consuming, especially if fundswere constantly being deposited and withdrawn for eachbeneficiary. 22 Use of an IOLTA-type trust account alleviates theseproblems.Compliance with the IOLTA RulesThe IOLTA rules set forth additional requirements to which alawyer using such an account is subject. 27Among those requirements are the following: Notice to financial institution from lawyer 28 (See Appendix5 for form.) Annual compliance on State Bar of Texas dues statement 29(See Appendix 6 for form.) Notice of IOLTA changes, such as closing an account oropening a new account at a different financial institution 30When the monies of separate beneficiaries will be held for only ashort period of time, or if the monies are nominal in amount, thelawyer should use an IOLTA-type trust account for these funds. 23An IOLTA trust account operates to pool the separate beneficiaries’funds in one account and pays all accumulated interest to the TexasAccess to Justice Foundation to benefit legal services for theindigent.The IOLTA RuleFinally, if a lawyer has made an error and placed funds into anIOLTA trust account when the funds should have been placed in anindividual interest-bearing trust account, the lawyer should contactthe Texas Access to Justice Foundation (TAJF). TAJF hasprocedures in effect to refund the interest received, so that theinterest can be paid to an individual beneficiary.Article XI of the State Bar Rules requires that client funds that arenominal in amount or are reasonably anticipated to be held for aThe TAJF website has information, forms, and Frequently AskedQuestions (FAQ) related to IOLTA accounts. 3124This practice has been upheld as permissible and is required underthe State Bar Rules. 256
FDIC insurance coverage is important when dealing with largesums of money for particular clients. For example, a lawyer who isholding one client’s 500,000 settlement in trust may want toconsider placing those funds in two or more separate trust accountsat different banks in order for the entire 500,000 to be insured. 35In addition, if the client has other funds on deposit at the same bankwhere the trust account is established, then each of the depositor’sother accounts (e.g., personal and business accounts) and the trustaccount are cumulative for purposes of FDIC insurance. 36Remember the 250,000 coverage is per depositor, and the client istreated as one depositor. 37Financial InstitutionsChoosing a financial institution for your trust account is important.For example, how much federal deposit insurance does thefinancial institution offer? Is the financial institution eligible toparticipate in the IOLTA program administered by the TexasAccess to Justice Foundation? Other factors to consider are fees,locations and convenience.Federal Deposit InsuranceEligible Financial Institutions for Interest on Lawyers’ TrustAccountsRule 4 of the Rules Governing the Operation of the Texas Access toJustice Foundation requires lawyers to deposit trust funds into afederally-insured checking account or investment product, such asan interest-bearing account at an investment firm like MorganStanley Smith Barney. 32 Investment firms also insure the interestbearing account, but through government securities, and not theFederal Deposit Insurance Corporation (FDIC). The federalgovernment insures bank accounts through the FDIC.The Texas Access to Justice Foundation determines which financialinstitutions are eligible to hold IOLTA accounts. 38 A lawyer mayestablish an IOLTA account at any eligible financial institution.Some eligible financial institutions, referred to as Prime Partners,have agreed to go above and beyond eligibility and pay theFoundation the higher of 1) 75.00% or more of the Fed FundsTarget Rate; or 2) a minimum of 1.00% on IOLTA accounts and donot assess service fees. This results in increased interest for thedelivery of legal services to low-income Texans. A list of allfinancial institutions approved by the Texas Access to JusticeFoundation is available at:http://www.teajf.org/financial institutions/docs/Eligible Banks List Master.pdf.All funds in IOLTA accounts at Insured Depository Institutions areinsured in full under the Federal Deposit Insurance Corporation(FDIC). Starting January 1, 2013, the standard FDIC insuranceamount will be 250,000 per depositor. 33 Because the FDICconsiders IOLTA and other lawyer and law firm trust accounts asfiduciary accounts, the per depositor coverage means that funds ofindividual clients and third persons in a trust account will be fullyinsured up to the 250,000 maximum, including any funds a clientor third person also has on deposit at the same insured depositoryinstitution. 34 The FDIC has more information online l.7
firm’s or corporation’s trust account without having to open a trustaccount specific to the individual lawyer. 42Out-of-State Trust AccountsA lawyer is required by Rule 1.14 (a) to maintain his trust accountsin the “state where the lawyer’s office is situated, or elsewhere withthe consent of the client or third person.” This provision allows alawyer to use a bank in another state if the client or third personconsents. However, consent is limited to the geographical locationof where the trust account is established. A lawyer cannot ask theclient or third person to consent to commingling or keeping fundsin a non-trust type account, such as a joint checking account. 39For interest-bearing accounts established on behalf of specificclients, the lawyer should use the client’s tax identification numberor social security number. This allows the financial institution toissue a 1099 tax form to the IRS in the client’s name to report theinterest income. If the bank sends the client’s 1099 to the lawyer,he or she has a duty to forward it promptly to the client. 43 Althoughthe account may have the client’s name on it, the client cannot be asigner. Only the lawyer or persons under the lawyer’s directsupervision may sign on the trust account. 44 It is advisable for thelawyer to require two signers on any type of trust account whichholds a substantial amount of money. The lawyer may be liable, for
Apr 15, 2014 · client’s property, it must be placed in the lawyer’s trust account. Thus, an advanced deposit or retainer is wholly prepayment distinguishable from a . true nonrefundable retainer. It is much easier to identify what constitutes an advance payment of expenses as
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3) You can also hire a lawyer for ongoing representation. Rocket Lawyer On Call attorneys generally offer Rocket Lawyer members 40% off their normal rate. Alternatively, you can speak to your Rocket Lawyer customer representative or call us at (877) 881-0947. We'll contact you within one business day and connect you to a local lawyer.
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 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
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:
