By: Claude Ducloux, Attorney
Director of Education, Ethics, and State Compliance at LawPay

Almost all lawyers in private practice are required to maintain a firm trust account under their state’s attorney trust account rules. The rules in various states might be written differently, but the concepts are the same. So let’s get started.

The first decision to make is: what bank?

In some states you must pick your banking institution from a list of approved providers, but in most you may simply pick a banking institution as long as it agrees to follow the trust accounting rules (if any) in YOUR home state. When it comes to IOLTA accounts (also called “IOTA” in some states), any interest earned in that account will be sent to a central fund or trust that provides funding for worthy projects. So, for larger deposits from clients being held for some big  project or perhaps a closing, the lawyer should consider putting those funds into an interest-bearing account specifically designated for that client, rather than a central IOLTA account.

As I speak to lawyers around the country, it seems apparent that many law schools have poorly prepared their students for the trust account procedures required, and the serious dangers of breaching those rules. For example, I traveled to California last October after the trust account rules were amended. Those amendments required lawyers who might typically pocket a flat fee to now deposit unearned fees into a trust account. The questions I received showed a total lack of training and a fair amount of paranoia based in confusion. I always try to encourage lawyers, especially young lawyers, that it is simply not that complicated. So, here are trust account basics.

What goes into an attorney trust account (or IOLTA/IOTA account)?

The answer is really easy:

• Client funds that have not been earned by you; and
• Funds deposited and held in escrow for an event, contract, or costs.

What doesn’t go into an attorney trust account? 

• Your money!  When you earn it, take it out and transfer it to your operating account.
• Non-refundable retainers (absent an agreement to the contrary). Also, be aware that in many states a “retainer” is not the same as a pre-payment of fees. It is simply a fee to ensure your firm will be ready and willing to help a client as needs arise. Non-refundable retainers, therefore, are similar to a flat fee and are generally earned when they are paid, except as provided in the next example.
• The exception is, many states still require that flat fees for which the work has not been performed should still remain (for safekeeping) in the attorney’s trust account. You can dole them out to yourself as work is completed and billed. That requirement is not the same in all states, so check your own rules.

What comes out of a trust account? 

• Payment for attorney work that has been completed. If it is paid to yourself make sure you always have a billing to back up the payment or transfer of funds from your trust account. DON’T pay YOUR bills, overhead, payroll, etc. directly from the trust account.  That’s a big mistake. Always transfer the funds to your operating account first.
• Payment of costs, transactions, closings or settlements that the attorney is making on behalf of a client from funds in the trust account deposited there for that purpose.
• Refunds to a client in appropriate circumstances (i.e., the fees and costs for the matter completed is less than the amount prepaid into the trust account).

What is the correct procedure for taking money out?

Every penny removed from a trust account should have some sort of invoicing or written recordation of the movement of that money and its purpose. In my office, I only remove attorney’s fees from my trust account once per month based upon the previous month’s billings.  Payment for costs may come out, but in each instance I have an invoice that is either placed or digitally scanned into the client’s file for reference purposes. Remember: in many states, like California and New Jersey, your trust account may be subject to random audit and it better balance, bub!

The best way to make it balance is to make sure you balance it like any other normal account at least monthly and always have a back-up document or digital record for every penny that has gone in and come out. Many billing programs (i.e., Sage TimeSlips) record and keep track of money in your trust account. So, when you take it out, the billing invoice will recap what was in there at the start of the month, the deduction being made with this invoice, and the resulting balance left in trust after the invoice.

Risk associated with sloppy record keeping

All attorneys holding clients’ funds in an attorney trust account have a duty of record keeping.  We are fiduciaries and the fiduciary legal standard puts the burden on the lawyer to prove that it was done right, not on the client to prove it was done wrong. Typically, trust funds are used for fairly short-term deposits: things like money to be expended on attorney’s fees or costs in a relatively short period of time, such as under six months.

If, however, a client is required to deposit funds for a longer period of time or larger purpose like a cash bond, or a real estate closing, the lawyer should give the client the opportunity to have those segregated into a separate fund where it might earn interest for the client, as under normal IOLTA programs, no trust account will earn interest that can be divided and paid to the individual clients.

Safekeeping client property

If you choose to have a third-party bookkeeper maintain your trust account, you are responsible for the conduct of that person whether or not he/she is an employee of the same law firm.

Handling disputes and refunds

If your client disputes the fee you desire to draw from the funds deposited in trust, only the disputed portion need remain in the trust account until the matter is resolved. When a client demands a return of unearned money still held in an attorney trust account, the refund should be given right away. Failure to refund money to a client entitled to it can subject the lawyer to a civil suit for conversion, breach of fiduciary duty, and claims of theft.

Third-party disputes

What if a creditor of the client finds out that you are holding money in trust and provides you documentation—do you need to honor that claim? Well, the answer depends on the nature of the claim. This subject could take a lot longer to discuss thoroughly, but let me cut to the chase: the lawyer may only pay when the claimant has a proven interest in the actual funds sitting in the IOLTA account. That would include:

• Holders of a statutory lien on the funds;
• A judgment or court order adjudicating ownership of the funds;
• A written assignment conveying the client’s interest;
• The right of subrogation by an insurer; or
• Honoring a signed Letter of Protection (“LOP”) from someone who has provided services to the client on a promise of payment, typically, a doctor in a PI case. Remember, mere third-party debts do not qualify to override the client’s right to the appropriate share of the funds held in trust.

Best practices

Keep these next few rules in mind when creating or managing a trust account:

1. Make sure that you are starting your trust account pursuant to your state’s rules and in an eligible institution when the state requires such eligibility;
2. Know what you put in there;
3. Know what comes out of there;
4. Keep accurate records of all money and property entrusted to you;
5. Have the right attorney-client agreement provisions to use the trust funds;
6. Keep the client informed of the balances as necessary; and
7. Know how to resolve disputes over money held in trust.

The ability to use money in trust is a great tool for the smooth operation of your law office.  Always respect your fiduciary duty and keep an eye on those funds.

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