Proper management of the client trust account is an important ethical duty of lawyers everywhere. Your clients give you their money and you are tasked with safeguarding this client property. With the narrow exception of a flat fee earned upon receipt, which may or may not be allowed in your jurisdiction, anytime your client gives you money in advance of your earning it, you must promptly deposit the funds into an account known as a trust account. In some jurisdictions they are called client trust accounts or lawyer trust accounts, with an important subset called IOLTA (Interest On Lawyer Trust Account) or IOLA (Interest On Lawyer Account) in which to hold client deposits that are of a relatively low amount held for such a short term that interest earnings would be insignificant. How insignificant? Insignificant enough that the net interest after deducting the cost of establishing a separate account would be negligible.
How responsibly must you safeguard your client’s or a third party’s money? You must protect this money with extreme care because to improperly safeguard this money is a frequent cause for discipline by your state Bar regulatory agency. In fact, conversion of client property is the most common reason that a lawyer is disbarred. The trust account is not for your money and to put your money into the trust account is an ethical violation because now you have commingled your money with your client’s money. Most jurisdiction follow the ABA Model Rule 1.15(b) on trust accounting A” lawyer may deposit the lawyer’s own funds in a client trust account for the sole purpose of paying bank service charges on that account, but only in an amount necessary for that purpose.” Be sure to check your own jurisdiction’s rules to avoid violating your rules.
Hearing that you must safeguard your clients’ money in your client trust account raises good questions. Imagine new lawyers Tom Jackson and Steve Brown create their own law firm, Jackson Brown, LLP. Their State Bar’s Practice Management Advisor (PMA) goes over a checklist on starting and managing their law firm. They are told to open a checking account for the law firm’s money called a general operating account and to open a checking account for their clients’ money called a client trust account. In their first month, they get four clients who sign their fee agreement and pay the $5,000 “retainer” to cover the anticipated legal fees and costs in advance of Tom or Steve doing the work. How do they safeguard Cathy Roger’s money, George Smith’s money, Jennifer Thompson’s money, and Rafi Ute’s money—isn’t that the bank’s responsibility? It is a surprise to learn it is your overarching responsibility. You are the fiduciary and in fact, banks classify trust accounts as fiduciary accounts.
“A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other asset for another person.” (Wikipedia Fiduciary)
So how does a lawyer do this? Let’s review what we are instructed to do in ABA Model Rule 1.15, Safeguarding Client Money.
1.15(a) A lawyer shall hold property of clients or third persons that is in a lawyer’s possession in connection with a representation separate from the lawyer’s own property. Funds shall be kept in a separate account maintained in the state where the lawyer’s office is situated, or elsewhere with the consent of the client or third person. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of [five years] after termination of the representation.
- Tom Jackson and Steve Brown open a general operating account which is where money belonging to the Jackson Brown, LLP law firm is held. They also open a separate client trust account which is where money belonging to their clients will be held. The trust account must be opened in the state where their law office is located or they would need consent from their clients to open it elsewhere. For practical purposes, most lawyers will choose to open these accounts nearby their office. Many ethics counsel recommend keeping trust accounts in a different bank from the bank where the general account is held because you are much less apt to use the wrong deposit slip if these accounts are held in different banks.
In similar fashion, it is helpful that the checks and even the checkbook registers look different. Perhaps you choose to have the old style peg-board checkbook with duplicate checks and deposit slips for your trust account. Perhaps you choose to have your general operating account checks be green-colored to represent permission and your trust account checks be yellow-colored to represent caution. Whatever you decide, make it difficult to pick up the wrong checkbook for paying your law firm expenses.
- The lawyer properly safeguards other property belonging to the client. This is typically done by using a safe deposit box to hold client deeds and stock certificates and a locked cabinet or locked storage room for keeping properly labeled client property such as the defective law mower blade housing unit that exploded and injured your personal injury client.
- Keep proper records so that your client property is identified and can be easily returned to the client if asked for or if the matter has concluded and you still hold the client property.
You must keep accurate records for all client property. For example, if your client brings in a green binder containing all the personal financial records, properly label it, list it on an inventory of client property, and lock it up safely.
- Main Street Bank considers that lawyers Tom Jackson and Steve Brown have one trust account, the Jackson Brown, LLP, Client Trust Account. But in reality, they have the trust account belonging to Cathy Roger, the trust account belonging to George Smith, the trust account belonging to Jennifer Thompson, and the trust account belonging to Rafi Ute. Those four clients do have their own trust account funds and they need to be tracked individually. To keep track, you will create and monitor four client trust sub accounts within the Main Street Bank Jackson Brown, LLP, Client Trust Account.
In the old days, lawyers maintained records for each client on a separate client ledger card which was buff colored card stock. Although some may keep individual client ledger cards by hand, it is more efficient to manage the accounting with an accounting software program. Lawyers are best able to keep their trust accounts in order if they keep up those ledger card equivalents by creating reports that provide the same information captured on those old ledger cards: all deposits to the client’s trust account, their amounts, the source of the deposit, and the date of the deposit; and all withdrawals from the client’s trust account, the amount, the reason, the payee, and the date paid. Where they have gotten into trouble is by only monitoring the overall Main Street Jackson Brown, LLP, Client Trust Account , but not monitoring the four client sub accounts for Cathy Roger, Thomas Smith, Jennifer Thompson, and Rafi Ute. To do so, in the category Other Short Term Liability, set up four sub accounts, one for each of the clients. The total in the Other Current Liability Account equals the sum of the four client sub accounts, and this amount should be the same number as the Bank Account Jackson Brown, LLP Client Trust Account held at Main Street Bank.
- When the Main Street Bank statement comes for Jackson Brown, LLP Client Trust Account, Tom and Steve should perform a three-way reconciliation. The bank statement is first reconciled so that an adjusted balance is determined by adding any outstanding deposits and subtracting any outstanding checks that are not reflected on the bank statement. They then compare their adjust bank statement to the balance shown in their client trust account register or by pulling a report from their accounting program that shows the trust account journal of transactions: deposits and withdrawals. Next Tom and Steve review the individual client ledger cards or by pulling a report for each client sub account. These individual balances are totaled together. This totaled amount should equal the checkbook register or client trust account journal of transactions and equal the adjusted bank balance on the monthly bank statement. All three equaling each other is known as a three way reconciliation. These bank statements, with cancelled checks or their electronic equivalent, and reconciliation forms, check book registers or transaction journals, client ledger cards and their equivalents are what must be maintained for the requisite period of time. Tom and Steve check with their PMA and are told that in their jurisdiction they can keep these records digitally.
It takes effort on a consistent basis to properly manage your trust account. Like our friends Tom and Steve, we may be surprised to learn how critically important it is to do right, but like them, we will find it is easy to do once we have done it. It is your turn now to it correctly. Your clients are counting on you.
Proper management of the client trust account is an important ethical duty of lawyers everywhere. Your clients give you their money and you are tasked with safeguarding this client property. With the narrow exception of a flat fee earned upon receipt, which may or may not be allowed in your jurisdiction, anytime your client gives you money in advance of your earning it, you must promptly deposit the funds into an account known as a trust account.