Trust Accounts: Accountability, Access, and Advantages

 Financial concerns in the business of lawyering go beyond billing and collecting money; they also include client trust accounts, or IOLTA (Interest on Lawyer Trust Accounts) accounts. These accounts, which are operated by states and the American Bar Association, earn interest that funds legal aid for the poor. Lawyers must understand and abide by regulations and specifications regarding these accounts to avoid serious professional trouble.

Disciplinary Rule Requirements

The American Bar Association’s Model Code of Professional Responsibility specifically addresses the issue of trust accounts and commingling of funds. Disciplinary Rule DR 9-102, “Preserving Identity of Funds and Property of a Client,” states the following:

(A) All funds of clients paid to a lawyer or law firm, other than advances for costs and expenses, shall be deposited in one or more identifiable bank accounts maintained in the state in which the law office is situated and no funds belonging to the lawyer or law firm shall be deposited therein except as follows:

(1) Funds reasonably sufficient to pay bank charges may be deposited therein.

(2) Funds belonging in part to a client and in part presently or potentially to the lawyer or law firm must be deposited therein, but the portion belonging to the lawyer or law firm may be withdrawn when due unless the right of the lawyer or law firm to receive it is disputed by the client, in which event the disputed portion shall not be withdrawn until the dispute is finally resolved.

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The conclusion to be drawn from this requirement is that money earned by a lawyer for provision of services belongs to the lawyer and must be removed from the client’s trust account when earned. This must be done immediately (unless jurisdictional rules state otherwise), with the earned money being placed in the lawyer’s general account.

Thus, when the lawyer first receives funds, the question to be answered is, “Which account should they be placed into—the trust account or the general account?” Use the following as a rule of thumb:

  • If the funds are provided on retainer, then they are for a task that is not completed and for hours that are not yet earned, which means the money goes into the client’s trust account.
  • If the funds have been earned when the lawyer receives them, then they should go into the general account.

Note that some jurisdictions may place additional requirements on the withdrawal of funds from a trust account. In Wisconsin, for example, the requirement is that before any funds can be withdrawn from the client trust account, the client must be given five days’ notice. This is so even when the funds are earned and even if the engagement agreement provides for immediate withdrawal. It’s always important to verify the rules in your jurisdiction before making an immediate withdrawal of earned funds.

Flat, Retained, and Split Fees

If you charge a flat fee and agree that it is earned upon receipt, withdrawal must be made. It may be better, though, to deposit the flat fee into a client’s trust account and withdraw when reaching specific events that qualify as services for which fees are earned, such as the filing of a complaint or signing of a settlement or merger agreement.

Even retainer fees can be deposited into a general account if the agreement says that the retainer is not for future work but is, instead, for the lawyer specifically being engaged (and thus taken off the market). In other words, there is a valid charge for not being available to others. Opinions on the subject suggest that the retainer for the purpose must be “reasonable,” as negotiated and detailed in the engagement agreement. If you receive a retainer for future work, it would seem best to put this into your client’s trust account. However, again, it is best that the engagement agreement provide for this upon realizing a certain date or event.

When discussing flat or fixed fees, the hours involved are irrelevant. If you compute the flat fee based on the number of hours you anticipate and discuss this with the client (suggesting that the fee will increase if actual hours exceed the estimate), that looks like hourly billing.

Some lawyers will split the type of fee that’s charged, making part of it a nonrefundable retainer and placing the balance into the trust account for withdrawal as the work is performed. This method may be preferable because it makes a clear distinction between the two elements—one nonrefundable and one to be paid only when it is earned or the work is actually performed. Even with the latter method, however, you should specify the event or date that triggers allowing you to take money from the trust account and place it into the general account. This avoids your having to wait for the client to say “yes” on the funds after the fact and, therefore, allows you to have the money sooner.

Trust Account Access

All lawyers should specify in their engagement letters that the client authorizes the lawyer to debit IOLTA trust account funds after a reasonable time from the date of billing—for example, 15, 30, or 45 days, whichever is most reasonable under the circumstances. This provides a date certain for payment to the lawyer. In most jurisdictions, of course, the client will retain the right to dispute the charges, although clients are unlikely to do so if they understand that, by agreement, they need to be timely with any objections.

The real issue, however, is that when the fee is earned, it must be withdrawn from the client’s trust account. Otherwise, it’s commingling, which violates the code. Commingling is a major potential problem. Generally, bar associations have taken the attitude that even $100 of personal funds in a client’s trust account is commingling of the lawyer’s and client’s funds. Today, most banks do not require a deposit of your own funds to open a trust account, so resist any request to do so. This issue requires discussion and perhaps negotiation with your bank. Further, you should look to any relevant “treaty” that may exist between your state’s bar and banking associations.

In addition, it is important to lay out a “protest process” in your engagement agreement. Provide that if you don’t receive a complaint or dispute in writing from the client within the number of days from the date of the invoice or statement set forth in the agreement, the client will be deemed to have approved the billing. If the client protests later, you will have a prima facie reason for the transfer and the money will be in your pocket (not the trust account), except as otherwise provided in your jurisdiction’s rules of professional conduct.

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The Importance of Trust Accounts

Clearly, trust accounts are very important to the lawyer, but it should be emphasized that these accounts are also very important, and desirable, to the bank where they are deposited. Client trust funds can offer a large and stable deposit for the bank, although this depends on the nature of the law practice. A criminal law practice, for example, might not involve large trust deposits, but a substantial personal injury, family law, or real estate practice would.

Clients’ trust account money tends to stay in the account for a period of time longer than in the lawyer’s general account—and with reason because general account funds are used for operating expenses. Trust account funds thus bolster the financial assets against which a bank makes loans, allowing it to loan more money in accordance with standard banking ratios of deposits to loans. And, of course, loans and not deposits are a bank’s source of income.

All of this is to say that trust accounts can be a considerable source of leverage for a law firm in negotiating fees and services with a bank. Because these accounts increase the bank’s ability to make profitable loans, you might ask your bank for additional services at no charge (such as no-cost checking accounts or financial management services for staff members) in exchange for maintaining a minimum trust account balance. Lawyers are desirable banking customers for many reasons—and recognizing that fact by negotiating mutually advantageous terms can only help both parties in the business relationship.

About the Author

PollEd Poll is an attorney and the founder of LawBiz, a law firm management consulting company. He can be reached at 800.837.5880.

 

 

 

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