A Primer on Using Attorney Trust Accounts

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 into it.

Director of Education, Ethics and State Compliance
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What goes into an attorney trust account (or IOLTA/IOTA account)?

• Client funds that have not been earned by you.
• 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.
• Nonrefundable retainers (absent an agreement to the contrary). Also, be aware that in many states a retainer is not the same as a prepayment of fees. It’s simply a fee to ensure your firm will be ready and willing to help a client as needs arise. Therefore, nonrefundable retainers are similar to a flat fee and are generally earned when they are paid. An exception is that many states still require that flat fees for which 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 you, 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).

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.

What is the correct procedure for taking money out?

Every penny removed from a trust account should have some sort of invoice 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.

The best way to do this is to make sure you balance it like any other normal account at least monthly and always have a backup document or digital record for every penny that has come in and come out. Many billing programs 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 RECORDKEEPING

All attorneys holding clients’ funds in an attorney trust account have a duty of recordkeeping. 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 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. Under normal IOLTA programs, no trust account will earn interest that can be divided and paid to the individual clients.

And remember, if you choose to have a third-party bookkeeper maintain your trust account, you are still responsible for the conduct of those people.

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.

BEST PRACTICES

There are several rules to keep 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.
7. Know how to resolve disputes over money held in trust.

The ability to use money in a 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.