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Amid the daily mania that constitutes the typical small firm lawyer’s work life, various to-dos can fall by the wayside—but let the management of a client trust account fall among them and big trouble can result. Managing your trust account is a very serious obligation. So are you absolutely clear on everything it entails?
As the comment to ABA Model Rule 1.15 on Safekeeping Property states, a lawyer “should hold property of others with the care required of a professional fiduciary.” The fiduciary duty is the highest standard of care at courts of -equity or law. And interestingly, with roots in the 16th century, the word “fiduciary” comes from the Latin fiducia meaning “trust.” How appropriate. But in sum, when it comes to a lawyer’s trust account, the lawyer has a personal, nondelegable responsibility—meaning you are vicariously responsible for any one handling the trust account. Think of it as strict liability, or to paraphrase President Truman, the buck stops with you.
Unfortunately, as every first-year law student knows, the number one reason lawyers get into regulatory hot water is due to mishandling their client trust account. Bounce a personal or business check and you’ll be embarrassed. But bounce a trust account check and your bank is required to notify your state bar regulatory division. Get behind on administrative paperwork and hassles result. But fail to provide your clients with an accounting of their money held in the trust account and they’ll likely file an ethics complaint.
That said, if you’re worried about managing your client trust account properly, it’s understandable. Just take a deep breath now. The following is designed to help you get it right.
Trust Account Dos and Don’ts
To begin, here’s a checklist of the steps to take to better manage your trust account.
■ Always remember that money that belongs to your client belongs in your trust account—and until you’ve actually earned the money, it continues to belong to your client. Caveat: Some lawyers like to use “earned upon receipt” fee agreements so the money can be put into their general account, thereby avoiding the need to use a trust account. Be sure to check your state rules governing this type of fee arrangement before you try to write one.
■ Explain in your fee agreement how you apply money held in your trust account toward the legal fees and costs incurred. Also explain that a statement will be provided showing these charges, along with the balance and any amount that’s needed to replenish the trust account balance to a required minimum balance, known as an “evergreen account.”
■ Only use funds in the trust account for client’s expenses. Write a trust account check payable to your firm and deposit it into your general account and then write a general account check to pay for your associated overhead expenses (e.g., do not pay your bar dues out of your trust account, please).
■ Keep a clear, detailed “paper trail” of all trust account deposits and withdrawals.
■ Wait an appropriate amount of time for deposits to clear before writing a trust account check. Be careful to verify that funds have been collected and are in the account first.
■ Watch out for fraudulent cashier checks (which frequently hit on the day before a bank holiday). Ditto for scams involving wire transfers. And take extra steps to protect your trust account check supply and checkbook from getting into the hands of an embezzler or thief. Lock them in a drawer or in your office safe.
■ Plan ahead to protect your clients’ funds in the event of your death, impairment or disability. Who will sign a trust account check to refund money belonging to each of your clients? Contact your bar for help in making provisions to have a special authorized signer on your trust account if you are a solo practitioner.
■ And for our final to-do—and it’s a big one—maintain your trust account records for the proper time as required in your jurisdiction, likely five years from the date the matter is closed. Be sure to back up your computer to preserve any electronic records, too.
Let’s delve more into the record-keeping needs now.
Trust Account Records You Need to Maintain
Here’s the rundown on records you need to keep for five years after the end of representation, or however long you are required to by your jurisdiction.
■ Monthly bank statements. These statements will show deposits to and withdrawals from your trust account. This is the aggregate of all your trust account money (versus how much money you hold for each of your clients).
■ Receipts and disbursements journal. You may think of it as your transactions log or checkbook register, but whatever you call it, keep it accurate. Include detailed records of all deposits to your trust account, with the date, source and description of each deposited item, and of all withdrawals, with the date, payee and purpose of each disbursement.
■ Client ledger. You also need to keep separate records for each individual client. Record the source of all funds deposited on behalf of the given client, the names of all persons for whom these funds are held, the amount of these funds, the description of and amount of each charge or withdrawal, and the names of all persons or entities these disbursements are paid to on behalf of the client.
■ Reconciliation records. Think of these in terms of a three-way -reconciliation—which involves (1) your trust account records, or receipts and disbursements journal; (2) the aggregation of all of your client ledger cards (known as running a trial balance); and (3) your bank statement. See page 47 for an explanation of the three-way reconciliation process.
■ Retainer agreements and fee or compensation agreements. Whatever type of written agreement you have with the client, keep a copy of it. It’s always prudent to put your agreements into writing so that there will be no misunderstandings.
■ Copies of accountings to clients or third persons showing all disbursements. This means disbursements of funds either to your clients or on their behalf along with bills for legal fees and expenses. And be assured, your clients will greatly appreciate a monthly statement that is sufficiently detailed so they understand what work you’ve completed on their behalf. Indicate the amount due and the payment due date. (Sending bills out on a monthly basis is good for your cash flow, too.)
■ Copies of records showing disbursements on behalf of clients. Similarly, your clients will appreciate seeing a copy of any invoice for services that you paid on their behalf. If you pay for an expert opinion, for example, you should give your client a copy of the expert’s bill with a statement showing you’ve paid for the service from the client’s trust account balance.
■ Physical or electronic equivalent of deposit slips or cancelled checks. This could be pre-numbered slips or substitute forms of checks provided by your bank. These are in addition to your monthly bank statements, although it’s easiest to maintain these with the monthly statement to which they pertain. The term “substitute check” refers to an electronic image of checks provided to you if you access your account on the bank’s Web site. You needn’t print copies of the electronic images, but you should store them for the five-year period so you can print them out if requested.
■ Records of all electronic transfers from client trust accounts. Some banks will not allow electronic transfers from client trust accounts. But if you do use electronic transfers, document the name of the person who has authorized the transfer, along with the name of the recipient, confirmation from the bank of the trust account number from which money was withdrawn, and the time and date of the transfer.
Plus, you’ll want to keep copies of those portions of client files that are reasonably related to any client trust account transactions.
An Ounce of Prevention Is Worth a Pound of Cure
So here’s the bottom line in all of this: Take your time and take good care of your trust account. If you have problems following any of the suggestions given here, get help with the implementation so you avoid problems maintaining your fiduciary duty. Help is a mouse click away, via the ABA’s list of practice management advisors and local bar outreach committees at http://tinyurl.com/pmasna. Also consult the ABA Model Rules for Client Trust Account Records, which replaced the Model Financial Recordkeeping Rule on August 9, 2010, at http://tinyurl.com/aba-ctr. In this way, you’ll be managing your trust account with the care of a professional fiduciary.
Sheila M. Blackford is Practice Management Advisor for the Oregon State Bar Professional Liability Fund. She is also a member of the Law Practice Editorial Board.