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Chapter 9

The Client Funds Trust Account

Funds in a Client Fund Trust Account

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Retainers – fee advancesCosts and expensesEstate proceedsEscrow fundsSettlementsJudgment paymentsFunds from third parties to pay client

Retainers /Fee Advances

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A fee advance is deposited into the trust account.

The fee may not be withdrawn until it is earned.

Does not apply to “true” retainers

Escrow Funds

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Reasons a firm will receive escrow funds:Real estate transactionsWhen a debtor's payments are made to a creditor

If there is a dispute regarding a debt

Client’s PropertyProperty other than cash must be

accounted forSecurities, stock certificatesPersonal property

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Two Types of Client Trust AccountsIOLTA AccountsNon-IOLTA Account

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Interest on Lawyers Trust Accounts IOLTA Accounts

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Mandatory deposit to IOLTA account:“Nominal” fundsFunds held for “short period of time”

Compliance is mandatoryInterest goes to state bar association

Funds legal service programs for indigentFunds client security fund

Generally, IOLTA accounts or unsegregated accountsDifferent client’s funds are deposited in same

account

Non-IOLTA Client Trust AccountsAn interest bearing client trust account

where the interest is payable to the client

May be segregated or unsegregatedPOINTER:

Better practice to establish individual segregated accounts for each client

Difficult to account for and allocate the interest between several clients in a segregated account

Assign client’s SSN or EIN to the account

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Rules Applicable to All Trust AccountsThe account must be clearly identified as a

“Trust Account” or “Client Trust Account”Signatories on the account should be

licensed attorneysCannot deposit law firm funds in the accountCannot keep law firm funds in the accountCannot withdraw trust funds and apply to a

disputed fee(cont.)

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Rules Applicable to All Trust Accounts (cont.)If a client asks for trust funds you

must deliver promptlyMust account to the client for

funds held in trustMust account to the State Bar if

requestedMust keep trust account records

for five (5) year following completion of representation

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Trust Account Accounting RulesManual vs. Computerized systemsMinimum Requirements

1. Client Ledger2. Account Journal3. Bank Statements and cancelled

checks4. Reconciliation Report5. Journal of Other Non-cash

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Client LedgerA written ledger for each client that

includes:Date of transactionSource of deposit and amountPayee and purpose of payments and amount

Running balance of client’s account

Useful where trust account holds several client’s funds

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•Chk •Fees •Costs •Trust Funds

•Date

•Description •No. •Charge •Rec’d •Balance

•Adv. •Rec’d •Balance

•Rec’d •Paid •Balance

•2/25 •Client Deposit •2434

•$2,500 •2,500.00

•3/1 •Legal Fees •$475.00 •$475.00 •2500.00

•3/1 •Fee Payment •467 •475.00 •-0- •475.00 •2,025.00

•3/10 •Filing fee •470 •120.00 •1,905.00

•4/1 •Legal fees & costs

•860.00 •860.00 •145.00 •145.00 •1905.00

•4/1 •Fee Payment •474 •860.00 •-0- •145.00 •-0- •1005.00 •795.00

•5/1 •Legal fees & costs

•525.00 •525.00 •27.80 •27.80

•5/1 •Fee Payment •482 •525.00 •-0- •27.80 •-0- •552.80 •242.20

•5/5 •Client Deposit •2564

•1000.00 •1242.20

•5/15 •Deposition Svc •491 •345.00 •897.20

•6/1 •Fees & costs •395.00 •395.00 •15.20 •15.20

•6/1 •Fee Payment •500 •395.00 •-0- •15.20 •-0- •410.20 •487.00

Account JournalSimilar to the Client Journal Records all transactions for the

accountIncludes all interest paid and bank charges deducted

Keeps a running balance of the account

If you have a segregated trust account Client Ledger is sufficient

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Trust Account AbusesMisappropriation

Using trust funds for personal purposes

Overdrawing trust accountUsing one client’s funds to pay another clients obligation – Example:

Client A $1,000Client B 500

Firm writes a check for $600 for Client B

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Trust Account Abuses (cont.)Comingling

Client’s funds are intermingled with attorney’s Leaving a buffer or reserve in the trust account

Depositing a “true retainer” in trust accountFailure to pay fees when earned

Failure to promptly disburse funds in trustSettlement proceedsClient expensesAttorney’s fees

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Trust Account Abuses (cont.)Failure to account to client for trust

fundsFailure to notify client of receipt of

trust fundsUse of Trust account to assist

client in secreting assetsCreditorsOther owners – spouse in divorce, partner, shareholder

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