Tips for Maintaining a Trustworthy Trust Account

Tips for Maintaining a Trustworthy Trust Account

05/12/2021

Rule 1.15 and Rule 1.15A of the Michigan Rules of Professional Conduct govern the management of funds belonging to clients and third parties. When clients or third parties entrust you with funds, you’re required to hold the funds in interest-bearing trust accounts. You’re also required to maintain your trust accounts in financial institutions approved by the State Bar of Michigan, which has published a list of approved financial institutions.

There are two types of trust accounts: an IOLTA (Interest on Lawyers Trust Account) and a non-IOLTA.

An IOLTA is designed to hold pooled client or third-party funds that, separately, would be too modest or held too briefly to earn substantial interest. Any interest earned from small or short-term deposits is remitted to the Michigan State Bar Foundation.

There’s no restriction on the amount of funds that you can deposit into a non-IOLTA. That said, a non-IOLTA is usually reserved for client or third-party funds that are anticipated to earn interest, either because the funds are substantial or because the funds are expected to be held for a significant amount of time.

Unlike most rules in the Michigan Rules of Professional Conduct, which require either knowledge of wrongdoing or foreseeability, the trust-account rules are generally regarded as strict-liability rules. Failure to adhere to the trust-account rules could result in an investigation by the Attorney Grievance Commission and a disciplinary sanction at the hands of the Attorney Discipline Board.

As the Supreme Court recognized nearly a half century ago, the importance of upholding your duty to safeguard client and third-party funds cannot be overstated:

There are few business relations involving a higher trust and confidence than that of an attorney acting as a trustee in the handling of money for a client… The basis of their relationship is one of confidence and trust. Any action by the attorney which destroys that basic confidence clearly subjects the legal profession and the courts to obloquy, contempt, censure and reproach. Foremost among the acts destroying the confidence between the public and the bar is the conversion and misuse of client funds. Matter of Leonard A Baun, 396 Mich 421 (1976).

The following pointers and guidelines are a good primer and an even better reminder to keep your trust accounts in line with the Michigan Rules of Professional Conduct and, more importantly, to preserve the confidence that your clients place in you when they entrust you with their money.

 

Trust Musts and Must Nots

If you receive client or third-party funds in connection with representation, including advance fees or costs, you’re obligated to maintain a trust account. You cannot remove the funds until the fees are earned or the costs are expended.

There may be circumstances in which you come into possession of funds unrelated to representation. If, for example, you’re acting as an escrow agent for two parties, neither of whom are clients, you’re not required to use a trust account. Likewise, you’re not required to use a trust account if you’re acting in the capacity of a personal representative, as distinguished from counsel for a personal representative. (But, of course, you’ll need to follow the Probate Court’s rules and regulations.)

 

In$ and Out$ of a Trust Account

As noted, a trust account designated for the safekeeping of client and third-party funds may include costs and fees paid in advance. A trust account may also include settlement proceeds owed to your client or funds designated to pay an obligation owed by your client. You may deposit your own funds only to cover service charges and maintenance fees for the trust account. The trust-account rules don’t place a limit on the amount of money that you can keep in the trust account to cover charges and fees. But as a practical matter, the Attorney Grievance Commission will look very closely at and unfavorably upon any amount over $50. To get the State Bar of Michigan’s nod of approval, financial institutions agree to eliminate or at least limit most charges and fees.

Costs and fees paid in advance must be deposited in your trust account and withdrawn only when you incur the costs or earn the fees. Michigan’s trust-account rules differ from the ABA’s trust-account rules to the extent that, timewise, you have some discretion regarding the removal of fees. You’re not required to remove fees immediately after you earn them. Still, the best practice is to remove earned fees promptly.

If your client or a third party pays you for services that you’ve already performed, the funds belong to you. The funds shouldn’t be placed or held in your trust account.

You may receive mixed funds in one payment from your client or a third party. As an example, your client may give you a check containing funds to pay an invoice for your services (earned fees) and funds to replenish a retainer (unearned fees). As another example, you may receive a settlement check containing both your fees and your client’s proceeds. In any such situation, you’re required to deposit the check into your trust account. Once deposited, the earned fees or incurred expenses must be withdrawn and may be placed in your personal or business account. Be sure to verify that the funds cleared before you attempt to remove them.

As noted in Michigan Ethics Opinion R-7 (1990), you should never pay personal or firm expenses directly out of your trust account―even if your trust account is holding earned fees. You must move earned fees to, and pay personal or firm expenses out of, your personal or business account.

 

Trust and Verify

You’re required to preserve complete records of trust-account funds for a period of five years after termination of your representation. So during the course of your representation of each client, you need to keep accurate and complete records of deposits, withdrawals, and distributions. You should keep copies of bank statements, deposit slips, and checks. You should also maintain separate, chronological cash receipts and disbursement journals that identify the date, amount, source of receipt, and distribution recipient. Your trust-account journal should be able to identify the amount of the funds being held and the client or party on whose behalf the funds are being held.

Note that the responsibility for accurate and complete record keeping lies with you. You can use a bookkeeper to assist you with reconciling your trust account, but you can’t delegate your oversight responsibility.

An approved financial institution is required to notify the Attorney Grievance Commission when any properly-payable instrument is presented against a trust account containing insufficient funds or when any debit to the trust account creates a negative balance. Perhaps needless to say, mismanagement of a trust account may result in an overdraft. But an innocent error on the part of your accountant or financial institution may also result in an overdraft. No matter the cause, an approved financial institution is under a mandatory duty to report a trust-account overdraft. In most circumstances, an overdraft notice will lead to an investigation by the Attorney Grievance Commission. Monthly account reconciliation is the best defense against an overdraft (and a resultant investigation).

 

Borrowing = Stealing

If you’ve ever thought about “borrowing” funds from your trust account and replacing them before your client requests or needs them, think again. Borrowing funds from your trust account will land you in hot water, even if you intended to replace them. As noted by the Attorney Discipline Board, borrowing is stealing: “To the public, a lawyer who spends trust funds knowing they do not belong to him is indistinguishable from a thief.” Grievance Administrator v Trott, 10-43-GA (Attorney Discipline Board, 2011).

 

Resources at a Click

The State Bar of Michigan provides resources to help you with trust-account maintenance and answer your trust-account questions. The State Bar’s Practice Management Resource Center provides helpful tools for general accounting and trust-account management. The State Bar also presents two semi-annual seminars on trust-account management: Tips and Tools Seminar and Lawyer Trust Accounts Seminar. Ethics opinions from the State Bar’s Standing Committees on Professional and Judicial Ethics on trust accounts are instructive, too.

 

Recap

Trust me, you can’t be too careful or be too vigilant in managing your trust accounts. Review the trust-account rules and make sure your staff is well informed. Actively decide where funds will go upon receipt. Perform regular, monthly reconciliations and personally oversee your trust accounts. You can rely on assistance from your staff, but ultimately, it’s your reputation and your license that hang in the (trust-account) balance.


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