A trust account is an account that is established by an attorney to hold the funds of clients or third persons in a financial institution. The funds in a trust account are held by the attorney in a fiduciary capacity and must be clearly identified as “trust”, “clients’ funds” or “escrow” accounts. Funds held in a trust account include funds held in any fiduciary capacity.
2. What are the basic requirements for an attorney holding funds in a trust account?
Attorneys are responsible for notifying any financial institution that the funds held are being held in a fiduciary capacity. As described below, the financial institution must be “eligible” to hold the funds, “approved” to hold the funds, and in many cases, physically located in Connecticut. The funds must be maintained separately from the attorney’s own funds. An attorney must appropriately safeguard funds held in trust and must maintain complete records, as described in Rule 1.15 of the Rules of Professional Conduct and Practice Book Section 2-27 and 2-28. Records must be preserved for a period of 7 years following the last transaction.
3. What is IOLTA and is it mandatory?
IOLTA is an acronym for Interest on Lawyers’ Trust Accounts. The IOLTA program is defined and described in Rule 1.15 of the Rules of Professional Conduct. Interest earned on IOLTA accounts is transferred to the Connecticut Bar Foundation to fund the delivery of legal services to the poor and for law school scholarships. IOLTA accounts are “pooled” trust accounts for holding the funds of more than one client or third person. Attorneys are not required to maintain an IOLTA account unless they wish to pool their clients’ funds in a trust account. If you maintain an IOLTA account or accounts you must report the account number(s) and bank name(s) as part of the attorney registration process. See Practice Book Section 2-27(d). An IOLTA account must be maintained at an eligible financial institution as determined by the Connecticut Bar Foundation and at a financial institution that has been approved by the Statewide Grievance Committee.
4. What is an eligible institution?
An “eligible institution” is defined by Rule 1.15(a)(2) of the Rules of Professional conduct and determines whether the financial institution may hold trust funds in IOLTA accounts. Although not the only one, a primary factor in determining a financial institution’s eligibility is whether the bank agrees to a particular formula for setting interest rates on IOLTA accounts pursuant to Rule 1.15(h)(3) of the Rules of Professional Conduct. The Connecticut Bar Foundation determines a financial institution’s eligibility to maintain IOLTA accounts and maintains a list of those institutions.
5. What is an approved institution?
An “approved institution” as set forth in Practice Book Section 2-28(d), is a financial institution that has agreed with the Statewide Grievance Committee to notify the Committee of overdrafts in attorney trust accounts maintained at the approved institution. The Statewide Grievance Committee approves financial institutions and maintains a list of those institutions.
6. Where must I maintain my trust account?
Attorneys must deposit funds held in a fiduciary capacity in an account that is separate from the attorney’s own funds. Rule 1.15(b) of the Rules of Professional Conduct provides that an attorney who is admitted to the Connecticut Bar and has his or her office in this state must maintain the trust account in Connecticut unless the attorney obtains the consent of his or her client or third person otherwise.
7. What financial records should I maintain for my trust accounts?
Pursuant to Rule 1.15(i), an attorney must maintain the following documentation for a period of seven years after the date of the last transaction performed on behalf of the client:
- receipt and disbursement journals containing a record of deposits to and withdrawals from client trust accounts, specifically identifying the date, source, and description of each item deposited, as well as the date, payee and purpose of each disbursement;
- ledger records for all client trust accounts showing, for each separate client or beneficiary, the source of all funds deposited, the names of all persons for whom the funds are or were held, the amount of such funds, the descriptions and amounts of charges or withdrawals, and the names of all persons or entities to whom such funds were disbursed;
- copies of retainer and compensation agreements with clients as required by Rule 1.5 of the Rules of Professional Conduct;
- copies of accountings to clients or third persons showing the disbursement of funds to them or on their behalf;
- copies of bills for legal fees and expenses rendered to clients;
- copies of records showing disbursements on behalf of clients;
- the physical or electronic equivalents of all checkbook registers, bank statements, records of deposit, pre-numbered canceled checks, and substitute checks provided by a financial institution;
- records of all electronic transfers from client trust
accounts, including the name of the person authorizing
transfer, the date of transfer, the name of the recipient
and confirmation from the financial institution of the trust
account number from which money was withdrawn and the date
and the time the transfer was completed.
By reconciling your trust account you determine that your financial records are accurate and that you are holding sufficient funds to cover the trust funds you should be holding. The requisite financial records are listed in Rule 1.15(i) of the Rules of Professional Conduct. Rule 1.15(i)(9) of the Rules of Professional Conduct requires that you perform, at a minimum, quarterly reconciliations of your trust account and that you maintain a list of monthly trial balances. A trial balance is a list of client names indicating the amount of funds held for each individual client on the date you are reconciling to, with a total.
To perform a complete reconciliation of your trust account you need your general ledger as defined in Rule 1.15(i)(1) of the Rules of Professional Conduct, your individual client ledgers as defined in Rule 1.15(i)(2) of the Rules of Professional Conduct, your list of trial balances as defined in Rule 1.15(i)(9) of the Rules of Professional Conduct, and your bank statement and checks for the month to be reconciled. Rule 1.15 of the Rules of Professional Conduct’s commentary further explains the reconciliation process.
- The first part of the reconciliation involves taking the bank statement ending balance for the month to be reconciled, then
- Subtracting any outstanding checks that were disbursed but not yet presented for payment, then
- Adding in any deposits-in-transit to reach a final figure which represents the exact amount of money you are holding in the trust account on the bank statement’s ending date.
- That final figure is then traced to the total you have on your receipts and disbursement journal (general ledger) on the same date as the bank statement’s ending date. The receipts and disbursement journal lists each and every deposit made and every disbursement made, in date order, with a running balance.
- Your balance on the receipts and disbursement journal for the same date as the bank statement’s ending date should match the final figure.
- Lastly, the final figure should be compared to the individual client ledger summary sheet total (monthly trial balances), for the same date as the bank statement’s ending date. The client ledger total is the total of all balances held for each individual client with open balances on the same date as the bank statement’s ending date.
- Your balance on the client ledger summary sheet for the same date as the bank statement’s ending date should match the final figure.
- If your figures do not reconcile to the bank, you should compare each line item on the receipts and disbursement journal to each line item on the individual client ledgers and then to the bank statements to make sure that nothing was entered in error, or omitted from any of your own created records.
- If this process is performed on a quarterly basis, any errors or omissions made will be captured and cured in a timely manner. Further, you will not have outstanding checks unaccounted for, any incomplete deposits or wires, any deposits or wires made to the wrong account or earned fees not taken.
In some circumstances yes, in others, no. Attorneys should remember that it is improper to provide financial assistance to a client in connection with pending or contemplated litigation, except for court costs and expenses of litigation. Rule 1.8(e) of the Rules of Professional Conduct.
If a client has provided the attorney with funds to cover future costs and expenses, including the payment of a retainer, these funds should be deposited into a trust account (e.g. the attorney’s IOLTA account) to be drawn against as the attorney earns his or her fee or uses the funds to pay for costs and expenses. In these circumstances, the attorney may pay costs and expenses for the client out of the trust account holding the retainer unless or until the retainer is exhausted because the attorney is using the particular client’s funds to cover the costs and expenses. These funds should be monitored by using individual client ledgers (Rule 1.15(i)(2) of the Rules of Professional Conduct) and the general ledger (Rule 1.15(i)(1) of the Rules of Professional Conduct).
On the other hand, if the client has not yet provided the attorney with a retainer or funds to cover costs and expenses, then using funds from a trust account to cover the client’s costs and expenses would violate Rule 1.15 of the Rules of Professional Conduct. In these circumstances, the attorney would be misusing funds in which another client or third party has an interest. The attorney would need to advance the costs and expenses from an operating account or some other source that does not involve the trust account.
Even in circumstances where the client has provided funds to cover costs and expenses, the use of a debit card connected with a trust account is strongly discouraged and would be viewed with increased scrutiny. Unlike checks, debit cards generate little supporting documentation when used and can be used without signature verification. They are also much more vulnerable to misuse generally, either by the attorney who obtained the debit card or a third person who misappropriates one. If the payee of the costs and expenses requires payment by a debit card, the attorney should make a payment with a debit card connected to the attorney’s office operating account, and then the attorney should receive reimbursement from funds belonging to the client.
10. My bank just told me I have an overdraft and it has been reported to the Statewide Grievance Committee. What should I do?
First, determine why you had an overdraft and fix the problem. Second, gather the documents needed to fully substantiate your explanation. Because the financial institution holding your funds is obligated to report the overdraft to the Statewide Grievance Committee (Practice Book Section 2-28), you will receive a letter from the Statewide Bar Counsel’s Office requiring you to explain and document the overdraft. You must answer the letter and be prepared to answer questions about any unusual transactions, even if they had nothing to do with the overdraft. Be prepared to provide bank statements, client ledgers, HUD-1’s and any other supporting documentation that is required to be maintained by Rule 1.15(i) of the Rules of Professional Conduct.
11. My client does not want me to pay his doctor with his settlement funds even though my firm gave the doctor a letter of protection. What should I do?
If you determine that the letter of protection was directly related to the settlement funds and the letter of protection was signed in order to aid you in obtaining the settlement funds, then do not disburse the money to your client. You cannot disburse the disputed funds until both the client and the doctor have reached an agreement. Rule 1.15(f) of the Rules of Professional Conduct states “When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved.” The commentary notes that interests include “a valid judgment concerning disposition of the property, a valid statutory or judgment lien, or other lien recognized by law, against the property; a letter of protection or similar obligation that is both (a) directly related to the property held by the lawyer, and (b) an obligation specifically entered into to aid the lawyer in obtaining the property; or a written assignment, signed by the client, conveying an interest in the funds or other property to another person or entity”....(emphasis added). Commentary to Rule 1.15 of the Rules of Professional Conduct (2013).
The commentary also notes that the attorney may have a duty to third persons, when a third person has a specific interest in property held by the attorney. When that occurs, “the lawyer must refuse to surrender the property to the client until the claims are resolved”. Id.
12. At a real estate closing there was a dispute and I held an escrow of $5,000 as the buyer’s attorney. I believe that the seller has fulfilled the terms of the escrow and I should disburse the money but my client will not authorize the disbursement. What should I do?
If the terms of the escrow agreement are clear, and there is no good faith basis for you to hold the funds, then you need to disburse those funds to the interest-holder. If you believe there is a valid argument in favor of your client’s position, you may interplead the funds to the court or hold the disputed funds in the trust account until the dispute is resolved. Rule 1.15(f) of the Rules of Professional Conduct. An individual client ledger should be used to track these funds.
13. I regularly receive sizeable retainers. Can I put the retainers in my IOLTA account?
Maybe. Rule 1.15 (g) of the Rules of Professional Conduct and its commentary indicate that you should perform a good faith cost benefit analysis to judge whether the funds would earn sufficient interest to warrant moving the client’s funds to a separate, interest bearing account for the benefit of that client. Factors to consider are the amount of the funds to be held, the time you reasonably expect to hold the funds, and the cost of establishing a separate interest bearing account for the client. The costs of establishing and administering the trust account include, but are not limited to, the attorney’s or bookkeeper’s time needed to maintain the account in accordance with Rule 1.15 of the Rules of Professional Conduct.
14. I’m an associate at a large firm. I have never seen the firm’s IOLTA checkbook or bank statements and I do not have signing authority. Do I have to report the IOLTA account on my annual registration?
Yes. If you or the firm that you work for maintains one or more fiduciary accounts, you must submit the information for any account in which the funds of more than one Connecticut client are kept. Sections 2-27(d), 2-28(c) of the Connecticut Practice Book.
15. I did a reconciliation and found five very old checks that were never cashed. What should I do with the money?
Stop payment on the checks. Even though the checks are old, a bank may honor the checks if they are presented for payment. Attempt to contact the payees on the checks and offer to provide them with a new check. You may transfer the money to a separate trust account, if appropriate, or you may keep the funds in the trust account. Whatever you do, keep a written record of the outstanding checks since you need them for your reconciliations. Once it has been more than seven years since you heard from the payee, you may escheat the money to the State of Connecticut pursuant to Section 3-61a of the Connecticut General Statutes.
16. We recently reconciled our books in accordance with the quarterly reconciliation requirements and discovered there is $5000 in our account that does not appear to belong to any client and is not represented by an outstanding check. Can we assume that the money is earned fees we forgot to transfer out?
No. The only time you should take funds from the trust account for fees is when you know that the funds represent fees earned. Since the funds may be fees, in part, you should undertake a complete accounting of the trust account. The unaccounted for funds should be tracked in a separate ledger. As the accounting identifies interest-holders, you should endeavor to return the identified funds to the appropriate interest-holder. When, in good faith, you reach a point where you can no longer identify an interest-holder, those funds should be tracked in the trust account in its own ledger and held for the statutory period to be escheated to the state as abandoned fiduciary property.
17. I am just an associate at a law firm. The firm is not going to let me review their bank accounts or financial records. Am I responsible if they are not doing the proper recordkeeping?
No. You are responsible, however, for reporting any Rule violations by another member of the bar which “raises a substantial question as to the lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects...” Rule 8.3 of the Rules of Professional Conduct. If you are personally asked to do anything unethical in connection with the trust account, you must decline and report that behavior to the Statewide Grievance Committee.
18. I suspect that a partner is stealing funds from the trust account, what should I do? Can I make an anonymous complaint to the Statewide Grievance Committee?
You cannot make an anonymous complaint. If you are a partner in the firm, then perform an audit of the books either yourself or hire an independent accountant to review the books. If you are an associate, you can raise your concern to another partner. If you can substantiate your suspicions, then you should file a grievance complaint containing as much documentary evidence as possible. If you are uncomfortable with filing a grievance complaint, you can contact the Statewide Bar Counsel’s Office in writing and provide them with the information. The Statewide Bar Counsel’s Office can request that a local grievance panel investigate the Respondent and file a grievance complaint, if warranted.
19. Is it appropriate to use the trust account for an attorney’s personal expenses if the account does not hold clients’ funds?
It is never appropriate to use the trust account for an attorney’s personal use. It is inappropriate to hold more than an amount sufficient for paying reasonable fees and expenses to maintain the trust account. Rule 1.15(c) of the Rules of Professional Conduct. Using a trust account as a depository for the attorney’s personal funds is a violation of the Rules of Professional Conduct and may be a violation of other rules, statutes or criminal laws.