1. What is
a trust account?
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.
8. How do I reconcile my accounts?
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.
9. Can
an attorney use funds from a trust account to pay the costs and
expenses associated with a client’s case?
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.
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