Lawyers’ responsibility for clients’ trust funds

Managing and accounting for client funds held in trust is a personal responsibility of the lawyer.  Although there are a number of good computer software programs to assist with trust accounting, including QuickBooks by Intuit, the lawyer who receives clients’ trust funds bears all the responsibility of accounting for every penny.  In an accounting sense, these funds are a liability of the law practice to the client, must be kept in an entirely separate account, and cannot be commingled with any other law firm funds. Recent challenges to the country’s banking system raise the specter of bank failures, with wide impact on the American public.  Lawyers, for example are the subject of recent inquiries because of their IOLTA trust accounts. 

The problem arises when any single account, in one person’s name exceeds the Federal Deposit Insurance Corporation guaranteed limit of $100,000.  In an active family law, real estate, personal injury or debt collection practice, or even in a large mass tort case, it’s easy to grow beyond this cap.  For example, if a lawyer holds $10,000 for each of ten people, the cap it exceeded.  Since most practices have more than ten clients, the problem is obvious.

Is it the responsibility of the lawyer to be in the banking business?  No, but the lawyer is responsible for acts of an agent, which in the case of client trust accounts is the bank.  If the bank fails, the lawyer (in light of ABA Model Rule 1.15) is responsible.  One way to ensure client safeguards is to identify in bank records the name of the client and the amount of dollars held for that client, in effect creating sub-accounts.  Another, more direct approach is to maintain a separate trust account for each client whose funds exceed $5,000 to $10,000 and are likely to be held for an extended period of time.  The interest on such a separate account belongs to the client.  This is not an IOLTA account. In the past, a lawyer was found not guilty of negligence because it was unexpected that the chosen bank would fail. In today’s stormy bank environment, it’s unlikely that a lawyer will get the same leeway. Lawyer, beware!

Does this increase the expense of a lawyer’s trust fund accounting?  Yes.  Some lawyers will see it as a standard cost of doing business.   For others, when it is anticipated that funds for the accounts will pass through the law office, it might be advantageous to provide in the engagement agreement for an administrative charge to cover the cost of account administration.  Also, remember that trust funds are a large and stable deposit for the bank, and thus are desirable accounts because they bolster the financial assets against which a bank makes the loans that are its source of income.  For that reason, a law firm may have considerable leverage to negotiate reduced service fees for multiple trust accounts.

Categorized in: Cash Flow - Finances, Management