The Financial Accounting Responsibilities of Lawyers Who Serve as Fiduciaries
By Alice Neece Moseley
This is the second installment in a series of articles that explain the revisions to the trust accounting rules in the Revised Rules of Professional Conduct. The State Bar Council adopted the revised trust accounting rules at its January quarterly meeting. The revised rules are now before the North Carolina Supreme Court for approval. The revised rules appeared in their entirety in the Journal, Vol. 4, No. 4 (Winter 1999). They can currently be viewed at the State Bars website: www.ncbar.com.
In the first
article in this series, I explained the reasons for revising the
trust accounting rules (Rule 1.15 et seq.) in the Revised Rules
of Professional Conduct. Specifically, the article explored the
Ethics Committees decision to distinguish between a lawyers
professional responsibilities under the Revised Rules when handling
entrusted funds pursuant to service as a compensated fiduciary and
the lawyers responsibilities when handling funds as an uncompensated
fiduciary. A lawyer is always acting as a fiduciary when holding
client funds such as an advance fee payment or the settlement check
for a personal injury claim. However, fiduciary roles addressed
by the revisions to the trust accounting rules do not constitute
the practice of law per se, but nonetheless, frequently arise out
of a client-lawyer relationship, for example: personal representative
of an estate, guardian, trustee of a trust, attorney-in-fact, and
escrow agent. A lawyer serving in one of these customary fiduciary
roles is subject to the requirements of the revised trust accounting
rules if the lawyer is providing the service as a part of his or
her professional legal services, regardless of compensation, or
if the lawyer is compensated for the service as a fiduciary even
though the service is provided outside of a law practice. Funds
received by a lawyer while serving as an uncompensated volunteer
fiduciary, such as the trustee of trust for the lawyers family,
do not have to be managed in accordance with the record-keeping
and accounting requirements of the Revised Rules of Professional
Conduct. This article explains a lawyers professional responsibilities
when holding funds pursuant to professional service and/or as a
trust accounting rules include a new definition section found in
Rule 1.15-1. To understand the requirements of the rules, a lawyer
must be familiar with several of the defined terms in this section.
Entrusted property is defined in Rule 1.15-1 as trust
funds, fiduciary funds, and other property belonging to someone
other than the lawyer which is in the lawyers possession or
control in connection with the performance of legal services or
professional fiduciary services. Trust funds are
funds belonging to someone other than the lawyer that are
received by or placed under the control of the lawyer in connection
with the performance of legal services. Fiduciary funds
are funds belonging to someone other than the lawyer that
are received by or placed under the control of the lawyer in connection
with the performance of professional fiduciary services. Professional
fiduciary services refers to compensated services (other
than legal services) rendered by a lawyer as a trustee, guardian,
personal representative of an estate, attorney-in-fact, or escrow
agent, or in any other fiduciary role customary to the practice
of law. A fiduciary account is an account,
designated as such, maintained by a lawyer solely for the deposit
of fiduciary funds or other entrusted property of a particular person
or entity. In other words, a fiduciary account is an account
in which a lawyer deposits funds that he or she receives in connection
with compensated service as a trustee, guardian, personal representative,
attorney-in-fact, or escrow agent.
of Fiduciary Funds
sets forth the general requirements applicable to entrusted property.
All entrusted property must be properly labeled and maintained separately
from the property of the lawyer. This duty is better known as the
prohibition against commingling of the lawyers funds with
property that belongs to clients or third parties.
must be segregated and promptly deposited in a separate fiduciary
account or deposited with client funds or other fiduciary funds
in a general trust account of the lawyer. The only funds of the
lawyer that may be deposited in a fiduciary account are funds sufficient
to open and maintain the account, such as the funds necessary to
pay bank service charges, and funds belonging in part to the client
or a third party and in part to the lawyer, such as a disputed legal
fee. Determining whether to deposit the funds in a general trust
account or in a separate fiduciary account depends upon how long
the funds are to be held and the nature of the funds. If the fiduciary
obligation to manage the funds wisely necessitates prudent investment
of the funds, depositing the funds into a separate fiduciary account
is probably imperative.
of Fiduciary Account
requirements for a standard lawyers trust account (designated
a general trust account in Rule 1.15-1) differ from
those for a fiduciary account. All trust accounts must be maintained
in a bank in North Carolina except a trust account dedicated to
the funds of one client (designated a dedicated trust account
in Rule 1.15-1). A dedicated trust account may be maintained in
a bank or other financial institution in or outside of North Carolina
but only with the written consent of the client. By contrast, a
lawyer in the exercise of his or her fiduciary responsibilities
may select a bank or other financial institution in or outside of
North Carolina in which to deposit fiduciary funds. Consent of the
beneficiaries or the client is not required. Unlike a general trust
account that may only earn interest if it is an IOLTA account, a
fiduciary account can and should earn interest for its beneficiaries.
to deposit fiduciary funds in a financial institution other than
a bank is important. A fiduciary has the legal obligation to invest
entrusted funds prudently. Under the old trust accounting
rules, before revision, the choices for sound investment of fiduciary
funds were limited because the rules at least appeared to require
that all funds entrusted to the lawyer had to be deposited in a
North Carolina bank. For example, a lawyer acting as a trustee of
a testamentary trust presumably could not deposit the trust funds
in an investment account with a New York investment firm. Such a
requirement circumscribed the service that a lawyer provided when
serving in the fiduciary roles customary to the practice of law.
There are disadvantages
to permitting a lawyer to deposit fiduciary funds in the out-of-state
bank or financial institution of his or her choice: it makes it
more difficult for the State Bar to investigate and audit an account.
There is also the possibility that Federal Deposit Insurance will
not cover losses from an investment account. Nevertheless, the benefits
of enhanced investment opportunities outweigh the costs of allowing
a lawyer-fiduciary to chose the appropriate depository for trust
Maintained at a Bank
Under Rule 1.15-3, as revised, the kinds of written records that a lawyer must maintain for fiduciary funds depend upon where the funds are deposited. If the funds are deposited into a general trust account or a fiduciary account at a bank, the lawyer must maintain all bank receipts and deposit slips listing the source of the funds, the date of receipt, and, in the case of a general trust account, the name of the client or other person to whom the funds belong. The lawyer must also maintain all canceled instruments drawn on the account or printed digital images of the canceled instruments. Instructions authorizing the transfer or disbursement of funds from the account must be retained, as must all bank statements. In the case of a general trust account, the lawyer must keep a ledger that contains a record of receipts and disbursements for any person or entity with funds on deposit in the account. Finally, any records required as a matter of law must be retained.
to these record-keeping requirements, a lawyer-fiduciary must file
a written directive with the bank requiring the bank to report dishonor
of instruments presented against a general trust account or fiduciary
account maintained at the bank.
Maintained at Other Financial Institutions
If a fiduciary account is maintained, by choice of the lawyer-fiduciary, at an institution other than a bank, Rule 1.15-3 requires the lawyer to retain all receipts and deposit slips from the account on which must be listed the source of the funds and the date of receipt. A copy of all checks or other instruments drawn on the account, or printed digital images thereof, showing the amount, date, and recipient of the disbursement must also be kept. Instructions authorizing transfers and disbursements must be maintained together with all statements from the depository institution, including notices of dishonor. Finally, the lawyer must retain any other record required by law for fiduciary funds.
for Fiduciary Property
Whenever a fiduciary, such as personal representative or a trustee, is required by law to make an annual or more frequent accounting to judicial officials, the revised trust accounting rules do not require separate written accountings to the beneficiaries of fiduciary funds. However, if the law does not require an accounting, a lawyer-fiduciary must provide a written accounting of all transactions concerning fiduciary funds to the beneficial owners at least annually and also upon termination of the lawyers professional fiduciary services.
Period and Audit by the State Bar
All of the written records required in Rule 1.15-3, whether the records are for entrusted property deposited in a bank or in a financial institution, must be maintained for at least six years. This time period did not change when the rules were revised. Similarly, the authority of the State Bar to audit the required written records randomly or for cause has not changed.
The record-keeping and accounting requirements for fiduciary funds in the revised trust accounting rules are not burdensome. Frequently, the requirements of the trust accounting rules are less than the accountings required of fiduciaries by law. Most of the records required by the rules should be maintained by a fiduciary as a matter of prudence and duty, regardless of the requirements of the Revised Rules of Professional Conduct. And remember, accuracy and honesty in record keeping every day keeps Bruno away.
Alice Neece Moseley is the assistant executive director of the North Carolina State Bar, counsel to the Ethics Committee, and director of Specialization.
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