Refresher Course on Maintaining a Trust Account
(or how to make Bruno change his tune)
By Alice Neece Mine
This is the final article in a series of three articles explaining the revisions to the trust accounting rules of the Revised Rules of Professional Conduct. The revisions went into effect when approved by the North Carolina Supreme Court on May 4, 2000. The revised rules can be found in the complete Revised Rules of Professional Conduct on the State Bars website, www.ncbar.com, and in the 2001 Lawyers Handbook which will be distributed this spring to all active members of the Bar. The first article in the series appeared in the Spring 2000 edition of the Journal. It explained the distinction in the rules between the handling of funds as a professional fiduciary and as a volunteer fiduciary. The second article appeared in the Summer 2000 edition of the Journal. It focused on the financial accounting responsibilities of a lawyer serving as a professional fiduciary. This article returns to basics: the responsibilities of a lawyer holding client funds in a lawyers trust account.
The report of
the ubiquitous Bruno DeMolli, staff auditor and investigator for
the State Bar, is the first item on the agenda of every quarterly
meeting of the Ethics Committee of the State Bar. After three months
of auditing the trust accounts of lawyers across the state for compliance
with the procedural requirements for trust accounts, Bruno returns
to the capital city to tell the committee what he is finding out
in the field. Unfortunately, Brunos presentations are more
than a little repetitious: every quarter he reports that more than
50% of the trust accounts he audits are not in compliance with two
key requirements of Rule 1.15 of the Revised Rules of Professional
Conduct. Specifically, lawyers are not reconciling their trust accounts
every quarter and they are not sending each client a written accounting
of funds in the trust account annually or upon final disbursement.
is a part of a series of articles on the revisions to the trust
accounting rules of the Revised Rules of Professional Conduct which
went into effect last May. Those revisions were undertaken primarily
for the purpose of clarifying the record keeping and money management
responsibilities of a lawyer serving in a professional fiduciary
role such as personal representative of an estate, guardian, trustee
of a trust, attorney in fact, or escrow agent. These roles do not
constitute the practice of law per se but are frequently performed
as a part of a lawyers legal practice. The revisions are designed
to protect the funds entrusted to the lawyer acting as a professional
fiduciary while simultaneously giving the lawyer discretion to invest
the funds prudently. For example, the trust accounting rules were
revised to clarify that a lawyer is allowed to deposit funds held
as a professional fiduciary in an institution other
than a North Carolina bank. This clarification permits the investment
of fiduciary funds in financial institutions offering higher rates
revisions to the trust accounting rules approved last spring were
substantial, for the most part the record keeping and accounting
requirements for a standard lawyers trust account were left
intact. In an effort to change Brunos tune at the next quarterly
meeting (lovely baritone notwithstanding), this article revisits
the primary requirements for the maintenance of a trust account.
of Entrusted Property
establishes the general rules for the safe keeping of client funds.
Foremost is the requirement that property of a client (or a third
party) shall be identified and maintained separately from the property
of the lawyer. Rule 1.15-2(a). All trust funds, defined in Rule
1.15-1 as 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, must be
deposited in either a general trust account or a dedicated trust
account of the lawyer.
Dedicated Trust Account
A general trust account is the defined term for the type of lawyers trust account that is familiar to all private practitioners. The funds of many clients, including advance fee payments from clients, are deposited into a general trust account for short periods of time. General trust accounts typically do not earn interest, except as permitted by Rule 1.15-4 for the benefit of the IOLTA program, because of the difficulty of allocating the interest among the funds of various clients. Because funds are held for relatively short periods of time in a general trust account, the absence of interest-earning capacity is a minimal inconvenience to the client.
trust account is a new name for what is always the preferred
way to hold a clients funds for any substantial period of
time. This type of account was allowed under the rules before revision,
although unknown to some lawyers. Defined in Rule 1.15-1 as a
trust account that is maintained for the sole benefit of a single
client or with respect to a single transaction or series of integrated
transactions, a dedicated trust account allows a lawyer to
further segregate funds of an individual client or for a specific
transaction in order that earned interest can be readily allocated
to a client or interested parties as appropriate. Whether to set
up a separate dedicated trust account depends upon two factors:
the amount of the funds and the length of time the funds will be
on deposit. If either factor is significant, a prudent lawyer will
establish a dedicated trust account.
of General and Dedicated Trust Accounts
The depository requirements for a general or dedicated trust account differ. All general trust accounts must be maintained in a bank in North Carolina. Rule 1.15-2(e). However, with written consent of the client, a dedicated trust account may be maintained in a bank outside of North Carolina or a financial institution other than a bank in or outside of North Carolina. Id. The latter alternative is, of course, designed to enhance the lawyers options for maximizing the clients return.
Pet Peeves: Quarterly Reconciliations and Annual Accountings
(c) requires quarterly reconciliations of the funds on deposit in
a general trust account. This requirement has been around since
the adoption of the original Rules of Professional Conduct in 1985.
Nevertheless, as noted by Bruno every quarter, lawyers routinely
fail to comply. Once a quarter, the individual balances for every
client, as shown on the ledger of the general trust account, must
be totaled and this total reconciled with the current bank balance
of the trust account as a whole. Comment  for the rule explains:
[t]he current bank balance is the balance obtained when subtracting
outstanding checks and other withdrawals from the bank statement
balance and adding outstanding deposits to the bank statement balance.
Quarterly reconciliations promote accurate accounting for client
funds by insuring that the running balances for each client when
totaled equal the total funds on deposit in the general trust account.
(Note that quarterly reconciliations are not required for dedicated
trust accounts simply because the balance in a dedicated trust account,
which contains the funds of one client or for one transaction, should
readily reconcile with the current bank balance for the account.)
to quarterly reconciliations, Brunos other pet peeve is annual
accounting. Pursuant to Rule 1.15-3(d), a lawyer must give a client
a written accounting of the receipts and disbursements of all funds
held in trust on the following occasions: (1) upon the complete
disbursement of the trust funds, (2) at such other times as may
be reasonably requested by the client, and (3) at least annually
if the funds are retained for a period of more than one year. Lawyers
are pretty good about giving a written accounting at the conclusion
of a transaction but, when a clients funds are held for longer
than a year, the duty to account annually is regularly overlooked.
As noted in the comment to the rule, annual accountings are a necessary
part of the duty to keep a client advised of the status of entrusted
property held by the lawyer. Rule 1.15, Cmt. .
Under Rule 1.15-3,
as revised, the written records that a lawyer must maintain for
entrusted funds are determined by where the funds are deposited.
If the funds are deposited in a bank rather than an investment institution,
the record keeping requirements are slightly more extensive. The
required records for a general trust account, which must be maintained
at a bank, include all of the following: bank receipts and deposit
slips listing the source of funds, the date of receipt, and the
name of the client or other person to whom the funds belong; all
canceled instruments drawn on the account or printed digital images
(front and back) of the canceled instruments; instructions authorizing
the transfer or disbursement of funds from the account; all bank
statements and documents from the bank including notices of return
or dishonor of any instrument drawn on the account against insufficient
funds; and a ledger that contains a record of receipts and disbursements
for any person or entity with funds on deposit in the account. The
records that must be maintained for a dedicated trust account at
a financial institution other than a bank are essentially the same
except no client ledger is required for obvious reasons. Of course,
all records required as a matter of law must be retained for either
type of trust account.
A lawyer must retain all of the written records required by Rule 1.15-3 for at least six years. This requirement has not been changed since 1985, nor has the State Bars authority to audit the required records in random audits (Brunos specialty) or for cause.
Brunos report to the Ethics Committee frequently mentions that a significant number of the lawyers he audits do not have on file a copy of the bank directive required by Rule 1.15-2(k). This written directive instructs the depository bank for a lawyers trust account (general,dedicated, or fiduciary) to report to the State Bar when an instrument drawn on the account is presented for payment against insufficient funds. The purpose of the directive is to prevent defalcations by giving the Bar notice that a trust account may be overdrawn. The bank directive form can be found in the Forms section of the State Bar Handbook on CD-ROM and on the website (www.ncbar.com). (Bruno notes that lawyers with signatory authority on fiduciary accounts, such as estate accounts, often fail to comply with this requirement.)
The management and record keeping requirements of the Revised Rules of Professional Conduct are not extensive or burdensome. They are simply common-sense regulations that protect the funds entrusted to a lawyer by clients. So, make Brunos report shorter at the next meeting of the Ethics Committee by performing quarterly reconciliations, sending out annual accountings to clients, and filing the bank directive with your depository bank. The Ethics Committee will thank you, and so will your clients.
Alice Neece Mine is the assistant director of the North Carolina State Bar. In that capacity, she serves as counsel to the ethics and administrative committees, and is director of the CLE and specialization programs.
THE NORTH CAROLINA STATE BAR
217 E. Edenton Street • PO Box 25908 • Raleigh, NC 27611-5908 • 919.828.4620
Copyrightę North Carolina State Bar. All rights reserved.