Transcript Slide 1

Trust Accounts and IOLTA
April 23, 2015
Presented by: Howard I. Gross,
CPA/ABV/CFF, CFP
& Samuel M. Pollom, JD, CPA
Strength in numbers.
What is a Trust Account?
“A bank account held by a professional
for the purposes of keeping money held
on behalf of clients separate from the
funds of the professional or business.”
Indiana Rules of Professional Conduct
Rule 1.15(a)
A lawyer shall hold property of clients or third
persons that is in a lawyer’s possession in
connection with a representation separate from
the lawyer’s own property. Funds shall be kept in
a separate account maintained in the state where
the lawyer’s office is situated, or elsewhere with
the consent of the client or third person. Other
property shall be identified as such and
appropriately safeguarded. Complete records of
such account funds and other property shall be
kept by the lawyer and shall be preserved for a
period of five years after termination of the
representation.
Key Fiduciary Principles
A lawyer has a duty to:
• Segregate
• Safeguard
• Promptly notify of receipt of funds
• Promptly deliver funds
• Account for all property
How Professionals End Up with Client
And Third Party Funds
Funds that MUST go in Trust Accounts
• Settlements and judgments
• Advanced fees
• Advanced expenses
• Funds belonging to client
• Receipt of aggregated Non-Trust and Trust
Funds
• Disputed funds
How Professionals End Up with Client
And Third Party Funds (cont.)
Funds that MUST NOT go in Trust Accounts
• Funds belonging exclusively to the
professional
• Withdrawing earned fees from trust account
• Employee payroll taxes
Prohibition Against Commingling
• Simultaneous presence of funds
belonging to a professional and a client
or third party in the same account.
• Rule of Thumb – Who owns these
funds? If the answer is a client or third
party, the funds belong in a trust
account.
Proper Identification of Trust Account
Part of duty to safeguard includes:
• Properly identify funds as trust funds
• Segregate funds into a properly designated
“trust account”
• Only licensed attorneys should have
signatory authority over the trust account
• Agreement with bank should clearly state it
is a trust account to protect from lawyer’s
personal creditors, probate, ex-spouses, and
the IRS.
Pooled Trust Accounts vs.
Separate Trust Accounts
• Pooled - accounts that are small in
amount and are not being held for a
substantial period of time
• Separate - accounts that are substantial
in amount and/or that are going to be
held for substantially long periods.
Should consult with client first, and all
interest earned belongs to the client,
not the lawyer.
IOLTA Accounts
(Interest on Lawyers Trust Account)
• Pooled Accounts with Interest paid to
Indiana Bar Foundation
• Funds designated to Public Interest
Programs
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Pro bono programs
Civil justice to persons of limited means
Law-related education for public
Research assistance in legal system
Improve administration of justice, and
Public service programs approved by
Indiana Supreme Court
Where Should Accounts be Maintained
• Approved in-state Financial Institution
• A list of these institutions is available
on the Indiana Supreme Court website
Conversion and Theft of Client and
Third Party Funds
• Unauthorized use of client and/or third party
funds is a crime.
• Indiana Professional Conduct Rule 8.4(b)
prohibits a lawyer from committing a criminal
act that reflects adversely on the lawyers
honesty, trustworthiness or fitness to
practice law.
• Funds belonging to a client or third party
should never be used for attorney’s own
benefit, for the benefit of another client, or for
the benefit of anyone else.
Handling Disbursements from Trust
• Trust account disbursements should
only be done by way of a fully
documented transaction
• A trust check should never be made
payable to cash or bearer
• Withdrawals from a trust account
should never be made by way of a
cash withdrawal from an automated
teller machine
Handling Disbursements from Trust (cont.)
• Cash should never be received back
when making a trust deposit
• Earned fees should be paid out of trust in
the form of a trust check and
documented as being earned fees
• Similarly, expenses incurred by the
professional should be paid out of trust
in the form of a trust check and
documented as being expenses
Fundamental Concepts in Trust
Account Management
A. Although client funds are often maintained
in pooled trust account, they must be treated
as though each client’s funds are held in a
separate account
• The funds of one client can NEVER be used to
cover disbursements on behalf of another client
• The tool for maintaining the separate identity of
each individual client’s funds is a subsidiary
ledger for each client who has funds in the trust
account.
Fundamental Concepts in Trust
Account Management (cont.)
B. Funds should never be paid out of trust on
behalf of a client until the funds on which a
trust check is written have been collected
through banking channels.
Fundamental Concepts in
Trust Account Management (cont.)
C. The lawyer should never issue a post-dated
trust check
D. Maintain an Audit Trail
1. An audit trail consists of source documents that
reflect all transactions in and out of the account.
Source documents include:
•
Copy of deposit ticket, receipt or bank credit
memorandum
•
Bank statement showing the credit of deposited funds
•
Checkbook stub or checkbook register
•
Check or bank debit memorandum
•
Bank statement showing the debit of disbursed funds
Fundamental Concepts in
Trust Account Management (cont.)
2.
Deposit tickets should be annotated to identify
each deposited item (whether cash or
instrument), client’s name (or file number) and
the source of the funds. (No unidentified
deposits should be made.)
3.
Checks should be annotated to identify the
client’s name (or file number) and the purpose of
the check.
4.
The deposit ticket and the check should be
annotated well enough to direct the lawyer to the
client matter file corresponding to the receipt or
disbursement.
Mechanics of Trust Account Maintenance
The following is an outline of the steps
that should be taken to maintain client
trust accounts:
1. Handling Deposits – Immediately obtain
endorsements and deposit trust funds;
2. Handling Disbursements – Immediately
disburse funds with client and/or third
party consent in writing
3. Reconcile balances monthly
What About Credit Cards?
Terminology:
• Merchant – a vendor (lawyer) who accepts credit
cards
• Merchant account – a bank account into which credit
card payments are deposited
• Acquiring bank – bank where merchant has
merchant account
• Issuing bank – bank that issues credit card to a
customer
What About Credit Cards?
• If fees already earned – no ethical concern
• Fixed fees deemed earned upon receipt
• Problem arises when credit card transactions are
connected to lawyer trust accounts
• Generally, lawyers cannot accept credit card
payments if those payments must go into the lawyer
trust account
What About Credit Cards?
Why?
• Can’t deposit credit card payments of trust funds
into an operating account then immediately transfer
to a trust account.
• Can’t designate a trust account as the merchant
account for credit card payments.
Why not?
• Can’t commingle funds – not even for a brief
moment.
• Merchant accounts subject to third party
interference – fees, chargebacks, etc.
The Solution: LawPay
AffiniPay – provider of LawPay
• Accepts all major credit cards from your clients.
• Ability to separate earned and unearned fees in
compliance with most state and ABA guidelines.
• Processing fees are deducted only from operating
account.
• 100% protection of Trust or IOLTA account.
• No debits for any reason are allowed from IOLTA at
any time.
• For more info, visit: www.lawpay.com
What About Debit Cards?
• Very simple: no can do!
• Against the trust accounting rules
• Most banks will not issue a debit card for a trust
account because it imposes imprudent and
unnecessary risks.
• To pay court fees (commonly paid on-line) from
client advances, use credit card then pay credit card
invoice with a properly documented trust check.
Other Issues in Trust Account
Management
Interest on Trust Accounts
• Unless an IOLTA, other pooled trust accounts
should not be interest bearing
• More cost beneficial for trust funds to be held
at interest in separate accounts that are long
term or have a substantial amount of money
• In no event is any interest earned on trust
funds considered lawyers’ own funds
• IOLTA rules issued by the Indiana Supreme
Court are found at Indiana Rule of Professional
Conduct 1.15(f) through (k)
Other Issues in Trust Account
Management (cont.)
Trust account Overdraft Reporting
• Banks that are approved as depositories will report
all overdrafts to the Disciplinary Commission
• It is not the bank’s obligation to guess whether or
not an account is subject to overdraft reporting –
the lawyer must provide notice to the bank.
• Upon receipt of the notice of overdraft, the
Disciplinary Commission will send notice to the
lawyer requesting a written and documented
explanation within 10 business days.
Other Issues in Trust Account
Management (cont.)
Unclaimed Trust Funds
• Every effort should be made to promptly forward trust
funds to their rightful owner. If lawyer loses track of
client and cannot pay funds to the client, the lawyer
should proceed pursuant to the terms of IC 32-34-1-1, et
seq., the Unclaimed Property Act.
Breaking Bad Not So Good
In the matter of Bruce G., Respondent - 952 N.E.2d 200
Accused of:
• Failure to keep adequate records
• Insufficient funds for checks written in trust account
• Commingling of client and personal funds
• Failure to hold client funds in trust
• Using funds of one client to pay expenses of another
Facts in aggravation:
• Repeated and prolonged pattern of misconduct
• Corrective action only after second inquiry by
Commission
Breaking Bad Not So Good
In the matter of Bruce G., Respondent
Facts in mitigation:
• No disciplinary history
• Misconduct not due to dishonest or selfish motive
• No client funds lost due to misconduct
Discipline:
• Respondent suspended from practice of law for 90
days, with 30 days actively served and remainder
stayed subject to completion of a 2 year probation.
• Court costs assessed against Respondent
Breaking Bad Not So Good
In the matter of Ayeshah J., Respondent – 969 N.E.2d 5
Accused of:
• Failure to keep adequate records
• Wrote checks to “self” or to “cash”
• Paid earned fees from trust to business account
using electronic transfers
• Commingling of client and personal funds
• Failure to hold client funds in trust
• Failure to maintain nominal balance to pay fees
Facts in aggravation:
• Respondent not initially cooperative, provided
inaccurate & misleading information
Breaking Bad Not So Good
In the matter of Ayeshah J., Respondent
Facts in mitigation:
• No disciplinary history
• Misconduct not due to dishonest or selfish motive
• No client funds lost due to misconduct
• Respondent was relatively inexperienced in law
office management, but then educated herself
Discipline:
• Respondent received a public reprimand
• Court costs assessed against Respondent
Breaking Bad Not So Good
In the matter of Stephen U., Respondent-918 N.E.2d 332
Accused of:
• Used trust account for personal reasons
• Insufficient funds for checks written in trust account
• Alcohol problems - JLAP
Facts in mitigation:
• Participated in JLAP program
Discipline:
• Respondent suspended from practice of law for 6
months, all stayed subject to 18 month probation.
• Court costs assessed against Respondent
Breaking Bad Not So Good
In the matter of Stuart B., Respondent - 954 N.E.2d 447
Accused of:
• Failure to hold client funds in trust
• Failure to deliver promptly to a client funds the client
is entitled to receive
Facts in aggravation:
• Lost settlement check he received
• For 10 years, failed to respond to clients’ repeated
requests for the funds
Breaking Bad Not So Good
In the matter of Stuart B., Respondent
Facts in mitigation:
• Respondent did pay $8,000 to clients in restitution
after grievance was filed. However, restitution made
after a client has filed a grievance or after
disciplinary proceedings are initiated does NOT
qualify as a mitigating circumstance. If restitution
not made, it would have been considered an
aggravating circumstance.
Discipline:
• Respondent suspended from practice of law for 30
days, with automatic reinstatement.
• Court costs assessed against Respondent
On-line Resources
Indiana Supreme Court Website
www.in.gov/judiciary/discipline/2330.htm
This page includes links to:
• Indiana Professional Conduct Rules
• Indiana Rules for Admission to the Bar & the Discipline of
Attorneys
• List of Approved Trust Account Depositories
• Trust Account Management