Opening, Maintaining, and Closing Trust Accounts

Opening the Trust Account

After reviewing the information in the “Financial Institutions” section, the lawyer should determine which financial institution or, in some cases, investment firm to use for trust account purposes.  

When opening an IOLTA account, the lawyer must use the Texas Access to Justice Foundation’s tax identification number, 74-2354575, because it receives the interest. Within 30 days of establishing an IOLTA account, the lawyer must also complete the mandatory “IOLTA Notice to Financial Institution and Foundation” form, which enables the account to be exempt from backup withholding and from reporting interest income to the Internal Revenue Service.41 The account should be titled in the lawyer’s or law firm’s name with the words, “Client Trust Account,” “IOLTA Account,” or “Client Escrow Account.” For interest-bearing, individual client trust accounts only, the accounts should be titled “Lawyer’s Name as Custodian for Client’s Name.”[42] Lawyers who practice in a law firm or professional corporation may use the firm’s or corporation’s trust account without having to open a trust account specific to the individual lawyer.[43]

When opening interest-bearing accounts established on behalf of specific clients, the lawyer should use the client’s tax identification number or social security number, which allows the financial institution to issue a 1099 tax form to the IRS in the client’s name to report the interest income. If the bank sends the client’s 1099 to the lawyer, the lawyer has a duty to promptly forward it to the client.[44]

Signatories

Only the lawyer or people under the lawyer’s direct supervision may sign on the trust account.[45] The client cannot be a signer even if the account is in the client’s name. A lawyer may want to have another signer on the trust account in case of the lawyer’s death or disability. It can be important when, for reasons such as a lack of Internet access or simply not being physically present to endorse a check, the lawyer cannot make a time-sensitive disbursement or deposit. IOLTA accounts and interest-bearing trust accounts do not require the second signer to be a lawyer. Be aware that the lawyer is responsible for the conduct of other lawyers and staff regarding trust funds under the disciplinary rules. Adequate supervision is essential.[46]

Trust Account Fees

It is the lawyer’s responsibility to pay the costs of check orders, bank fees, insufficient fund fees, and other fees that may be deducted from the trust account. The lawyer should anticipate these expenses and deposit a reasonable amount of money into the trust account to cover the expenses before their deduction.[47]

As previously stated, a lawyer may deposit their own funds into the trust account if they are “reasonably sufficient to pay for fees or obtain a waiver of fees or to keep the account open.” This exception has limitations. A lawyer cannot place funds into the trust account to provide a “cushion” for potential withdrawals that would exceed the amount needed for these nominal fees, such as additional funds to protect against overdrafts or hot checks.[48]

When purchasing trust account checks, the lawyer may want to consider ordering checks that are a different color or design from the lawyer’s operational account, so it is easy to tell the difference between the two accounts.

Maintaining the Trust Account

Remember these three simple rules:

• No commingling!
• Identify each clients’ deposits and disbursements to create a record, regardless of whether you make a wire or phone transfer, or bank online.
• Reconcile, reconcile, reconcile!

Deposits

A deposit slip should identify each client by name or file number. Deposits should be recorded in chronological order in the check register or similar electronic record.

Disbursements

Disbursements should be made according to the fee agreement between the lawyer and client. Rule 1.04 (d) of the Texas Disciplinary Rules of Professional Conduct requires a contingent fee agreement to be in writing[49] and Rule 1.04 (f) requires a written fee agreement when two lawyers at separate firms intend to share fees while performing legal services for the same client.

In many cases, a fee agreement is not required to be in writing.  However, it is highly recommended that the lawyer has a written fee agreement with every client to avoid disputes between them regarding the lawyer’s fees, expenses, or payments to third parties on behalf of the client. Under Rule 1.14 (c), a lawyer must hold disputed funds in a trust account until the dispute over who is entitled to receive the money is resolved. Here again, a written fee agreement can provide a reasonable amount of time for the client to dispute the lawyer’s fees before the fees are deemed earned.

Disbursements should be made promptly once funds have been received, deposited into the trust account, and have cleared the bank. The latter is especially important as a failure to do so may cause the lawyer financial and disciplinary problems. During economic downturns, the risk of checks, money orders, or other financial instruments being forged, written on insufficient funds, or counterfeit may also increase. [50]

If fraud is suspected, the lawyer should not hesitate to take the financial instrument to the bank from which it was allegedly issued and verify its authenticity.

It is also prudent for the lawyer to ask how much time the bank requires for local, in-state, and out-of-state checks, money orders, and cashier’s checks to clear the payor’s bank. The payor is the person who wrote the check or provided the cashier’s check or other financial instrument. Once the funds have cleared the bank, they are called collected funds. It is important to distinguish collected funds from available funds, which have not cleared the bank and are still prone to chargebacks to the trust account. A chargeback is the amount of money disbursed from the trust account but not actually available because the financial instrument never cleared the payor’s bank. In other words, the lawyer did not wait until the funds were collected funds before making a disbursement. The bank may add its own fee to the amount which it charges back to the trust account. Wire transfers and cash are the only deposits that are recognized as collected funds upon deposit. 

Disbursements, like deposits, should identify the person or entity that is being paid on behalf of the client, be recorded chronologically, and note the purpose of the disbursement. A file number may be used instead of the client’s name. If the disbursement is made by some other means than a check, the check register (or the electronic equivalent) should indicate how the disbursement was made and include the above information. The purpose of these notations is to create a paper trail to facilitate an accounting of the trust account. The following example illustrates a disbursement with this information. 

 A check with a check and a dollar sign

Description automatically generated with medium confidence 

Disbursements on behalf of a client should never exceed the amount of trust funds available to that particular client. It goes without saying that the client’s trust account must never fall below zero! If it does, the lawyer is converting another client’s funds to make disbursements for the client who lacks sufficient funds or even for himself, which may lead to financial, disciplinary, and criminal liability.[51]

A lawyer should also never write a check for cash from the trust account. Any transfers that do not create a paper trail for disbursements from a trust account should be avoided.

Reconcile, reconcile, reconcile!

Each month, the bank will provide the lawyer with a trust account statement. This bank statement needs to be balanced or reconciled with the check register. A lawyer may balance the trust account manually or use a software program. There are software programs specifically designed for trust accounting, such as Smokeball, and general law office billing and accounting software, such as CosmoLex, Rocket Matter, TimeSolv, MyCase, or Practice Panther. Some case management systems, such as Clio, integrate trust accounting into their case management software. A lawyer may also balance his trust account manually. 

To balance a trust account for multiple clients, the IOLTA check register (or similar electronic record) should include the following information:   

If the check register does not have room to include the above information, the lawyer should create a separate trust account ledger to include it. Each client should also have an individual ledger where the client’s deposits and disbursements with a brief description are recorded at the same time as the entry in the check register or shortly thereafter as follows:  

A table with a number of text

Description automatically generated with medium confidence 
 
If the lawyer deposits nominal personal funds to cover trust account check orders or bank fees, the lawyer should keep an individual ledger for himself. If the account is an interest-bearing trust account for only one client, it is not necessary to put the client’s name on each deposit and disbursement, but the client’s name should be on the check register itself.   

When all individual client ledgers (including the lawyer’s own ledger for the trust account) are added up, the total dollar amount should equal the total dollar amount shown on the reconciled monthly bank statement. As an example:  

A screenshot of a document

Description automatically generated 

If the sum of the client ledgers does not equal the reconciled monthly bank statement balance, the lawyer needs to review the check register (or trust account ledger(s)) for mistakes. If a mistake is found in the check register, it also needs to be corrected in the corresponding client ledger. Occasionally, the bank will make a mistake.   

When the statement and ledgers do not reflect the same balance, it means that: 

●    A client ledger may have been forgotten and not added; 

●    An activity was not posted in the check register or to the individual client’s ledger; or 

●    A mistake was made in adding or subtracting the running balance in the check register, reconciliation of the bank statement, or a client ledger. 

Monthly reconciliation of the ledgers and bank statement is practical, wise, and necessary for efficient law office management.  Under Disciplinary Rules 5.01 and 5.03, a supervising lawyer is responsible for the misconduct of a lawyer or employee under his or her direct supervision. When the lawyer routinely reconciles the trust accounts each month, it discourages employees from embezzling trust funds. It also prevents spending hours of aggravation reconciling trust account transactions over longer periods of time.  

Keeping a running balance in the check register, trust account ledger (if applicable), and individual client ledgers facilitates balancing a trust account. It also helps the lawyer quickly answer if the client asks how much money is in their trust account, boosting client confidence in the lawyer and avoiding on the spot mathematics. 

Communicating Trust Account Information to the Client

The Texas Disciplinary Rules of Professional Conduct require accountings under two rules:  1.14 (b) (safekeeping of property) and 1.04 (d) (contingent fee). Rule 1.15 (d) requires the return of unearned fees when the representation is terminated.[52]

Rule 1.14 (b) requires the lawyer to notify the client promptly when in receipt of funds belonging to the client or a third person to whom the client owes money. If the client or third person requests an accounting, the lawyer must deliver it. While Rule 1.14 (b) does not specify that the accounting must be in writing, a written accounting is required under Rule 1.04 (d) in all contingent fee cases regardless of whether the client has asked for it.

Rule 1.15 (d) specifies “refunding any advance payments of fee that has not been earned.” Obviously, any fee that has not been earned belongs in a trust account. If the trust account records have been properly maintained, the lawyer can quickly identify the amount owed to the client upon termination. How the termination arose is irrelevant under Rule 1.15 (d). Even if the client fired the lawyer without cause, the unearned fee must be refunded.[53]

The “When to Use a Trust Account” section discusses the problem with nonrefundable retainers.  

Although the disciplinary rules are silent about sending clients written monthly invoices with a summary of the client’s trust account activity, it is good law office management to do so. If a client is inactive, a monthly invoice may not be necessary, but employee embezzlement may be deterred if the client is also reviewing the statement on a regular basis. To encourage the client’s timely review, the lawyer may want to state on the invoice that the client has 14 days, for example, to dispute the bill as per the fee agreement, as suggested earlier in this material.[54]

Keeping Trust Account Records

Rule 1.14 (a) of the Texas Rules of Professional Conduct requires a lawyer to keep a client’s trust account records for five years after termination of the client’s representation. As a result, it is advisable to issue a closing letter at the end of representation to establish a date to begin tolling time.  

A lawyer is required to keep records that establish how the trust account was used. Under Rule 17.10 of the Texas Rules of Disciplinary Procedure, a lawyer shall maintain and preserve:

the records of such accounts, including checkbooks, canceled checks, check stubs, check registers, bank statements, vouchers, deposit slips, ledgers, journals, closing statements, accountings, and other statements of receipts and disbursements rendered to clients or other parties with regard to client trust funds or other similar records clearly reflecting the date, amount, source, and explanation for all receipts, withdrawals, deliveries, and disbursements of the funds or other property of a client.[55]

Closing the Trust Account

Closing a trust account requires returning unearned fees to the client or paying amounts due to third parties.[56] When closing an IOLTA trust account, the Texas Access to Justice Foundation must also be notified in writing or electronically within 30 days after the account is closed.[57]

Under usual circumstances when a lawyer chooses to leave the practice of law, or will otherwise no longer need a trust account, it is easy to comply with the rules and IOLTA notification. Problems arise when a lawyer dies or becomes mentally or physically incapacitated unexpectedly and no other person can sign on the trust account.[58]

To avoid these problems, a lawyer should plan for his own unexpected death or incapacity by having a succession plan in place, including the designation of one or more custodians who can step in and close the office on a temporary or permanent basis. An easy way to designate a custodian is through the State Bar of Texas Advance Designation of Custodian portal. Custodians do not take on the attorney’s clients or practice. They simply step in to notify clients of the situation, review and return files to clients, make determinations about file retention and destruction, and handle the final accounting and return of any unearned retainer fees. 

The lawyer’s succession plan may also include adding another signer on the trust account or accounts. It may also be helpful to provide written instructions to the person who has been given authority to close the trust account and inform a trusted family member or friend on how to retrieve the instructions in the event of the lawyer’s death or incapacity. The Law Practice Management Committee of the State Bar of Texas created the Succession Planning Toolkit to assist lawyers and their family and friends in temporarily or permanently closing an attorney’s practice.

If a custodian has not been designated and no one else has access to the accounts, family or friends should make efforts to have a personal representative or guardian for the deceased or disabled lawyer, respectively, appointed as soon as possible. Many times, the person who is appointed as the legal representative does not know how or where to begin the process of accounting for and returning trust account funds. If the lawyer has kept the trust account records in order, the task is less overwhelming for the person who assumes this responsibility.