Trust Account Tips

Trust Account Requirements

Two Rules (as of January 1, 2009) govern a lawyer’s possession of money that is not completely owned by the lawyer at the time the money is received:

  1. Ethical Rule 1.15 (Safeguarding client property); and
  2. Supreme Court Rule 43 (General Trust Account Guidelines)

The most important provisions in Supreme Court Rule 43 involve: 1) the documents that must be maintained for the trust account; and 2) how credit card payments are processed.  Those provisions are found in Rule 43(b) – subsections (2) and (3):

Trust Account Records

A. Every active member of the state bar shall maintain, on a current basis, complete records of the handling, maintenance and disposition of all funds, securities and other property belonging in whole or in part to a client or third person in connection with a representation. These records shall include the records required by ER 1.15 and cover the entire time from receipt to the time of final disposition by the lawyer of all such funds, securities and other property. The lawyer shall preserve these records for a period of five years after termination of the representation.

B. A lawyer shall maintain or cause to be maintained an account ledger or the equivalent for each client, person or entity for which funds have been received in trust, showing:

(i) the date, amount and payor of each receipt of funds;

(ii) the date, amount and payee of each disbursement; and

(iii) any unexpended balance.

C. A lawyer shall make or cause to be made a monthly three-way reconciliation of the client ledgers, trust account general ledger or register, and the trust account bank statement.

D. A lawyer shall retain, in accordance with this rule, all trust account bank statements, cancelled pre-numbered checks (unless recorded on microfilm or stored electronically by a bank or other financial institution that maintains such records for the length of time required by this rule), other evidence of disbursements, duplicate deposit slips or the equivalent (which shall be sufficiently detailed to identify each item), client ledgers, trust account general ledger or register, and reports to clients.

E A record shall be maintained showing all property, other than cash, held for clients or third persons in connection with a representation, including the date received, where located and when returned or otherwise distributed.

F. Deposits from Credit Card Transactions. A lawyer or law firm may permit funds from a credit card transaction to be deposited into a client trust account for payment of advance fees, costs or expenses, and merchant or credit card transaction fees, but only if:

  1. the lawyer has sources of funds, other than client or third-party funds, available at the time of the credit card transaction to replace any funds that may be debited from the account due to a credit card chargeback and any associated fees or charges;
  2. within three business days of receipt of notice or actual knowledge that a chargeback has been made, the lawyer deposits into the trust account his or her own funds in an amount equal to the amount of the chargeback that exceeds the client’s credit card funds remaining in the trust account, and any fees or charges associated with the chargeback; and
  3. the trust account contains sufficient funds of the lawyer or law firm at the time of the transaction to pay all merchant and credit card transaction fees, except to the extent such fees are paid by the client as part of the transaction.

The following are basic tips for trust account compliance:

Assure that your accountant and bookkeeper completely understand the requirements for handling money in an Arizona law firm trust account.  The following is a brief checklist:

  1. The lawyer for the trust account is responsible for assuring that the trust account is used, documented, and reconciled in accordance with the Supreme Court Rules.  Accordingly, give a copy of the Supreme Court Rules to whomever does the accounting and bookkeeping for the law firm trust account.
  2. Assign an equity partner in the firm to be responsible for:  a) reviewing the bank statement each month; b) reviewing the three-way reconciliation prepared each month; and c) responding to Random Examination Letters on behalf of the firm.
  3. When you receive a check, wire transfer, cash, or any other money and the firm does not own all of that money at the moment it is received, the money must be deposited into a law firm IOLTA account.  Only money that either does not currently belong to the firm or a small amount of firm money to cover bank charges may be held in the trust account.  When money is “earned” by the firm, it must be withdrawn from the trust account promptly.
  4. There must be paper records that keep track of the money for each specific client that goes into the trust account – in addition to maintaining the general trust account ledger.  Each “client ledger” must list payments into the trust account for that client and payments out of the trust account for that client – with a running balance after each transaction.
  5. The Trust Account must be reconciled three ways every single month, which means that the bank statement is compared to the trust account register (where all transactions on the trust account are listed) and those two documents are then reconciled against the total of the individual client ledgers.
  6. Keep all documents related to the trust account including bank statements, duplicate deposit slips, cancelled checks, records of wire transfers, copies of the client ledgers (including the ledger for “firm money” that is in trust), the trust account register, and copies of the reconciliations – Supreme Court Rule 43 requires that the records be maintained for five years from the conclusion of the representation but realistically – keep the records forever.
  7. Keep the trust account register current, with a balance for each entry.
  8. Do not disburse money until it’s actually in the trust account.  The State Bar recommends letting deposits clear for ten days.
  9. Do not use other clients’ money to disburse…..except as permitted by Supreme Court Rule 43’s provisions for the four categories of “limited risk” deposits that may be disbursed against immediately.  The four categories are: 1) checks from government entities; 2) checks where the payor is a financial institution; 3) checks and drafts from insurance and title companies; and 4) cashiers and certified checks.  Remember:  If you disburse immediately against one of those deposits and the deposit fails, you have THREE BUSINESS DAYS TO COVER THE BOUNCED CHECK….which means you must have sufficient money in your operating account.  Suggestion:  Ignore this option – do NOT disburse funds from trust for ten business days – it is not worth the risk that you will need to cover disbursements if the deposit fails.
  10. Establish an “Administrative Funds” ledger for a SMALL amount of firm money to cover wire transfer fees, and check reorder fees, etc.
  11. Have appropriate documentation supporting all disbursements from the trust account and if the firm accepts cash, have a cash receipt book and assure that the receipts issued are sequential – preferably receipts with TWO signatures (two employees should count the money in front of the client/messenger and sign the receipt).
  12. Keep trust account records and checks secure.  Blank checks and deposit tickets should be locked in a secure place each night.  Only a lawyer should be a signer on the law firm trust account – even though the Supreme Court Rules do not “require” this.
  13. Do not put any money in the trust account that is not related to the representation of a client (except for a “small” amount of firm money to cover bank charges).  For instance, do not hold money in the trust account for other services or for other associations that you belong to.
  14. Have safeguards in place to reduce risk of staff  taking money from trust – including: a lawyer should open the monthly bank statement,  requiring two signatures on cash receipts, lawyer review of deposit slips, and lawyer signature on trust checks – and lawyer review of the monthly three-way reconciliation.

More Practical tips for risk management and to avoid internal theft:

  • Read what is put in front of you – particularly the supporting documentation for trust account checks.  Institute procedures and a form that requires documentation before any trust account check can be issued.  Review the supporting documentation before signing the check.
  • Make the trust account checks a different color than your operating account checks.
  • Assure that there are double-checks on all accounting; do not have the same staff person doing deposits or disbursements and the reconciliations.
  • Do not “borrow” money from the trust account.  “Borrowing” client funds from your trust account is criminal theft.  A.R.S. §13-1802.A.2; In re Apker, DC No.  99-2298; SB- 01-0126-D (Arizona Supreme Court 10/18/01).
  • Do not apply client funds to a purpose other than that for which they were entrusted to you.  Doing so without client permission is also theft.  Ariz. Op. 04-03
  • Do not write any checks to the State Bar from your trust account; the Bar will not cash the check and it will trigger an inquiry.
  • Do not store earned fees in a slush fund in the trust account – that’s considered commingling.  Have a procedure to remove earned fees on at least a monthly basis.
  • Have your staff verify deposits are going into the correct account; any money received that is not COMPLETELY your money at the moment it is received, must be deposited into the trust account until it is earned.  If a check includes both earned fees and a retainer replenishment – it goes into the trust account and you then withdraw the earned fees.
  • Overpayments by clients: MUST GO INTO TRUST even if there is “work-in-progress” – unless you have billed for the work, the entire check is deposited into trust, the earned fees withdrawn and the overpayment stays in trust until you bill for the work in progress.
  • Review and sign the monthly 3-way reconciliation….make sure that it is prepared correctly.
  • Make sure that trust account checks clear sequentially.  This requires actually having a lawyer look at the bank statements….
  • Have your bank statement opened and reviewed by someone in your firm with a law license.
  • Have a procedure to confirm that un-cashed trust account checks are voided after 90 days and reentered to credit the appropriate client ledger.
  • Do not leave prepared trust account checks sitting on lawyer/secretary/paralegal desks – many thefts occur by overnight staff picking up such checks and/or clients walking by and helping themselves to the check.
  • Require lawyer authorization of electronic transfers – including moving earned fees from trust to operating.
  • Confirm that deposit slips for trust account deposits have: 1) a listing for each client that is having money deposited (i.e., detail must be listed, not just the sum total of the deposits); and 2) a duplicate.
  • Do not keep “left-over” money when a client cannot be found or third party does not cash a trust account check; it escheats to the State of Arizona as abandoned property after it is held in trust for 5 years.  During that time, letters should be sent to the “owner” at least yearly to try to return the money.  Ariz. Op. 97-03
  • Anything characterized as either “non-refundable” or “earned-upon-receipt” DOES NOT GO INTO TRUST – it is earned at receipt, so it goes into operating.  Ariz. Op. 99-02
  • An ADR practice where there is no representation of clients does not require a trust account.  Ariz. Op. 03-07
  • A law firm may have more than one trust account.  Supreme Court Rule 44.
  • Money may be wired into and out of a trust account, as long as you keep records of the transactions.  Supreme Court Rule 43.
  • Do not hold disputed funds indefinitely; either interplead the funds, file a fee arbitration or file a declaratory judgment action.  ER 1.15
  • If a client makes an overpayment on an invoice, the firm MUST deposit the entire check into trust, withdraw the earned portion and keep the overpayment in trust until it either is returned to the client or earned.  An overpayment may not be placed into operating just because the firm has work in progress that will be billed within the month.
  • Any money that must be deposited into trust must be deposited directly into trust which means wire transfers must be wired into the trust account and cash or credit card payments must be deposited into directly into the trust account; no stops in “temporary” accounts.

Missing Clients With Trust Balances

 Sometimes clients will disappear – even when you are trying to give them money.  Ariz. Op. 97-03 that money held in trust that cannot be identified as to the owner must be held in trust for five years until it becomes abandoned property, at which time it escheats to the State of Arizona.  Following along the lines of Ariz. Op. 97-03, a later opinion, Ariz. Op. 01-08 explains that lawyers must use reasonable efforts to try to locate a missing client, including possibly contacting family or friends and performing a reasonable search.  If the client cannot be located, the firm should at least send a letter, once a year, attempting to contact the missing client.  Keep copies of these letters and at the end of five years, any trust balance would escheat to the State.