Trust account guidelines mandate how attorneys navigate their non-delegable duty of managing client funds. Funds encompass expenses, fees, and costs managed by the attorney on the client's or third party's behalf. Completing this task correctly includes determining which funds belong in the account and which do not. Failure to parse this correctly can result in misappropriation of funds or a commingling violation.
This article seeks to be a quick resource of the Do’s and Don’ts of depositing funds according to the California State Bar’s Trust Account Guidelines.
Before depositing funds, trust account guidelines state multiple stipulations to remain mindful of. The first is knowing the do’s and don’ts of which funds rightfully belong in the client's trust account. Monies that need depositing into the client's trust accounts are:
Examples of these include:
Knowing which funds cannot go into the client's trust bank account is just as important. Monies that must never be deposited into a client’s trust account are:
As simple as these regulations are, instances often arise that cause many attorneys difficulty navigating. Here are some expectations of which to remain considerate. One example is the one advance fee, or “flat fee.”
The flat fee is paid to the attorney or law firm in advance for a fixed amount representing complete payment for the agreed services. It may be paid in full or part in advance. Generally, funds that belong to the attorney or law firm should not commingle with client money. The flat fee is required, by trust account guidelines, to be deposited and held in the client's trust account. However, the flat fee can be held in the firm’s operating account if the regulations outlined in Rule 1.15 (b) are first met. In advance of the action, the attorney must notify the client in writing that they are entitled to a refund of any amount of the flat fee that is unearned by the attorney.
Although firm or attorney money must not be deposited into the client's trust account, one such exception is doing so to prevent bank charges from being debited against client funds. According to the Handbook on Client Trust Accounting, these deposits are allowed solely when “reasonably sufficient to pay bank charges''. This arrangement must be made correctly and with the bank in advance so these charges don’t accrue against the trust accounts and the client’s money.
They should instead be charged against the office/attorney’s business accounts. It is mandatory and crucial that these transactions, like any transactions or deposit, be recorded in the client trust account journal for the bank account. If not, this will become a commingling violation. Consider this an example of why it remains of the utmost importance to ensure that experienced individuals knowledgeable of client trust account regulations are the banking institution's point of contact. This protects the attorney as they protect their clients.
IOLTA accounts hold funds for a short time, and if the amount is small enough, the funds wouldn’t earn interest for the client if placed in an individualized client trust account. If the trust account is an IOLTA account, differentiating factors determine what must be deposited and held in the account.
Some attorneys can use only one pooled account– while other firms may use several pooled accounts instead. This depends mostly on the firm and the type of law the firm practices.
The following factors are set by the Rules of State Bar of California (Rule 2.110(A)) to determine if funds “can earn income in excess of costs,” meaning the funds are capable of earning income in excess of the costs accrued to run the account:
Attorneys and qualified banking institutions should discuss this checklist to determine if funds should be deposited in an IOLTA account to earn interest for the client. The State Bar certifies, via Rule 2.110(B), that an attorney attempting to determine whether funds belong in an IOLTA account will not garner disciplinary action if done in good faith.
However, suppose funds will not be held for a “short period of time” or “nominal in amount” and, therefore, will not be entered into an IOLTA account. In that case, the interest earned on client funds must be coded to the client taxpayer identification number.
Do withdraw any earned fees on a regularly scheduled basis. If the attorney and client have agreed upon a set amount to be periodically withdrawn to pay the attorney, these funds must be removed on a consistent, regular basis. When an attorney’s interest becomes “fixed” on client funds, the funds begin commingling. This is a violation of Rule 1.15.
Do deposit funds from the client as soon as possible and notify the client of receipt.
Don’t have ATM access. The account used for client funds must not have ATM access. In short, remember the difficulty of keeping up with cash once withdrawn from an ATM.
Oftentimes, such funds are hard to account for. It is in the nature of the responsibility of managing client trust accounts for the attorney to have a record of all activity. Therefore, it may be to the attorney’s benefit that ATM access is not allowed for this type of account.
Don’t have too many members involved. Additionally, the number of individuals and team members with access to the client funds should be minimal. To maintain account integrity and accuracy in record-keeping, attorneys may consider hiring a bookkeeper instead of working with an assistant or secretary on these accounts, as it is ultimately the attorney’s responsibility to manage the trust account and funds within them.
If you need a little help, consider reading out to SmartBean® for our TAB services. We offer TAB - Trust Account Bookkeeping– for an affordable monthly fee. Our knowledgeable, dedicated team is ready to help you make depositing client funds a breeze! At SmartBean®, we are not only bean counters but also the beans you can count on!