How To Manage Trust Account Money In Indiana

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1 Trust Accounts and IOLTA April 24, 2014 Indianapolis Bar Association Applied Professionalism Course Presented by: Howard I. Gross, CPA/ABV/CFF, CFP & Samuel M. Pollom, JD, CPA BGBC Partners, LLP 300 N. Meridian Street Suite 1100 Indianapolis, IN (317) 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. 1

2 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 2

3 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. 3

4 IOLTA Accounts (Interest on Lawyers Trust Account) Pooled Accounts with Interest paid to Indiana Bar Foundation Funds designated to Public Interest Programs 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. 4

5 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. 5

6 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. 6

7 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 7

8 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: 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. 8

9 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 , et seq., the Unclaimed Property Act. 9

10 In the matter of Bruce G., Respondent 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 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 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 10

11 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 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 In the matter of Stuart B., Respondent 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 11

12 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 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 12