The Necessity of Client Trust Accounting

For attorneys in private practice, managing their Client Trust Account is, by and large, a thankless task.

It’s also a critical one.

All attorneys who maintain a Client Trust Account are subject to random and for-cause audits by the State Bar. When the auditor comes calling, they’ll examine the financial records you’re required to maintain pursuant to the Rules of Professional Conduct.

If you’re asked to produce your trust accounting records, the following responses won’t cut it:

• Oops, I lost those records.
• My dog ate them.
• Can you come back in a week? A month? Never?
• Financial records? What financial records? 

For a cautionary tale, consider the legal travails of Boris Becker. The former tennis ace, who declared bankruptcy in 2017, was recently convicted in a London court of concealing financial transactions and hiding assets, including two Wimbledon trophies. The six-time Grand Slam winner claimed he didn’t know where the trophies were.

No matter. He was found guilty on four charges under Britain’s Insolvency Act.

Read more here, here and here.

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NC Rule of Professional Conduct 1.15 – Safekeeping Property

This rule has four subparts: Rule 1.15-1, Definitions; Rule 1.15-2, General Rules; Rule 1.15-3, Records and Accountings; and Rule 1.15-4, Trust Account Management in Multiple-Lawyer Firm. The subparts set forth the requirements for preserving client property, including the requirements for preserving client property in a lawyer’s trust account. The comment for all four subparts as well as the annotations appear after the text for Rule 1.15-4.Comment [1] The purpose of a lawyer’s trust account or fiduciary account is to segregate the funds belonging to others from those belonging to the lawyer. Money received by a lawyer while providing legal services or otherwise serving as a fiduciary should never be used for personal purposes. Failure to place the funds of others in a trust or fiduciary account can subject the funds to claims of the lawyer’s creditors or place the funds in the lawyer’s estate in the event of the lawyer’s death or disability.

Property Subject to these Rules

Comment [2] Any property belonging to a client or other person or entity that is received by or placed under the control of a lawyer in connection with the lawyer's furnishing of legal services or professional fiduciary services must be handled and maintained in accordance with this Rule 1.15. The minimum records to be maintained for accounts in banks differ from the minimum records to be maintained for accounts in other financial institutions (where permitted), to accommodate brokerage accounts and other accounts with differing reporting practices.

Client Property

Comment [3] Every lawyer who receives funds belonging to a client must maintain a trust account. The general rule is that every receipt of money from a client or for a client, which will be used or delivered on the client's behalf, is held in trust and should be placed in the trust account. All client money received by a lawyer, except that to which the lawyer is immediately entitled, must be deposited in a trust account, including funds for payment of future fees and expenses. Client funds must be promptly deposited into the trust account. Client funds must be deposited in a general trust account if there is no duty to invest on behalf of the client. Generally speaking, if a reasonably prudent person would conclude that the funds in question, either because they are nominal in amount or are to be held for a short time, could probably not earn sufficient interest to justify the cost of investing, the funds should be deposited in the general trust account. In determining whether there is a duty to invest, a lawyer shall exercise his or her professional judgment in good faith and shall consider the following:

a) The amount of the funds to be deposited;

b) The expected duration of the deposit, including the likelihood of delay in the matter for which the funds are held;

c) The rates of interest or yield at financial institutions where the funds are to be deposited;

d) The cost of establishing and administering dedicated accounts for the client's benefit, including the service charges, the costs of the lawyer's services, and the costs of preparing any tax reports required for income accruing to the client's benefit;

e) The capability of financial institutions, lawyers, or law firms to calculate and pay income to individual clients;

f) Any other circumstances that affect the ability of the client's funds to earn a net return for the client.

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