Other People’s Money

Download Other People’s Money

Preview text

Other People’s Money:
Operating Lawyer Trust Accounts
(Revised January 2020)

Minnesota Lawyers Professional Responsibility Board

Office of the Director of Lawyers Professional Responsibility
445 Minnesota Street, Suite 2400 St. Paul, Minnesota 55101-2139 (651) 296–3952 (outstate) 1-800-657-3601 http://lprb.mncourts.gov

Table of Contents


Introduction .....................................................................................................


II. Types of Trust Accounts .................................................................................


III. Defining Books and Records ...........................................................................


IV. Handling Trust Account Transactions ...........................................................


V. Reconciling the Trust Account ........................................................................


VI. Using the Reconciliation to Find Mistakes ..................................................... 11

VII. Frequently Asked Questions ........................................................................... 16

A. Rule 1.15, Minnesota Rules of Professional Conduct .................................... 20 B. Appendix 1 to Minnesota Rules of Professional Conduct ............................. 25

Other People’s Money Page i

I. Introduction
One of the routine aspects of practicing law is receiving money from and on behalf of clients and third parties; one of a lawyer’s most serious responsibilities is safeguarding and accounting for those funds.
Client funds take the form of unearned fee retainers, cost advances, settlements, escrow funds, estate assets, judgment awards and other fiduciary funds, to name the most common. Funds belonging to third parties that a lawyer may be required to hold include funds subject to doctors’ liens, disputed funds, and court-ordered deposits.
Both common sense and the Minnesota Rules of Professional Conduct (MRPC) dictate that client funds must be segregated from a lawyer’s own funds and accounted for in a manner that allows the lawyer to determine, to the penny, what funds are held on behalf of each and every client. Lawyers accomplish this by placing all client money in a separate bank account called a trust account. Rule 1.15, MRPC (Appendix A), and Appendix 1 to the MRPC (Appendix B) spell out the technical requirements for maintaining trust account books and records.
The purposes of this manual are to describe the trust account books and records requirements, explain the rationale for those requirements, provide a straightforward guide to following the requirements, and answer common questions that may arise.
II. Types of Trust Accounts
A. Pooled Accounts.
The Rules require that all client funds be deposited in an interest-bearing account at a financial institution, typically a savings or commercial bank. Most lawyers maintain one trust account into which all of their client funds are “pooled.” Because most client funds are held for short periods of time (several days to several months) and are often for nominal amounts, insignificant amounts of interest are generated for each individual client. Nevertheless, the pooled funds in these accounts (called IOLTA, Interest on Lawyers Trust Accounts) earn cumulative interest. As in many other states, this interest is collected and forwarded to the IOLTA program which uses the money to fund various nonprofit groups that provide legal services to individuals and groups that would not otherwise be able to afford legal representation.
Virtually all banks in Minnesota are familiar with IOLTA accounts. Banks often do not charge monthly service fees on these accounts and can set up the account to automatically withdraw the interest each month and forward it to the IOLTA program. The Office of the Director of Lawyers Professional Responsibility (“Director’s Office”) maintains on its website (http://lprb.mncourts.gov) a list of banks that have been approved to handle
Other People’s Money Page 1

IOLTA accounts. Banks are approved to handle IOLTA accounts when they agree to report overdrafts on those accounts to the Director’s Office and to pay a certain minimum amount of interest on the accounts.
A lawyer may also open a pooled interest-bearing trust account for which the interest will not be forwarded to the IOLTA program. For this type of account, a lawyer must use sub-accounting to compute and pay out interest to individual clients. Few lawyers use this type of trust account due to the administrative burden and costs associated with allocating the interest to each client on an average daily balance.
B. Separate Accounts.
Some lawyers handle substantial individual amounts of client funds or funds that the lawyer expects to retain in trust for a long period of time. These funds may be deposited into a separate interest-bearing account and the interest, net of any transaction costs, paid directly to the particular client. Rule 1.15(f)(1), MRPC.
Lawyers maintaining pooled trust accounts must maintain the books and records discussed below.1
III. Defining Books and Records
A lawyer cannot fully account for client funds without documentation of all transactions involving such funds. Proper documentation both prevents mistakes and allows a lawyer to correct errors that are discovered later. Good recordkeeping also helps to prevent and to resolve disputes with clients. Failure to keep books and records may potentially result in professional discipline, which may be public in severe cases. See In re Reiter, 567 N.W.2d 699 (Minn. 1997).
A. Records.
Records refer to documents created in the ordinary course of operating a bank account or handling other client property. They include bank statements, canceled checks or copies of canceled checks (if they are provided with the bank statements), deposit slips, bank interest reports, service charge notices, and notices of interest payments to the IOLTA program. See Appendix 1 to the MRPC, I(6).
Banks routinely provide most of these documents to the lawyer. Where a bank does not return with the bank statements either the original or copies of
1 Lawyers maintaining a separate trust account for an individual client need only maintain a check register and reconcile that check register to the monthly bank statements.
Other People’s Money Page 2

canceled checks, a lawyer need not make or retain copies of checks drawn on the trust account. Where a bank does not routinely return original deposit slips, however, a lawyer must create and retain duplicate deposit slips (usually using a book with carbon copies) because the lawyer needs a record of the clients on whose behalf funds were deposited. Each deposit entry must include an identification of the client on whose behalf the funds are deposited. (Lawyers making electronic deposits into their trust account, pursuant to the 21st Century Act or otherwise, must request and retain image statements from their bank for each such deposit.) Similarly, a lawyer must identify the client on the memo line of each trust account check issued. It is improper for a lawyer to make ATM or other cash withdrawals from a trust account or to retain cash from a trust account deposit. It is also improper for a lawyer to issue trust account checks in payment of the lawyer’s own personal or business expenses. Every withdrawal from a trust account must be signed by at least one lawyer associated with the firm. See Rule 1.15(j), MRPC.
Appendix 1 permits lawyers to withdraw funds from their trust account by bank wire, electronic or telephone transfer so long as the lawyer creates and signs a written memorandum authorizing the transaction.
Cash Payments. When a lawyer receives payment of a retainer or fees from a client in cash, the lawyer must create and keep a copy of a receipt signed by both the lawyer and the client. The receipt must identify the client from whom the cash payment was received. This rule was imposed to reduce the disputes over the amounts of cash payments to lawyers.
Other records lawyers must maintain include receipts or other statements of non-cash property held for clients (e.g., personal property from a divorce, an abstract from a real estate transaction, stock or bond certificates discovered in a decedent’s safe deposit box, etc.). Lawyers must also have records identifying the trust accounts they maintain. See Appendix 1 to the MRPC, I(1) and (6).
B. Books.
Books refer to the ongoing journals and ledgers a lawyer maintains on a daily basis to keep track of client funds. Lawyers must contemporaneously maintain all of the following books:
1. Check Register.
Just like a personal checking account, a lawyer trust account must have a check register. It tracks all the checks written from the account and all the deposits to the account, in chronological order. This provides a running balance of how much money would be in the account on a given day if all the checks written had cleared. This balance is very important; as part of the monthly reconciliation process (see Appendix 1 to the
Other People’s Money Page 3

MRPC, I(5)) it is compared to the balances from the other books and to the bank statement to make sure the proper funds are in the trust account.
Each entry in the register, whether a check, transfer or deposit, must include the date, the client on whose behalf the transaction occurred, the amount, the purpose (e.g., retainer, fees, costs, payment to medical provider, etc.) and (for checks) the payee and the check number. See Appendix 1 to the MRPC, I(2).
2. Receipts and Disbursements Journals (optional).
As of September 1998, cash receipts and disbursements journals are no longer required. Instead, lawyers are required to maintain detailed check registers and subsidiary ledgers.
In addition to a check register, lawyers may also keep separate lists (“journals”) for the money they receive and for the money they pay out. At month-end, these journals provide the lawyer with separate totals of deposits and withdrawals, which can then be compared with the register and the bank statement. This is another way to check that no mistakes have been made during the month and that disbursements have not exceeded the available trust funds.
3. Client Subsidiary Ledgers.
For each client, a lawyer must keep a separate page on which all the trust account deposits and disbursements for that client are recorded. Each entry must have the same details as the entries in the check register: date, amount, payee, check number, and purpose. A subsidiary ledger must also reflect a running balance. By its nature, a client subsidiary ledger should never have a negative balance; a lawyer should never disburse funds on behalf of a client unless there are sufficient funds for that client to cover the check. When the representation ends, the subsidiary ledger balance should be zero. See Appendix 1 to the MRPC, I(3)(a).
A lawyer must maintain a subsidiary ledger for the nominal funds the lawyer has in the account to cover bank fees. See Rule 1.15(a)(1), MRPC. The amount of a lawyer’s own funds in a trust account may not exceed $200.
Failing to keep client subsidiary ledgers is one of the most common causes of errors —including inadvertent shortages of client funds. It is virtually impossible to reconcile a lawyer’s own records with the bank statement and safeguard clients’ funds without subsidiary ledgers. This is true regardless of how frequently the trust account is used or whether the
Other People’s Money Page 4

trust account use is limited to real estate closings, personal injury settlements, or other “routine” transactions.
4. Monthly Trial Balance and Reconciliation Reports.
At the end of each banking month, lawyers need to compare the balances of their various books to catch mistakes or oversights that might lead to shortages or commingling. Finding the balances for the register and the journals (if journals are being maintained) is easy enough: just take whatever balance is recorded for the banking month-end date. To find the balance for the client subsidiary ledgers, a lawyer must create a “trial balance report.” A trial balance report is a listing of the clients with funds in the trust account as of the banking month-end date and the balance for each such client. All the individual client balances are added together to arrive at the subsidiary ledger trial balance. See Appendix 1 to the MRPC, I(4).
This trial balance report should be identical to the check register balance for the same date and to the balance of the cash receipts and disbursements journal (if these optional journals are being maintained). They should be identical because the same information should have been entered in all three places.
As noted earlier, no client subsidiary ledger balance should ever be negative. If, however, through error or oversight, a negative client balance occurs and has not been rectified when the trial balance is computed, that balance should be viewed as zero in computing the trial balance. A negative client balance may not serve to reduce the trial balance total.
The month-end balances from a lawyer’s books often will not match the month-end balance on the bank statement because there may be checks that have been written but not yet cleared. There may even be deposits made before the end of the month and noted in a lawyer’s records, but which missed the cut-off for the bank statement. After accounting for these items, however, the book balances should be identical to the bank statement balance. See Appendix 1 to the MRPC, I(5).
If the book balances cannot be reconciled with the bank statement balance, then either a mistake has been made in entering information in the books, or the trust account has a surplus or a shortage. These problems must be corrected immediately.
A lawyer must separately maintain the books detailed above for each of their pooled trust accounts.
Other People’s Money Page 5

A lawyer must preserve trust account books and records for “at least six years following the end of the taxable year to which they relate.” See Rule 1.15(h), MRPC.
C. Manual vs. Computerized Record Keeping.
Lawyers may note that maintaining books and records by hand requires that the lawyer or an assistant record each trust account transaction several times: on the check or deposit itself, in the register, in the subsidiary ledger, and in a receipts or disbursements journal (if journals are being maintained). By using computer software programs designed for checking accounts, lawyers only need to enter information on the instrument itself and in the computerized register; the software will automatically create the ledgers and journals. Some programs will even print checks. At the Director’s Office’s website (http://lprb.mncourts.gov) are guides for the use of some common computer software to maintain the required trust account books.
Note that the electronic trust account check registers, trial balance reports and reconciliation reports must be either printed or saved in a PDF form to a separate electronic device on a monthly basis.
IV. Handling Trust Account Transactions
Maria Abogada has decided to open a solo practice after passing the bar in October. She opens a trust account with $100 of her own funds to cover check printing costs and other charges that may arise. (Although lawyers are generally prohibited from keeping their own funds in their trust accounts, the rules do allow a deposit of a nominal amount of funds, $200 or less, to cover bank charges and fees. See Rule 1.15(a)(1), MRPC.) She writes the deposit in her check register and creates a subsidiary ledger page for “Law Firm Funds” and writes the deposit there as well.

Client name: Description of representation:
File or case number:

Law Firm Funds N/A

Date 1/2/xx

Payee & Purpose Deposit

Check No.

Funds Paid

Funds Received
$ 100

Balance $ 100

In January, Abogada settles a personal injury action for client Bates, receives a retainer and starts a lawsuit for new client Computer Circuit Corp. (CCC), and receives payment from a dissolution client, Davis, comprised of past due fees, an advance on future fees and costs that she has already paid. She records the transactions in her check register and ledgers as follows:

Other People’s Money Page 6

1/2/xx 1/4/xx 1/7/xx 1/9/xx 1/9/xx 1/9/xx 1/9/xx 1/9/xx 1/15/xx 1/22/xx 1/25/xx 1/25/xx 1/31/xx

Abogada Trust Account Check Register Page 1

Payee or Deposit Source
Law Firm funds deposit Settlement received Retainer received Court Reporters, Inc. Metro Wide Courier, Inc. Dr. Bailey Simon Bates Maria Abogada Ramsey Cnty Dist. Ct., filing fee Retainer received Maria Abogada, cost. reimbursed Maria Abogada, atty fees Maria Abogada, atty fees

Firm Bates CCC Bates Bates Bates Bates Bates CCC Davis Davis Davis CCC

Check No.
1001 1002 1003 1004 1005 1006
1007 1008 1009

Funds Paid
$ 400 60
340 9,200 5,000
152 1,770 2,075

Funds Received $ 100
15,000 5,000

$ 100 15,100 20,100 19,700 19,640 19,300 10,100
5,100 4,968 7,468 7,316 5,546 3,471

Client Subsidiary Ledger

Client name: Description of representation: File or case number:

Simon Bates Car accident v. American States Ins. 97-10

Date Payee & Purpose

1/9/xx 1/9/xx
1/9/xx 1/9/xx

Settlement Received
Court Reporters, Inc., costs Metro Wide Courier, Inc., costs
Dr. Bailey, expert witness fee
Simon Bates, settlement dist. Maria Abogada, atty fees

Check No.
1001 1002 1003 1004 1005

Funds Paid
$ 400 60 340
9,200 5,000

Funds Received

$15,000 14,600 14,540 14,200 5,000 0

Client Subsidiary Ledger

Client name: Description of representation: File or case number:

Computer Circuits Corp. (CCC) Patent infringement litigation 98-2

1/7/xx 1/15/xx 1/31/xx

Payee & Purpose
Retainer Received Ramsey Cnty Dist. Ct., filing fee Maria Abogada, atty fees

Check No.
1006 1009

Funds Paid
$ 132 2,075

Funds Received

$5,000 4,868 2,793

Other People’s Money Page 7

Client Subsidiary Ledger

Client name:
Description of representation: File or case number:

Angela Davis
Davis v. Davis dissolution 98-3

1/22/xx 1/25/xx 1/25/xx

Payee & Purpose
Funds Received Maria Abogada, costs reimb. Maria Abogada, atty fees

Check No.
1007 1008

Funds Paid
$ 152 1,770

Funds Received

$2,500 2,348 578

Note that Abogada issued herself separate checks for her costs and attorney fees in the Davis matter; she also could have issued one check and annotated her register and subsidiary ledger accordingly. Similarly, if she knew on January 25 that she had also earned fees and billed the client in the CCC matter, she could have written one check for all three transactions and annotated each ledger with the amount of the total check and the amount attributable to each client.
Handling IOLTA interest
Trust account interest activity must be entered into the check register and posted to a separate “IOLTA Interest” subsidiary ledger, especially where the interest is credited in one month and debited the next month so that the interest debits and credits are not offsetting. Even where interest is credited and debited within the same month, banks occasionally make errors in crediting and debiting IOLTA interest. Maintaining a separate ledger for IOLTA interest transactions facilitates detection of these errors and proper reconciliation of the trust account. The IOLTA transactions should be entered into the check register and “IOLTA Interest” ledger from the monthly bank statement prior to reconciling the account.

Client Subsidiary Ledger

Client Name: Description of representation: File or case number:

IOLTA Interest

Date 1/31/xx

Payee & Purpose Interest Credit (Deposit)

Check No.

Funds Paid

Funds Received $19.19

Balance $19.19

Other People’s Money Page 8

V. Reconciling the Trust Account
Trust account records should be reconciled monthly after receiving the bank statement. Before reconciling the account, the Director’s Office recommends that paperless transactions appearing on the statement (e.g., IOLTA interest debits and credits, service charges, wire transfer fees, check printing charges, stop payment fees, returned check fees) be recorded in the check register and posted to the appropriate ledgers.
The reconciliation for Abogada’s first month is fairly straightforward. The check register balance is simply the balance on January 31: $3,471 plus any paperless transactions added after reviewing the statement (i.e., $19.19 IOLTA interest). The trial balance of the subsidiary ledgers looks like this:

January 20xx Trial Balance

CCC Davis Firm IOLTA Interest Trial Balance

$ 0.00
$ 2,793.00 $ 578.00 $ 100.00 $ 19.19 $3,490.19

Notice that the Bates zero balance is included because funds for that client were held during the month, even though all client funds have been disbursed.

Other People’s Money Page 9

Preparing to load PDF file. please wait...

0 of 0
Other People’s Money