Podcast: What Every Family Lawyer Should Know About Trust Accounts

Virtually every lawyer is required to maintain a trust account, but one mistake could get you disbarred. Family lawyer Claude Ducloux – LawPay’s Director of Education, Ethics, and Compliance – is here to clear up the confusion surrounding trust accounts. (Press the green “Play” button, below, to listen to the podcast.)

Maintaining a client trust account is something virtually every lawyer is required to do, but it’s also a topic that generates a lot of confusion and uncertainty. My name is Diana Shepherd, and I’m the Editorial Director of Family Lawyer Magazine. My guest today is family lawyer Claude Ducloux, LawPay’s Director of Education, Ethics, and Compliance. Claude is here to talk about “What Every Family Lawyer Should Know About Trust Accounts”. Let’s dive right in.

Why are trust accounts so important? And how do family lawyers use them?

Claude Ducloux: That’s a great question. Apparently, trust accounts are not being taught the way they used to be in law school, so let’s take a few seconds to talk about why they are so important. As a lawyer, you have a fiduciary duty to your client. You have to note and you have to account for anything that comes into your possession – whether that’s property, money, or documents. Very often in a family law practice, the most important thing that comes into your possession is money – and all of the state bars in this country have regulations on what a lawyer must do to care for that money. As to the accounts themselves, a lot of times we call them either IOLTA (which stands for Interest on Lawyer Trust Accounts), or in some states, we call them IOTA accounts (Interest on Trust Accounts), but every state will have their regulations that lawyers need to follow.

Claude, what goes into a trust account?

There are only really two things, Diana, to go into a trust account. Those are your client’s money that is being placed as a pre-paid fee, and money that is being held by you for some sort of closing or distribution, or an escrow for an event or contract, or costs. Let me also mention that typically, you have a trust account for short term events, because the interest does not accrue to the benefit of the client. Those are called qualified funds. Non-qualified funds, generally speaking in many states, are those that you might take for [a longer time, perhaps] to hold for a bond. Let’s say you’re a criminal lawyer, and the courts going to allow you to hold a $20,000 bond. Typically, you wouldn’t put that into your attorney trust account, you would start a new account – an interest-bearing account – for that. [For] most of the funds – 99% of the funds – that are going to come into your possession, that there is some interest credit which otherwise would be given to the client have to stay in a trust account. But remember, it’s simply two things [that go into the trust account], and that’s what lawyers find confusing. It’s only client funds that you haven’t earned yet, and client funds that are being held in escrow for an event, or contract, or costs.

So now that we know what goes into a trust account, what comes out of a trust account – and when?

Let’s talk first about what doesn’t belong in there before we talk about how you [take money out]. When you put money in, you always have to have some sort of notation, whether you keep an actual bound book (by that I mean, do something in ink and writing) or you can do it digitally in certain financial platforms. But you always have to have a notation – for example, “On July 2, I took $5,000 belonging to client Bob Smith” – so that that’s in there as a permanent notation. Then you can show how you took that money out. 

What doesn’t belong in [a trust account] is your money. You don’t put any of your own money – with the very small exception of if you’re in a state that charges you banking fees, and you get bank charges $4 and 30 cents a month, you are allowed to cover that by putting in your own money. But once you earn that money of a fee, take it out, you don’t pay your bills directly out of a trust account. When you earn that money, take it out, and transfer it to your operating account. The other thing that doesn’t belong in there are what they call non-refundable retainers. That can be in two forms, that could be a flat fee, which somebody says I agree to do your wills for you and your wife for $500. That’s considered a flat fee and a non-refundable retainer. However, let me put an asterisk on that: there are several states now, and I think one of them is California, that says the better policy, even if you’re taking a large flat fee is to keep it in your trust account and “stage it out” with billing, saying “Okay, I put that 5,000 [into trust] even though I agree I’m going to do the whole case for 5,000. Now that’s causing a lot of concern and confusion. However, you can get around that [requirement] in every single state that I know of by having an agreement with the client that you don’t have to keep that [flat fee in trust], that you may keep it as a flat fee. Generally speaking, though, flat fees don’t go into a trust account, except if you’re in a state where the regulations require you to keep unearned fees, even if it’s a flat fee, in your trust account…. unless you have a specific agreement that you don’t have to do that with your client.

What is the correct procedure for taking money out of a trust account?

We talked about putting money in: have that deposit slip, have that notation in the banking of who put that money in there and when. To take it out, again, you need to have a written and either writing or digital if you’re on one of those financial platforms that allows you to do it digitally. But you have a notation. Now, I will just tell you what’s been my practice for almost 40 years. That’s because I’m sort of old fashioned. My CPA, who’s been telling me what to do for the last almost 40 years, is [old fashioned] too, and he wants me to write myself a check. I don’t have to write a check. I might have, for example, I’ll send out 40 bills a month, and there might be six of them where I am paying myself with funds in the attorney trust account. What I do is I write myself one check around the fifth or sixth of the month after I bill – I’m very, very, good at making sure my bills go out on the first business day of the month – and then around the fifth, after everyone’s received their bill, I write one check from my trust account to me. But on that check, there is a notation. Let’s say the check is for $3,400; it’ll say $400 on the Murphy case $250.60 on the Jones case – all of those adding up to the amount of money that I take out. That has served me very well in that I can say [to the client], “Yes: here is when I took your money out of that trust account in these four checks in the year 2013. Here’s your money in, and here are my four checks, that shows your little part of the check [taking it out].” I always have a written thing. Again, a modern lawyer might want to use a digital platform. That’s perfectly acceptable as long as there is a clear tracing going in, and a clear tracing going out. Because remember: if you take money out that you’re not allowed to, that is fraud and a breach of fiduciary duty. In many states, proof of that is automatic disbarment.

What about flat fees not yet earned? In or out of a trust account? 

Well, that depends on your state. But here’s how it would work in a state where all fees need to be placed in an IOLTA Trust account until earned.

Let’s say you’re doing a probate case – I know we’re talking about family law, but probate is easier to discuss. In a typical probate case, you might have three basic steps:

1. Get the will and other paperwork filed in the probate court,
2. Get the will admitted to probate,
3. Perform an inventory and appraisement.

You might say to your client, “I’m going to do that for $1,500, so give me your check, and I will put it in my trust account.  Then I will “stage” the payment of that fee to myself as follows: when I get your will filed and all the documents filed of record, I’ll pay myself my first $500 dollars. Second, when we prove up the will and get the judge to sign the order admitting the will to probate, I’ll have earned that second $500. Finally, when I file your inventory and appraisement and obtain an order of the court approving it, that’s my third $500.”

Even flat fees can be staged. Otherwise, you and the client can agree to simply bill against a deposit of pre-paid fees into your trust account. And that’s fine, too – but remember, you need to know what you’re doing if you’re going to charge a flat fee. Because once you’ve earned all that money, if it’s not enough to cover [the comparative cost of service at] your hourly rate, then you would still have to complete the tasks that you said you were going to complete for the flat fee.

To answer your question, generally speaking, you don’t have to put flat fees in a trust account unless your state law attorney regulations require you to do that. The work-around of that is to have a contract with the client saying they understand it’s going to be a flat fee, that you will do all of the work for that flat fee. And they agree that you don’t have to put it into a trust account while it’s being earned.

I suspect that conflicting claims to money held in trust is a thorny issue. How do you handle this situation?

You always remember that your client’s rights come first. It will always typically – 99% of the time – go into the lawyer’s trust account to be divided among the people who are entitled to it, which are principally the law firm and the client. But along the way, you may have to pay bills on behalf of that client. Typically, if you’re paying a doctor who is treating the client during a personal injury case, you send what’s commonly referred to as a “letter of protection”. That means once you sign that “Dear Dr. Mary Jones, if you’ll treat my client, Bob Smith, I promise to pay your bills out of the recovery we make,” then those have to be honored. Let me start at the top. If a third party makes a claim to the client funds, the answer depends on the nature of the claim: you have to analyze the basis of that third party’s claim. Is that the result of the contract? Is the result of a court order? Is it a result of a legitimate claim that the client has assigned to someone to whom the client owes money?

Let me give you an actual case. This is a real case that I use when I’m teaching this skill of resolving claims and trust accounts. Grace settles Archie’s big case and the settlement comes into her IOLTA trust account. Well, word has gotten out because Archie, the client, owes a lot of creditors money, and they start sending you letters saying, “Hey, I want my money.” Four of them come in, [including one from] the city hospital, which has a lien for services provided to the injured Archie. And so the question is, do you have to pay that? Let’s say that then Archie’s insurance company said, “We paid $10,000 of his bills directly, we want our money back under our subrogation rights of his insurance policy.” The third guy writes, and that’s Dr. Smith, and he said, “Well, I provided service,” but he does not have a letter of protection. And then Archie’s former employer says that Archie took money with him and he wants that money back, and he sends you a letter. So what does Grace the attorney need to honor? Here is the cut to the chase. That includes that statutory lien, or any judgment adjudicating ownership of the funds – that means a court order, or other court order, that says “You’ve all agreed that when you sell the condo in Palm Springs, you will pay the wife $130,000 out of those proceeds.” That would be a court order that the that the lawyer has to [honor]. Or if the client has signed a written assignment, or the insurance company’s right of subrogation, or you’re given a letter of protection. So in that case that I gave you, [you must honor the claims of] the hospital, the insurer, and Dr. Jones with his letter of protection – none of those other things can be honored.

Also, lawyers always have to be very, very careful when the client says – and this actually happened in a divorce case. It was one of those typical things where they were selling some of the real estate, and the lawyers agreed that when that real estate was sold, a certain amount of money would come to either that husband or wife. The wife, who was supposed to pay the husband, said to her lawyer, “Don’t worry, I can handle this. I’m your client, you give me all that money, and I’ll work it out with my ex-husband. I know I can get 20 grand off what I have to give him if I do that.” So, instead of honoring the court order, [the attorney] went ahead and did that. Did that lawyer act correctly? No! He had agreed to a court order – he should have honored that court order signed by the parties. He’ll end up being personally liable if that ex-spouse doesn’t pay. So be very careful in those situations.

Speaking of being very careful, what are some of the common trust accounting pitfalls that lawyers experience?

Let me give you some real-life examples. Again, in some states, the short answer is they take money out of it, or they distribute money to somebody who’s not entitled to it. You might as well be taking that money out of your own pocket when you’re distributing it to somebody who is not entitled to receive it because you have a fiduciary duty to account for all those funds, and you’re going to owe that money back. In some states, the state comes in does a random audit. One of those states is New Jersey. In a case that made the national news, a lawyer named Frank Catania – who is the ex-husband of the Real Wives of New Jersey star Dolores Catania – was disbarred in 2017 for unauthorized transfers from his IOLTA account. He got caught by that random bar audit and got disbarred for not having the right amount in his account. It’s a little more complicated, in that they actually gave him a little time to do it. And he wasn’t able to do it and ended up taking out more.

When I gave a national webinar on trust accounting about two weeks ago, and we had 900 people sign up to do that. Afterwards, I got about 40 emails, because I didn’t have enough time to answer everyone’s questions. One lawyer actually asked, “If I know I’m going to earn – let’s say it’s the month of April, the of middle of April, and I don’t have enough money to make my payroll – I know I’m going to earn  $3,000 out of this account, can I just go ahead and borrow against my trust account, knowing that I can reimburse the trust account by leaving that money in there?” No, you can’t! That’s not your money! You can’t borrow against it. You have a duty to account for every single penny of it.

Almost every state or every state, certainly, that I can think of – and I’m on the Supreme Court committee for our own disciplinary rules here in Texas – has a requirement that you account for who handles those trust accounts. In other words, if you give a paralegal or a legal assistant or someone access to it, and they embezzle from it, again, you have 100 cents on the dollar liability for that employee. That’s part of your disciplinary rules. In this case, Florida Bar vs Gilbert, was doing huge transactions, and he had a person working in his office that turned out to be an ex-felon [who] embezzled millions of dollars, and he’s liable for that. So be very careful.

Finally, there are people that just spend money. This is [another] New Jersey case, because they have those random audits. In In re Madden, a New Jersey lawyer – which I must say with incredibly bad judgment – was disbarred for paying $14,000 out of his trust account, believe it or not, for phone sex. The only thing they found was that he was $108 overdrawn, but that led them to discover this other thing. It’s a very, very serious matter and they consider any money that you’ve lost to be stealing. In most states, that’s called a disbarrable offense, “serious crime,” or that category [of offense] that entitles the bar to automatically take away your law license.

Is it OK to use credit cards to pay into a trust account?

It is if you use Law Pay. It’s one of the reasons that I’ve been so enamored with Law Pay as one of their earliest clients. And unlike other credit card solutions, when a client pays into your trust account, the client must go through you to get it back. It’s not like a typical credit card charge where the buyer can call and say, “I don’t like the shoes [I just bought], cancel my credit card charge.” All of the banks and everyone knows that if the [LawPay] credit card charge went into a lawyer trust account, they have to tell you, “Sorry, you’ve got to go through the lawyer.” Especially for family lawyers and lawyers with big practices, that makes me feel extremely secure, that when my client funds an advance fee payment retainer into my trust account, if there is some need for a refund, it must go through me and it just doesn’t go through the bank. I get most of my bills paid by credit cards, and I’m a big fan of that.

Claude, do you have any final tips for family lawyers regarding trust accounts?

Absolutely! First of all, always review your trust account regularly.  It does not take you 30 seconds, every two or three days, to make sure that everything looks good in your trust account. Make sure you limit access to your trust and checking accounts. Just like the need for cybersecurity, you need to review your accounts to ensure their financial safety.

Part of managing your office is to manage that trust account. So listen to these 10 tips:

1. Monitor your trust account often for any unauthorized or weird transactions; it does not take you 30 seconds a day to do that.
2. Don’t give the signature access to your trust account unless it’s absolutely necessary.
3. Make sure you have enough time to sign anything coming out of that trust account.
4. Have a system that could be part of your billing system, your financial system, that shows you at a glance, every client’s fund balance.
5. Make sure in your state that the institution you use is “eligible” or authorized by your bar rules. In some states, you must only use an eligible or authorized bank.
6. Always use separate passwords for your trust account.
7. Answer your clients’ questions very promptly about it.
8. Make sure every client knows that when money goes into that trust account, they don’t earn any interest for the client.
9. Give them the opportunity to put larger amounts into a separate account that’s interest-bearing.
10. Finally, the most important thing is to never ignore a request by your bar association or regulatory agency for information concerning that account.

My guest today has been family lawyer Claude Ducloux, Director of  Education, Ethics, and Compliance for LawPay. He has created an accredited CLE program for LawPay and gives monthly webinars to lawyers. Claude practices family law in Austin, Texas. Claude, thank you so much for taking the time out of your busy practice to share this information about Trust Accounting with our listeners!

Thank you so much for letting us participate!

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