What Are California Attorney Trust Accounts?
Client trust accounts are used by many California attorneys to hold client funds related to matters for which the attorney has been retained. Trust accounts are sometimes called IOLTA accounts (see below) and may also be referred to as client trust funds or simply trust accounts. Like other financial institutions, each bank is free to collect its own terms and conditions for the use of its accounts, including bank fees, checking limits, and use of debit cards in connection with the use of client trust accounts. The basic terms and conditions are not specifically governed by California law although there are some laws that do govern the conduct of lawyers who hold client funds as well as rules governing minimum interest that must be paid and remitted to the State Bar of California in certain circumstances.
According to Business and Professions Code section 6211, "Every attorney receiving or disbursing any money as a fiduciary shall maintain and operate an account in the name of the client or in the name of the client and the attorney jointly." This is the general rule regarding client trust accounts — they must be named for the client (or the client and the lawyer jointly) unless one of the exceptions discussed below applies.
A client trust account is to be used only for client funds , except for the following:
• Advance fees.
• Costs and expenses the lawyer has incurred directly for the client and paid out of the attorney’s operating funds.
• Costs and expenses for which the lawyer has obtained prior written consent from the client to pay directly out of the client trust account.
• Funds which the lawyer may be entitled to apply to his/her fees upon either (i) a contract between the lawyer and the client which allows such application or (ii) after giving the client appropriate notice and a reasonable opportunity to object.
• Clients’ funds which may be withdrawn only on an order of court.
• Funds belonging to a third party where a dispute arises as to the right to such funds.
• Funds in which both the attorney and a third party have claims against them, until their respective claims have been resolved to the satisfaction of the Bank. (State Bar of California Trust Accounting Primer, January 1995.)
Client trust accounts can also be set up as Interest on Lawyer Trust Accounts (IOLTA) accounts. An IOLTA is an interest-bearing account into which lawyers deposit client funds that are nominal in amount ($10,000 or less and held for a short time, typically less than one month) or held on a pooled basis for more than one client for which the interest earned would be negligible. Clients’ funds deposited into IOLTA accounts are not eligible to earn interest for the benefits of on-going legal services provided to low income Californians, and these IOLTA funds are routinely remitted to the State Bar of California — at least quarterly — to be used in providing access to justice programs and civil legal services for low-income Californians. See IOLTCA.org (the IOLTA program website).
California’s Key Rules Relating to Attorney Trust Accounts
Attorneys in California must comply with specific rules when it comes to managing their trust accounts, with a key focus on the management of client and third-party funds. The State Bar of California requires its licensees to adhere to 20/20 (Formerly Rule of Professional Conduct 4-100) and the California Business and Professions Code Section 6211. Failure to follow these legal guidelines can lead to disciplinary action, including disbarment and civil liability.
20/20 highlights two essential requirements: record-keeping and reconciliation of all trust accounts. Attorneys in California have a year from the date of this rule’s enactment (July 1, 2015) to confirm that their record-keeping practices comply. Attorneys need to ensure that they are meeting all of the required record-keeping practices. Reconciliation of an attorney’s records is a vital part of complying with the record-keeping requirements of 20/20. California law specifies that attorneys must keep seven types of records regarding trust accounts: In Section 6211, California emphasizes the ethical and legal requirements of every attorney who receives and controls client or third-party funds in trust accounts, further explaining their obligations as fiduciaries. This includes an obligation to honor all requests for the withdrawal of a client’s personal funds upon the demand of the client as long as the funds do not exceed the allocated amount, and such demands ought to be honored without question.
Setting Up and Managing Your Attorney Trust Account
Like all California attorneys, you are required by statute to maintain client funds in a separate account. However, you don’t just open any old bank account and start using it to deposit client funds. Instead you must have a client trust account at a financial institution that is insured by the Federal Deposit Insurance Corporation (FDIC), or that has similar insurance.
When it comes to what should go into your client trust account, generally speaking, you may deposit only funds that belong to your clients. So, if a client pays you a fee for services or reimburses you for advanced costs, that money belonging to the client should go in your attorney trust account. If a client pays you for a service you haven’t yet performed for them, that money should also go in your attorney trust account for safekeeping until you perform the service. Money that you need to spend in connection with a case you are handling at the instruction of a client can go into your attorney trust account, too.
Although clients’ funds should go into an attorney trust account, not all funds should go there. Unearned fees should go there, but earned fees belong in your operating account. Charges clients pay you that advance costs also go in your operating account rather than your trust account. A deposit you make on behalf of a client should generally be placed in your trust account because it belongs to the client until the bank pays it out.
There are specific record-keeping rules for your trust account. For example, trust accounting records must demonstrate the proper handling of client funds, and keep a separate list of clients and matters for which you hold such funds. Any time you deposit a client’s money into your trust account, you must write a receipt acknowledging your receipt of that money. You must promptly notify the client when you receive money for them, if it is received under circumstances indicating it is not rightful property of yours. When a client requests a refund of money held in your trust account, you should promptly refund it unless you have a right to offset other obligations the client owes to you for legal services rendered or costs advanced.
Within the records you keep for every client, you should include details pertaining to the matter, the funds received, and the purpose for which the funds were received.
Common Mistakes and Compliance Issues
One of the key mistakes lawyers make is failing to trust account all advanced attorney fees and costs in criminal cases. Many attorneys fail to understand that even a $100 advanced fee in a criminal case is not considered earned upon receipt pursuant to California Business and Professions Code Section 6140.5. This is true even if the advanced fee is to cover work to be done only after trial has been set. The reason for that is that pursuant to the rule, attorneys have to write down their hourly rate to arrive at the "earned upon receipt" fee upon setup of the account. The account must reflect the entire retainer as an unearned deposit and must be disbursed properly as the attorney earns the money. If a $3,500 retainer was paid and only $1,000 was earned upon receipt, $2,500 must remain in the account until it is earned by the attorney’s labor. These funds cannot be transferred to the operating account to pay the earned portion of legal services, or the disbursement recipient’s account, without specific written consent. In criminal law, this is extremely hard to do. Obviously, some firms handle this properly, either by using a trust account or converting advanced amounts to earned fees immediately upon receipt. Most don’t. But the small mistakes listed here can be expensive, and they can cause adverse possession by clients upon a dissolution of the firm.
Consequences of Improperly Managed Trust Accounts
More than 1,000 California attorneys received disciplinary sanctions stemming from attorney-client trust account violations in the past 5 years, the largest single source of sanctions against attorneys. While breaches of fiduciary duties to clients generally lead to disbarment under California law, once again, money handling crimes lead the list of serious sanctions against attorneys in California. Imposition of discipline -whether serious, like disbarment, or less severe like suspension or censure – is governed by the Rules of the State Bar of California (primarily Rule 5.2), which set out what kind of conduct will trigger sanctions and the range of punishments. When it comes to trust mismanagement, the State Bar imposes severe penalties.
Misappropriation of client funds is seen as one of the most dishonest acts an attorney can commit. This is true both because attorneys are in a fiduciary relationship with their clients and because lawyers are entrusted with large amounts of client money. (These clients include the trustees of non-profit organizations and public agencies.) The Under Management of these funds leads to disbarment under California law , usually without the option to petition for reinstatement. In some instances, attorneys may be barred even from practicing law in separate businesses. Any criminal convictions for mismanagement of client funds can also lead to a variety of sanctions, including sentencing enhancements under California Penal Code § 12022.6, which adds an additional 2, 3, or 4 years in state prison to the sentence for any felony for which there is a financial loss of more than $65,000.
In addition to disbarment, and other discipline, the State Bar’s Client Security Fund ("CSF") pays restitution to victims of attorney theft of client funds up to $100,000 per claimant. In 2013 – 2014, the CSF paid out $1,487,986 to 228 claimants. In 2013 – 2014, the CSF approved restitution payments to 55 claimants in 2013-2014 totaling over $1.6 million. However, the CSF will not reimburse victims for loss of profits, interest, or consequential damages.
Tips for Attorneys to Follow
The following are best practices for attorneys in California to adopt for trust account management:
- Only use separate bank accounts for client deposits. Trust accounts must be segregated from attorneys’ business and personal accounts.
- Maintain a separate and dedicated "Interest-Bearing Client Trust Account" ("IBCTA") to hold client funds in the trust account that are likely to remain there, without a partial or total withdrawal, for more than 30 days or are of a gross value of $1,000 or more and deducting all interest earned on the account, even if that interest is less than the service charges, fees and account maintenance charges, shall be paid to the State Bar of California Lawyers’ Fund for Client Protection. Interest must not be paid to attorneys.
- Maintain trust funds in federally insured banks or savings and loan associations located in California.
- Do not deposit personal fees, costs, or advances by the client into a client trust account; do not advance personal fees of the attorney into a client trust account.
- Avoid third-party checks unless they are made out to the firm and made out to the client’s order, or unless the attorney’s interests have been protected in a satisfaction of the lien in writing by the payee of the check. A third-party check is a check written by someone other than the attorney or the client; it can be written to the order of the attorney or the named payee of the check.
- Do not cash client checks at the bank.
- The attorney is responsible for all trust funds and the management of a trust account, and for violations of any rules of conduct, even if the funds were deposited or handled by the attorney’s office staff including the bookkeeper. See Rule 3-110(G)(responsibility for another lawyer’s violation).
- At all times, attorneys using positive pay should have a voided check available for a stop payment and to verify that the correct amount has been deducted. Staff can verify on-line that the amount of the check deposit has been deducted from the trust account.
- Maintain a ledger to record all trust account transactions regarding each of the attorney’s clients.
- Always acquire client consent when deposits of personal funds are required or when a credit card receipt is going to be issued.
Where to Find More Information
When seeking more information regarding California Attorney’s Trust Account Rules , the following resources are available:
California State Bar website
Client Trust Fund Account Cheat Sheet
Client Trust Fund Account Frequently Asked Questions
Client Trust Fund Account Rule 4-100
FAQ on Client Trust Fund Accounts – This document was a part of Lawyers Mutual’s workshop training on Client Trust Fund Accounts and Trust Accounting. This FAQ document was created by the Office of General Counsel of the State Bar of California.
Trust Account FAQ’s – This document was a part of Lawyers Mutual new lawyer training and FAQ document for both associates and partners/founders on the topic.
California Trust Account Handbook for Lawyers – Written by the California State Bar Standing Committee on Professional Responsibility and Conduct (COPRAC).