We all know that we need a trust account to practice law. But did you know that not all trust accounts are created equal? And that you need at least two of them? Did you also know that even the smallest accounting error can land you in hot water with the State Bar? This article examines these and other important issues related to trust accounts.
A lawyer must deposit money belonging to a client in a trust account. See Nevada RPC 1.15(a). Although simple in the abstract, the rule is a bit more nuanced in its application. Specifically, if the money is either nominal in amount or if you intend to hold it for only a short period of time, then you must deposit the money in an “Interest On Lawyer Trust Account” a/k/a IOLTA account; otherwise, the money must be deposited in a regular, non-IOLTA account.[i] Why? Because the Nevada Supreme Court says so. See SCR 78.5(1)(a), (9); SCR 217. That, and because interest earned in your IOLTA account is pooled with interest earned in other lawyers’ IOLTA accounts and then earmarked to benefit the poor, victims of domestic violence, and children in need of assistance in juvenile court. See SCR 216(1)(a). This is unlike interest earned in a non-IOLTA account, which belongs to the client. See SCR 219. You do not need client approval to deposit money in an IOLTA account, nor does it constitute a “regulatory taking” for the Nevada Supreme Court to require you to deposit your client’s money in an IOLTA account. See Brown v. Legal Found. of Wash., 538 U.S. 216, 240-41 (2003).
Now, be mindful of two steps when opening not one, but two trust accounts: an IOLTA account and a non-IOLTA account.[ii] First, not all financial institutions are approved by the State Bar to manage either or both types of accounts. And that matters because the State Bar has to know where you keep money belonging to your clients.[iii] In other words, you will not be able to keep secret from the State Bar where you hold money in trust for clients—those annual renewal forms that you prepare and submit to the State Bar require you to disclose where you maintain your trust accounts. See SCR 78.5(5)(a); SCR 217(4)(b).
Second, each trust account needs to be specifically designated as such when it is opened. You cannot get away with having checking and savings accounts and, in your mind, treat the checking account as your operating account and the savings account as your trust account.[iv] Why? Consider the following hypothetical: You get sued for non-payment of rent for your office lease. A judgment is entered against you. While you are trying to satisfy the judgment, your landlord proceeds with execution, including freezing all of your bank accounts. If that happens, and the money in your self-described trust account, which the financial institution understands to be a normal savings account, is drained, you now owe money to numerous others (i.e., your clients, and possibly third parties) and will be defending an action brought against you by the State Bar for violating the Rules of Professional Conduct.[v] Do not let that happen.
Once you have opened the accounts, be meticulous about your recordkeeping. Use a good accounting software to track not only credits and debits for particular client matters,[vi] but all money going in and out of the accounts. At any point in time, you should be able to render a full accounting of the accounts, down to the last penny. If not, there is a problem.
Next, be vigilant when it comes to handling money in your trust accounts. Even a minor overdraft that is promptly remedied, thereby resulting in no harm to a client, can still earn you a letter of reprimand.[vii] The State Bar treats trust account violations as strict liability offenses—the issue at formal hearings concerns the severity of the discipline to be imposed, not the fact of discipline.[viii] Now, do not take this to mean that you should hire a bookkeeper and then delegate authority over your trust accounts to the bookkeeper. As the lawyer, the buck stops with you. See Nevada RPC 5.1(a); Nevada RPC 5.3(a). And there is no “head in the sand” defense when dealing with the State Bar.
Money, once earned, must be promptly withdrawn from your trust account. The money cannot stay in there until it is convenient for you to withdraw it. Additionally, you may not pay business expenses, such as payroll, taxes, and utilities, using funds in your trust account, even if those funds have been earned by you but not yet withdrawn. There is a limited exception to this rule: You may keep in your trust account funds sufficient to cover monthly service charges imposed by your financial institution.[ix] See Nevada RPC 1.15(b). No more; no less.
The same is true about disbursing money to your client and, if applicable, third parties who have a valid interest in the money.[x] In fact, if you know that your client has assigned to a third party an interest in money that you obtained for the client, you must promptly notify the third party once the money is received and, upon request, render a full accounting. See Nevada RPC 1.15(d). If a dispute arises over how to disburse the money that you are unable to informally resolve, you must take steps to try to resolve it, such as by recommending arbitration or initiating an interpleader. See Nevada RPC 1.15(e). Recent unpublished Orders issued by the Nevada Supreme Court demonstrate that the State Bar will pursue lawyers who unreasonably delay disbursing money held in trust to third parties, even if it appears that the clients did not suffer any harm.
Keep copies of all records related to your trust accounts. Do not rely on your financial institution to be able to reproduce copies of deposit slips, checks, and bank statements upon request in the future. Such accounting records, together with ledgers, must be preserved for a period of seven years following the conclusion of a matter. See Nevada RPC 1.15(a).
Trust accounts are an important aspect of the practice of law. By being proactive and conscientious about your duties and responsibilities related to trust accounts, you can avoid the pain and suffering associated with client disputes and disciplinary proceedings.
If you have any questions about this article, please call or email Joshua P. Gilmore at 702-562-8820 or [email protected]. Additional resources can be found at www.baileykennedy.com/category/articles/
[i] How do you know when money qualifies as being “nominal in amount;” and what constitutes a “short period of time”? There are no easy answers to those questions. But, as long as you think about where the money should go when it is initially deposited, you are immune from disciplinary action if it later turns out that the money should have been deposited in an IOLTA account as opposed to a non-IOLTA account (or vice versa). See SCR 221.
[ii] Unless you are dealing with large amounts of money, it ends there because you may hold money belonging to multiple clients in the same trust account.
[iii] As an aside, not only can the State Bar ask you to make your trust account records available for inspection upon request, see SCR 78.5(1)(b), the State Bar can subpoena those records during a disciplinary investigation. See Agwara v. State Bar of Nev., 133 Nev., Adv. Op. 96 (2017). With that in mind, when responding to a grievance received from the State Bar, although you may fight about disclosing certain portions of your file, do not fight about disclosing your accounting records.
[iv] Be sure to decline an ATM card for your trust account, if one is offered.
[v] The charge will not be limited to Nevada RPC 1.15—the State Bar will invariably add a Nevada RPC 1.1 charge, for failing to know that you needed to have a specifically identifiable trust account; a Nevada RPC 1.4 charge, for failing to communicate with your clients regarding how money was being held for their benefit; and a Nevada RPC 8.4(a) charge, for violating Nevada RPC 1.1, 1.4, and 1.15. Needless to say, the more rules that you violate, the greater the discipline that is likely to be imposed.
[vi] Along those same lines, avoid writing checks made payable to “cash.” All else being equal, you want to be able to determine, from the check itself, to whom it was issued and in connection with what matter it was issued.
[vii] The State Bar will hear about the overdraft, even if the check is honored despite insufficient funds in the account. See SCR 78.5(2). And once the State Bar opens an investigation (and it will), you will be producing far more than just the accounting records related to the matter in which the overdraft occurred.
[viii] Leniency is in short supply when it comes to mistakes handling a client’s money.
[ix] Do not shift the monthly charges for maintaining a trust account on to your clients. Such costs constitute general office overhead that is subsumed within your fee.
[x] Of course, you must wait to disburse the money until after it has cleared your trust account.