Commonly Asked Questions About Trust Accounts
Prepared by the Ethics Department of The Florida Bar
Q. I have recently opened an IOTA trust account and have been informed by the bank that there will be fees for checks and other fees associated with maintaining the account. The bank has declined to provide these services for free and has asked for a transfer from my operating account to cover these expenses. I am concerned about commingling my own funds with the clients’ funds, but I cannot think of any other way to pay for these expenses. Is it permissible to do what the bank has asked?
A. Yes. Rule 5-1.1 (a)(1), Rules Regulating The Florida Bar, states that “[a] lawyer may maintain funds belonging to the lawyer in the trust account in an amount no more than is reasonably sufficient to pay bank charges relating to the trust account.”
The deposit should be treated like an individual client account with a ledger, etc. Once the balance gets low, the attorney can deposit additional sums to maintain a sufficient amount to avoid using client funds to pay the bank fees.
Q. Is it permissible to charge a non-refundable retainer?
A. An attorney may charge a fee that is nonrefundable provided the client agrees in writing. Rule 4-1.5 (e) requires that a nonrefundable fee be confirmed in a writing that explains the nature and the amount of the nonrefundable fee.
Florida Ethics Opinion 93-2 states that a nonrefundable retainer is earned upon receipt and should therefore be deposited into an attorney’s general account. The opinion cautions that:
[T]he lawyer may later be obligated to refund part, or possibly all of it, if the legal services are not performed, in which case the fee may be found to be excessive, but the money is the lawyer’s upon receipt of it.
If, however, an attorney receives a prepaid fee or retainer as an advance then the funds must be deposited into the attorney’s trust account. Opinion 93-2 states:
On the other hand, the prepaid fee may be given to the attorney with the understanding that it is a deposit securing a fee that is yet to be earned. Such money does not belong to the lawyer, and should be held in trust until it has been earned by performance of the agreed-upon services. The committee believes that there should exist a presumption that prepaid fees are an advance deposit against fees for work that is yet to be performed. Certainly, this is the assumption that the typical client would make. The attorney should bear the burden of rebutting this presumption.
Q. I have recently decided to start charging clients a flat rate for some of the legal services I provide. Some of the services will require a payment for costs. In order to keep things simple I wish to include the amount for costs in the flat rate that I charge. Do I have to place the funds in my trust account?
A. According to Florida Ethics Opinion 93-2 “advances for costs and expenses must be deposited in the attorney’s trust account and withdrawn and applied against such expenses as they are incurred and paid.”
The opinion states that a “flat fee’ which includes costs:
….should be first deposited in the trust account. Then that portion, if any, of the payment that is considered an earned fee upon receipt should promptly be withdrawn from the trust account. Any portion that does not constitute earned fees must remain in the trust account.
The fact that costs are to be paid out of this “flat fee” complicates matters somewhat. As required by Rules 4-1.15(a) and 5-1.1(a), any advance of costs is to be held in trust until used to pay those costs. Therefore, the attorney must make a good faith estimate of the amount of costs to be incurred and must hold that amount in the trust account. Failure to hold the estimated costs in the trust account would result in the attorney paying the costs out of his or her own funds, which would violate Rule 4-1.8(e) (lawyer may not provide financial assistance to client, except to advance costs and expenses). Not holding the estimated costs in the trust account would also result in a commingling violation under Rule 4-1.15(a) when those funds, which should have been left in trust, are removed and commingled with the attorney’s own funds.
To summarize, a fee paid to the firm that is understood to be earned upon receipt must be placed in the operating account. If money for costs is part of a prepaid lump sum that includes a fee that is deemed earned when paid, then the entire amount must be placed in trust and the earned fee portion promptly withdrawn. If money for costs is part of a prepaid lump sum that includes an advance deposit against fees to be drawn as the services are performed, then the entire amount must be deposited in the trust account, and the fees must be withdrawn within a reasonable amount of time after they are earned. The costs must be disbursed as they are incurred.
Q. What should an attorney do with client funds presently held in the attorney’s trust account because attempts to contact the former client have been unsuccessful?
A. Proper handling of funds held in trust for a missing owner is addressed in Rule 5-1.1(i) of the Rules Regulating The Florida Bar. This rule provides:
(i)Unidentifiable Trust Fund Accumulations and Trust Funds Held for Missing Owners. When an attorney’s trust account contains an unidentifiable accumulation of trust funds or property, or trust funds or property held for missing owners, such funds or property shall be so designated. Diligent search and inquiry shall then be made by the attorney to determine the beneficial owner of any unidentifiable accumulation or the address of any missing owner. If the beneficial owner of an unidentified accumulation is determined, the funds shall be properly identified as the lawyer’s trust property. If a missing beneficial owner is located, the trust funds or property shall be paid over or delivered to the beneficial owner if the owner is then entitled to receive the same. Trust funds and property that remain unidentifiable and funds or property that are held for missing owners after being designated as such shall, after diligent search and inquiry fail to identify the beneficial owner or owner’s address, be disposed of as provided in applicable Florida law.
This rule requires that the funds in question be designated on the attorney’s trust account records as being held for a missing owner, that the attorney make a diligent attempt to contact the clients, and that, if the attorney is unable to contact the clients, the funds be disposed of pursuant to applicable law. For information regarding reporting unclaimed funds contact The Florida Department of Financial Services Bureau of Unclaimed Property at (850) 413-5555.
Q. Must all client funds be held in an IOTA account?
A. An attorney should only place funds that are either nominal or short-term into an IOTA account. Rule 5-1.1 (g)(2), Rules Regulating The Florida Bar states:
(2) Required Participation. All nominal or short-term funds belonging to clients or third persons that are placed in trust with any member of The Florida Bar practicing law from an office or other business location within the state of Florida shall be deposited into one or more IOTA accounts, unless the funds may earn income for the client or third person in excess of the costs incurred to secure the income, except as provided elsewhere in this chapter. Only trust funds that are nominal or short-term shall be deposited into an IOTA account. The member shall certify annually, in writing, that the member is in compliance with, or is exempt from, the provisions of this rule.
(3) Determination of Nominal or Short-Term Funds. The lawyer shall exercise good faith judgment in determining upon receipt whether the funds of a client or third person are nominal or short term. In the exercise of this good faith judgment, the lawyer shall consider such factors as:
(A) the amount of a client’s or third person’s funds to be held by the lawyer or law firm;
(B) the period of time such funds are expected to be held;
(C) the likelihood of delay in the relevant transaction(s) or proceeding(s);
(D) the cost to the lawyer or law firm of establishing and maintaining an interest-bearing account or other appropriate investment for the benefit of the client or third person; and
(E) minimum balance requirements and/or service charges or fees imposed by the eligible institution.
The determination of whether a client’s or third person’s funds are nominal or short term shall rest in the sound judgment of the lawyer or law firm. No lawyer shall be charged with ethical impropriety or other breach of professional conduct based on the exercise of such good faith judgment.
If an attorney determines that the funds are not nominal or short-term, then the funds must be deposited into an interest-bearing account and all interest must go to the benefit of the client.
Q. May I keep the copies of cancelled trust account checks?
A. Rule 5-1.2(b)(3), Rules Regulating The Florida Bar, allows attorneys to maintain copies of canceled checks rather than the originals. Most banks now return copies of canceled checks in the monthly bank statements, but generally provide copies of only the front side of the checks. To comply with the requirement, the copy must include both the front and the back of the check.
To maintain a copy of the front-side only does not satisfy this requirement because front-side only copies exclude endorsements and bank clearing stamps that are placed on the back of the checks.
Endorsements and bank clearing stamps are important portions of the check that establish that the proper payee actually received the intended distribution of trust account funds. Attorneys should request that their bank provide a copy of both sides of their trust account canceled checks in order to meet the minimum trust account record requirements.
If you have questions about the topics discussed in this article or any other ethics issues, please call The Florida Bar Ethics Hotline at (800) 235-8619 or (850) 561-5780.
Ethics Opinions issued by the Professional Ethics Committee are available online through the Bar’s website at www.floridabar.org.