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Understanding amendments to the trust accounting rules

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By Yen T. Cam
Assistant Ethics Counsel

For many lawyers, navigating the trust accounting rules can be daunting. Many in the profession are just not “numbers people,” and others, rightly so, are intimidated by the gravity of the task of safekeeping others’ money. On February 1, a few amendments to the trust accounting rules, which seek to clarify and simplify the requirements, went into effect.

Lawyers must hold all funds and property being held for clients or third persons in connection with representation separate from the lawyers’ own property. Client or third-person funds must be held in a trust account. Rule 5-1.1(a)(1) Rules Regulating The Florida Bar. The dilemma is in what kind of trust account should those properties be held?

Contrary to the belief of many Florida attorneys, not all funds held for clients or third persons should be held in an IOTA account. Many lawyers incorrectly assume they are required to use the IOTA account for all funds they hold in trust. However, trust funds should only be deposited into an IOTA account when they are so small or are expected to be held for such a short period of time that the cost to generate income for the client or third person exceeds the income earned.

Under IOTA, lawyers and law firms aggregate all of their nominal or short-term trust funds into one or more IOTA accounts. It is because such funds are aggregated that they can earn interest in excess of financial institution service charges and generate net interest. The net interest is sent by the financial institution to The Florida Bar Foundation, which uses the interest for the Florida Supreme Court approved purposes of funding legal aid for the poor, improvements in the administration of justice, and loans and scholarships for law students (visit the Foundation’s website for more information about IOTA and how the funds are used: ).

Funds that are “nominal or short-term” used to be defined as those that the lawyer has determined cannot “practicably be invested for the benefit of the client or third person.” Of course, what seems “practicable” to one person may not be to another. In order to dispel any confusion on the matter, a more objective definition has been adopted. The term has now been amended to define “nominal or short-term” funds as those that a lawyer has determined cannot “earn income for the client or third person in excess of the costs to secure the income.”

If trust funds can earn more income than the cost to secure that income, then, as the fiduciary for those funds, the lawyer should invest such funds for the benefit of the client or third person.

It is the lawyer, not the client or third person, who must use his or her own best judgment to determine whether funds should be deposited into an IOTA account. Factors lawyers should consider when exercising such judgment can be found at 5-1.1(g)(3), Rules Regulating The Florida Bar. Lawyers cannot be charged with an ethical violation for such good-faith judgment.

One of the reasons why some lawyers resist the idea of opening additional trust accounts is the record-keeping requirements that go along with the maintenance of a trust account. In order to simplify that process somewhat, the rules have been amended to allow lawyers to store trust accounting records in digital media “as long as the copies include all data contained in the original documents and may be produced when required.” Rule 5-1.2(b), Rules Regulating The Florida Bar. Furthermore, authorized records of deposit slips and cancelled checks are no longer restricted to originals but now include copies as long as they are “clearly legible” and include “all data on the originals” and “all other data and tracking information.” Rule 5-1.2 (b)(2) and (3), Rules Regulating The Florida Bar. As to cancelled checks, “all other data” includes the endorsements on the back of the checks.

However, the allowance of alternate forms of records retention should not be mistaken as a sign that trust accounting is being taken any less seriously by The Florida Bar. A lawyer’s duties regarding funds held in trust are significant, and when there is even a chance that something has gone wrong, The Florida Bar wants to be informed. For that reason, there has long been a requirement that lawyers authorize and request the bank to notify the Bar when a trust account check is returned for insufficient or uncollected funds (Rule 5-1.2(c)(4), Rules Regulating The Florida Bar). The rule is often overlooked by lawyers, so it has been amended to clarify that the authorization must be made at the time the account is opened. Also, in addition to the instances when a check has been returned, the notification must now be sent every time the trust account is overdrawn or a check is dishonored due to insufficient or uncollected funds. Furthermore, attorneys are now prohibited from authorizing overdraft protection on trust accounts (Rule 5-1.1(k), Rules Regulating The Florida Bar). Overdraft protection undermines the safeguards set up by the requirement that the Bar be notified when the trust account is overdrawn, and prohibition of overdraft protection prevents commingling of the lawyer’s own funds with client funds.

Finally, demonstrating just how serious The Florida Bar is about trust accounting, the rule regarding failure to comply with a subpoena for trust accounting records has been amended to make the failure a “matter of contempt” that can be processed under subdivisions (d) and (f) of Rule 3-7.11 (Rule 5-1.2(g), Rules Regulating The Florida Bar). Under the prior version of the rule, the Bar had to address the failure to comply through the ordinary grievance process. The amendment to the rule streamlines the course, allowing the Bar to summarily deal with the failure to comply.

Whether or not an attorney feels comfortable with trust accounting procedures, it is an aspect of the practice of law that is unavoidable for many lawyers. Hopefully, the recent amendments to the rules will serve their purpose in making the rules more clear and effective.

For questions about these and other ethics issues, call (800) 235-8619. The Ethics Hotline is open Monday through Friday from 9 a.m. to 5 p.m.

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