Managing client trust accounts can be tricky, and as a California lawyer, one of the paramount responsibilities of your practice is the proper handling of client funds.
While this may seem like a boring or technical subject, it couldn’t be more critical to your successful practice.
Indeed, failure to manage these accounts correctly could result in severe disciplinary action, including disbarment. So, you can understand why we want to take a few minutes out of your day to present the fundamentals of this important subject.
This is especially important right now, when the State Bar has just enacted significant new rules and procedures involving client trust accounts.
In this guide, we will explore the importance of client trust accounts and provide an overview of how you should set up and maintain them.
We’ll also discuss the plethora of consequences (legal and otherwise) that could befall you if you fail to handle your client trust accounts as you should.
We’ll finish off this post by providing links to numerous rules and other resources that will help you get a full grasp of this important topic.
Note, however, that it is nearly impossible to cover all the ins and outs of client trust accounts in a short article such as this.
If you are seeking “in the weeds,” detailed advice on how to create and maintain these accounts, we suggest you consult the 150-page “Handbook on Client Trust Accounting For California Attorneys”, which was published by the State Bar of California earlier this year.
What is a client trust account?
Simply put, a client trust account is a separate account where lawyers hold money on behalf of their clients, and knowing how to handle them is an important aspect of the operations of any law firm.
This could be done for a variety of reasons: a retainer for future services, money to pay fees or expenses, or funds that belong to the client but need to be disbursed under certain conditions.
California Rule of Professional Conduct 1.15 outlines the specific obligations and guidelines for client trust accounts.
Setting up the account
Choosing a financial institution
The first step in setting up a client trust account is to select a financial institution. It should be a trusted bank that operates in California.
In many instances, you’ll want to use an institution that provides “Interest on Lawyers’ Trust Accounts” (IOLTA), and the State Bar publishes a list of approved banks for this purpose.
The interest generated from these accounts is not paid to the client but is instead sent to the California Bar Foundation to fund legal aid programs.
These accounts are generally appropriate if you’re holding funds that are either small in amount or will only be held for a short period.
If, on the other hand, there is a large sum of money involved or the money will be held for a long time, an attorney can hold the client’s funds in an individual account, known as a Client Trust Account (CTA). When your firm deposits money into a CTA, the interest earned will go to your client.
Whichever type of account you choose, note that the account must be clearly labeled as a “Trust Account” or “Client Funds Account” to distinguish it from your regular business or personal accounts.
Registering and reporting client trust accounts
As part of the California State Bar’s new Client Trust Account Protection Program (CTAPP), attorneys must “[r]egister their client trust accounts (including IOLTA) annually with the State Bar, either individually or through their law firm or organization.”
Thereafter, they will be required to fill out “an annual self-assessment of client trust account management practices” to ensure they understand and are in compliance with the new rules.
The State Bar has produced a short video that provides an overview of these new requirements.
Managing the account
Segregation of funds
One of the most critical aspects of managing a client trust account is the absolute segregation of client funds from your own. Commingling personal and client funds is a serious ethical violation. Your client trust account should only contain client money, and, as noted above, it should be clearly labeled as such.
Record keeping
Rule 1.15 of the California Rules of Professional Conduct emphasizes the importance of accurate record-keeping. This is particularly important in the CTAPP era, when lawyers are required to report on all client funds held in trust annually.
For each client trust account, you or your firm should maintain:
- A ledger for each client or matter
- Receipts and disbursements journals
- Reconciliation reports
- Supporting documentation like deposit slips, canceled checks, and client invoices
In addition to your ethical obligation to maintain these types of records, note that under the California Business and Professions Code, section 6091, your clients have the right to request such information from you at any time. One sure way to have a State Bar Complaint filed against you is to fail to provide timely records to your clients when asked.
Managing client trust accounts: Common pitfalls
Inadequate record keeping
Keeping meticulous records is not just good practice – it’s a requirement. Inadequate record-keeping can result in swift disciplinary action. Indeed, failure to comply with the new rules regarding client trust accounts, “must” result in a lawyer being “enrolled as an inactive.” Thus, if your firm doesn’t have dedicated accounting personnel, make sure you or another supervising attorney maintains responsibility for precise record-keeping.
Overdrafts and bounced checks
Any overdraft on a client trust account is a serious violation and will attract immediate attention from the State Bar (likely because banks are required to report overdrafts on client trust accounts directly to the Bar).
To avoid this, always reconcile your accounts so there is never any question as to how much money is available for disbursement.
Unauthorized withdrawals
Unauthorized withdrawals from client trust accounts could lead to severe disciplinary action. To avoid this, make sure your firm follows basic client trust account security measures measures, such as: limiting access to debit cards linked to client funds, requiring dual signatures for checks drawn on all client trust accounts, and frequently changing passwords on bank accounts.
Commingling funds
As noted, it is a huge mistake to mix client funds with personal or business funds. Always maintain a clear separation. Sure, setting up new accounts each time you accept client monies can be time-consuming, but the consequences are dire (see below).
Thus, it’s smart to have processes in place within your firm that disallow client funds from being commingled with personal/organizational funds from the moment they are collected.
Consequences of mishandling a client trust account
This point can’t be reiterated too many times — mishandling a client trust account is a grave matter that carries severe repercussions. Not only does it undermine the confidence that clients and the public have in the legal profession, but it also jeopardizes your (and your firm’s) standing in the legal community.
Disciplinary action
The most immediate consequence for failure to properly manage a client trust account is disciplinary action by the State Bar of California.
In fact, the Bar maintains a list of proposed sanctions for certain ethical violations that unabashedly proposes stiff penalties whenever client funds are misused.
Depending on the severity of the misconduct (and often depending on whether the conduct was intentional or negligent), penalties could range from a public reprimand to suspension or even disbarment.
Criminal charges
In extreme cases where funds are embezzled or fraudulently misused, criminal charges could be brought against the offending attorney. In fact, prosecutors famously charged California attorney Tom Girardi with embezzlement and other crimes as a result of his alleged misuse of client funds.
Conviction on these charges can result in imprisonment and hefty fines, not to mention the permanent tarnishing of one’s professional reputation.
Civil liability
In addition to disciplinary and criminal consequences, an attorney may also face civil liability. Clients who have suffered losses due to mismanagement or misuse of trust account funds could bring a civil lawsuit against the attorney for damages.
Loss of professional reputation
Trust is critical in the legal profession. Mishandling a client trust account can result in a loss of credibility and professional reputation that might be irreparable.
Even if you are allowed to practice law after your misdeeds, your ability to attract and retain clients could be severely impacted for the rest of your career.
Reporting and audits
Failure to appropriately handle client trust accounts may also subject you to mandatory reporting to the State Bar and random audits.
This added scrutiny can lead to the discovery of other ethical or professional shortcomings, opening you up to additional disciplinary actions.
Understanding the potential consequences should underscore the gravity of the responsibility that comes with managing a client trust account. Hence, it’s not merely a best practice but an ethical imperative to maintain these accounts diligently and in strict compliance with the rules set forth by the State Bar of California and the California Rules of Professional Conduct.
Managing a client trust account may seem daunting, but it’s a fundamental skill that every legal practitioner in California absolutely must master.
For more details and updates on managing client trust accounts, consult the following resources:
- State Bar of California’s Handbook on Client Trust Accounting for California Attorneys (2023 edition)
- Rules of the State Bar of California, Rule 2.5 (Rule 2.5 Client Trust Account Protection Program Annual Reporting, Account Registration and Self-Assessment Completion Requirements)
- California Rules of Professional Conduct, 1.15 (Safekeeping Funds and Property of
- Clients and Other Persons)
- California Rule of Court 9.8.5 (re: State Bar Client Trust Account Protection Program)
- California Business and Professions Code, section 6091 (Miscellaneous Disciplinary Provisions)
- Frequently Asked Questions: Client Trust Account Protection Program
- CTAPP Training and MCLE
- Preview of Client Trust Account Annual Self-Assessment
By adhering to these guidelines and maintaining the highest standards of professionalism, you’ll not only protect your clients but also safeguard your reputation in the legal community.
Conclusion
Responsible handling of client trust accounts is an ethical imperative for California lawyers. Recent State Bar changes underscore the importance of diligent management, emphasizing selecting the right financial institution, meticulous record-keeping, and avoiding common pitfalls.
Failing to meet these obligations can result in disciplinary action, criminal charges, civil liability, and tarnished professional reputations.
Mandatory reporting and audits further heighten accountability. Consulting the State Bar’s Handbook on Client Trust Accounting and relevant rules is strongly advised.
By upholding professionalism and mastering client trust account management, attorneys protect clients and their own standing in the legal community.
