1. The Ethical Requirements of Handling Trust Funds under Rule 1
The Ethical Requirements of Handling Trust Funds under Rule The Basics of Opening and Maintaining a Trustworthy Client Trust Account Mary Andreoni ARDC, Ethics Education Counsel

2. When is a Lawyer Required to Hold Property in Trust?
Rule Safekeeping Property
(a) A lawyer shall hold property of clients or third persons that is in a lawyer’s possession in connection with a representation separate from the lawyer’s own property…

3. Duties of Holding Trust Property under Rule 1.15
(1) separate, i.e., client or third person funds must be segregated from the lawyer's own property;
(2) accountable, i.e., the lawyer must be easily able to account to the client or third person through updated and accurate records of the funds being held in trust;
and (3) identifiable, i.e., the funds being held in trust must be readily recognized as the property of others.

4. Why?
To safeguard client and third person property from loss or risk of loss through:
Commingling – mingling trust funds with funds that belong to the lawyer
Conversion - any unauthorized use of trust funds

5. Where to deposit funds depends on the answer to the question –
Whose property is it?

6. What MUST Be Deposited in the Client Trust Account
Funds held for the benefit of a client or third person, e.g.,
Settlement funds
Funds owed to lienholders
Advances for costs not yet incurred
Security retainers
Amounts in dispute

7. What MUST NOT be Held in the Client Trust Account
Lawyer’s own personal or business funds, e.g., payroll, business expenses, earned fees
Fixed fees, general retainers or an advance payment retainers

8. What MAY Be Deposited in the Client Trust Account
Lawyer’s own funds necessary to pay bank service charges to open and maintain the account is allowed under Rule 1.15(b)

9. Key Changes to Rule 1.15 (eff. Sept. 1, 2011)
Types of Client Trust Account ¶(a), (f) & (g)
- interest-bearing IOLTA or Non-IOLTA
Recordkeeping Requirement ¶(a)(1)-(8)
- Required preparation & maintenance of journals and record for seven years
Overdraft Notification ¶(h)
- Automatic notification of overdraft of trust account

10. Opening the Client Trust Account
Every client trust account must be interest-bearing and opened for either:
1. Benefit of One Client/Matter (Non-IOLTA) or
2. Benefit of Many Clients (IOLTA)
Non-Interest Bearing Trust Accounts are Prohibited

11. IOLTA Account – Rule 1.15(f)
Pooled (several clients/matters)
Interest- or dividend-bearing
Nominal amounts or amounts held for a short period time
and
Interest goes to the Lawyers Trust Fund of Illinois
e.g., settlement funds, advances for unearned fees and un-incurred costs

12. One Client/Matter Account - Rule 1.15(a)
Individual client or matter
Interest- or dividend-bearing
Substantial amounts or amounts held for a long period of time
and
Interest goes to client
e.g., required by contract (real estate escrow) or court order (estate or divorce)

13. Which Type of Client Trust Account is Appropriate?
IOLTA or Non-IOLTA?
Which Type of Client Trust Account is Appropriate?
Answer depends on whether funds are nominal or are expected to be held for a short period of time
Why? Amount of net interest earned

14. Factors in Determining the Type of Client Trust Account
Interest the funds would earn during the period they are expected to be held;
Costs of establishing and administering the account; and
Capability of the financial institution to calculate and pay interest by each client’s funds, net any transaction costs, to the individual client.
Rule 1.15(g)

15. Decision on Type of Trust Account
Rule 1.15(g) states:
“No charge of ethical impropriety or other breach of professional conduct shall attend to a lawyer’s or law firm’s exercise of reasonable judgment under this rule or decision to place client funds in an IOLTA account or a non-IOLTA client trust account on the basis of that determination.”

16. Client Trust Account Requirements
Form of Account
IOLTA - the account must be payable on demand, e.g. checking or NOW savings account
Non-IOLTA – can include passbook, CD or other longer term accounts

17. Eligible Financial Institution
IOLTA and non-IOLTA accounts must be maintained only at an “eligible financial institution”
“[A] bank or a savings bank insured by the Federal Deposit Insurance Corporation or an open-end investment company registered with the Securities and Exchange Commission that has agreed to provide dishonored instrument notification regarding any type of client trust account as provided in paragraph (h) of this Rule; and that with respect to IOLTA accounts, offers IOLTA accounts within the requirements of paragraph (f) of this Rule.” R. 1.15(i)(3).
List of Eligible Financial Institutions
IOLTA – (Lawyers Trust Fund of Illinois)
Non-IOLTA – (ARDC)

18. Requirements Cont’d Location of Account
State where lawyer’s office is located or elsewhere with the informed consent of the client or third person
Tax Information or Taxpayer Identification Number (TIN)
IOLTA – TIN of the Lawyers Trust Fund for IOLTA (contact the Lawyers Trust Fund for TIN)
Non-IOLTA – TIN of client or third person

19. Requirements Cont’d. Account Name
Clearly identifies the fiduciary nature of the account in the account name and checks
E.g., for IOLTA – “Law Firm of John Doe – Client Trust Account” DO NOT identify the Lawyers Trust Fund as designee, trustee or owner in the account name or on printed checks
E.g., for Non-IOLTA – “Law Firm of John Doe – Estate of Mrs. Smith”

20. IOLTA Enrollment
The lawyer or law firm enrolls in the IOLTA program by completing a sign-up form ("Notice to Financial Institution to Establish IOLTA Account") and submitting the form to his/her bank. The enrollment form instructs the bank to establish an IOLTA account for the attorney. Download the sign-up forms at or call the Lawyers Trust Fund at or to request additional copies.

21. Maintaining the Account

22. Accounting Principles
Separate Clients = Separate Accounts
In a pooled, IOLTA account, the client ledger enables the lawyer to know the individual balance for each client matter

23. Accounting Principles Cont’d.
Can’t Spend What You Don’t Have
Know the financial institution’s rules regarding when funds become available and are credited to the account

24. Accounting Principles Cont’d.
Know the Balance
The balance is either “0” (when no trust funds are being held) or equal to the sum of all funds being held for clients or third persons

25. Required Client Trust Records: New Rule 1.15(a)(1)-(8)
Recordkeeping Journals
Trust Account Receipts Journal
Trust Account Disbursements Journal Trust Account Register
Trust Account Client Ledger
Trust Account Reconciliation Report
Source Documents
Accountings to clients or third persons, including portions of client file
Checkbook registers, check stubs, bank statements, record of deposit and checks or other record of debits
Retainer and compensation agreements with clients
Copies of bills for legal fees and expenses

26. Receipts Journal Rule 1.15(a)(1)
Lists alls receipts chronologically for all deposits in the trust account and identifies the date and source of each receipt

27. Receipts Journal DATE SOURCE CLIENT DEPOSIT AMOUNT 2/01/10
Smith Check #2398
Joan Smith
50062
$1,000

28. Disbursements Journal Rule 1.15(a)(1)
Lists all disbursements chronologically and identifies the recipient, purpose and date of each disbursement.

29. Disbursements Journal
DATE
CHECK
PAYEE PURPOSE
CLIENT
AMOUNT

30. Client Ledger Rule 1.15(a)(2)
A separate page for each client/matter showing chronologically all receipts, disbursements and balances for each client/matter.

31. Client Ledger Date Description of Transaction Payor/Payee Ref
Name of Client: Joan Smith
Legal Matter/Adverse Party: Marital Dissolution/Bob Smith
File/Case Number:
Date
Description of Transaction
Payor/Payee
Ref
Funds Paid
Funds Received
Balance
2/01/10
Retainer - Smith
Deposit
$1,000.00
0/15/

32. Client Ledger Date Description of Transaction Payor/Payee Ref
Name of Client: John Doe
Legal Matter/Adverse Party: Bob Smith
File/Case Number:
Date
Description of Transaction
Payor/Payee
Ref
Funds Paid
Funds Received
Balance
10/15/08
Adv. Fee dep.
J. Doe
Deposit
$3,500.00
10/23/08
Attorney’s fees
My Law Firm
#625
$423.14
$3,076.86
11/17/08
Med. records
RCS
#634
67.89
$3,008.97
11/18/08
Filing fee
County Ct. Clerk
#635
$210.00
$2,798.97
0/15/

33. Checkbook Register Rule 1.15(a)(4)
Lists sequentially all trust account deposits and checks and reflects a current and accurate daily balance on the trust account.

34. Checkbook Register CHECK DATE PAYEE OR DEPOSIT SOURCE AMOUNT OF CHECK
DEPOSIT AMOUNT
BALANCE
2/01/10
Joan Smith
$1,000

35. Reconciliation Report Rule 1.15(a)(7) (done at least quarterly)
Balance in the Trust Account Journals Receipts Journal – Disbursement Journals
Balance in Client Ledger Pages
Amount of all client ledger pages
Balance in Checkbook Register
All three balances should be the same and equal to the bank statement (less for outstanding checks & net interest for IOLTA accounts, plus in-transit deposits)

36. Record Retention Rules
Trust account records must be kept for 7 years after the representation ends including all journals required in Rule 1.15 and the following source documents.
Source Documents
Rule 1.15(a)(3)-(6)
Accountings to clients or third persons, including portions of client file
Checkbook registers
Check stubs
Bank statements
Record of deposit
Checks or other record of debits
Retainer and compensation agreements with clients
Copies of bills for legal fees and expenses

37. Supreme Court Rule 769(2) Maintenance of Records
A lawyer has a duty to maintain for all financial records relating to the law practice for 7 years.

38. Rule 1.15(a)(8) – provisions must be made for the maintenance of the records in the event of the closing, sale, dissolution, or merger of a law practice.
Records can be maintained by electronic, photographic other media but must be able to (1) print and (2) easily access records.

39. Overdraft Notification: Rule 1.15(h)
Trust accounts can only be maintained at financial institutions that have agreed to provide overdraft notification to the ARDC
ARDC notified when a properly payable instrument against a client trust account containing insufficient funds (a/k/a non-sufficient funds or “NSF”)
Applies regardless of whether check is ultimately honored
Purpose of Rule – provide an early warning that a lawyer is engaging in conduct that could injure clients.

40. Let’s Talk about Fees
2007 decision Illinois Supreme Court, Dowling now codified in Rule 1.15(c)
Rule 1.15(c) provides that client funds to secure payment of legal fees and expenses shall be deposited in a trust account and withdrawn only as fees are earned and expenses incurred except:
1.fixed fee arrangements
2. advance payment retainers and
3. general retainers.

41. Rule 1.15(c) Advances for Fees and Expenses
(c) A lawyer shall deposit in a client trust account funds received to secure payment of legal fees and expenses, to be withdrawn by the lawyer only as fees are earned and expenses incurred. Funds received as a fixed fee, a general retainer, or an advance payment retainer shall be deposited in the lawyer’s general account or other account belonging to the lawyer.

42. Three Types of Retainers Recognized in Illinois See Comments [3B]-[3D] to Rule 1.15
General or “Classic” Retainer = payment to secure lawyer’s availability. Deposit in the business account
Security Retainer = payment to secure fees owed for future services. Deposit in trust account
Advance Payment Retainer = present payment in exchange for the commitment to provide future services. Deposit in business account

43. Fixed/Flat Fee Agreements
a/k/a “lump” sum or “flat” fee, the lawyer agrees to provide a specific service (e.g., defense of a criminal charge, a real estate closing, or preparation of a will or trust) for a fixed amount paid by the client to engage a lawyer at the outset of a matter. See Comment [3C] to Rule 1.15.

44. Standards for All Fee Agreements All fee agreements SHOULD:
be in writing
disclose the nature of the fee arrangement; and
state where the money will be deposited and how withdrawals will be handled

45. For an Advance Payment Retainer under Rule 1.15(c), it MUST:
be in writing and use the term “advance payment retainer”;
disclose the special purpose of the retainer and explain why an advance payment retainer is advantageous to the client;
state where the money will be deposited and how withdrawals will be handled;
state that any portion of unearned fees or un-incurred expenses will be refunded to the client; and
advise the client of the option of using a security retainer.

46. Other Considerations
Guiding principle in choice of retainer – protection of client’s interests
If agreement is unclear = deposit in trust account
Advance Payment Retainers should be used “sparingly”
Amount of retainer = reasonable fee under Rule 1.5(a)

47. Questions ARDC Ethics Inquiry Program ARDC website – www.iardc.org
Client Trust Account Handbook
Lawyers Trust Fund (IOLTA) –

48. Depositing Trust Funds
Aaron Attorney represents Carol Client in a personal injury action against Daryl Defendant. During the pendency of the case, Dr. Oscar Orthopod and Hilltop Hospital filed liens with Defendant’s insurer, State Farm, and with Aaron Attorney for medical services provided to Client related to the accident. The parties have agreed to settle for $100,000 and on October 13, 2004, Aaron Attorney receives a check made payable to Client, Dr. Orthopod and Hilltop Hospital.

49. Record of Deposit Write case name/number on deposit slip
Record deposit in:
- Client Ledger page for client matter;
- Receipts Journal; and
- Checkbook Register.

50. Questions ARDC Ethics Inquiry Program
Created by the ARDC to help Illinois lawyers understanding their professional duties and assist them in resolving important ethical dilemmas.
To make an inquiry call, please call the ARDC offices:
Chicago office –
Springfield office