1. Strength in numbers. Trust Accounts and IOLTA November 1, 2012 Indianapolis Bar Association Applied Professionalism Course Presented by: Howard I. Gross, CPA/ABV/CFF, CFP ® & Samuel M. Pollom, JD, CPA BGBC Partners, PC 300 N. Meridian Street Indianapolis, IN 46204 (317) 633-4700

2. Strength in numbers. “A bank account held by a professional for the purposes of keeping money held on behalf of clients separate from the funds of the professional or business.” What is a Trust Account?

3. Strength in numbers. Indiana Rules of Professional Conduct Rule 1.15(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. Funds shall be kept in a separate account maintained in the state where the lawyer’s office is situated, or elsewhere with the consent of the client or third person. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of five years after termination of the representation.

4. Strength in numbers. Segregate Safeguard Promptly notify of receipt of funds Promptly deliver funds Accounting Key Fiduciary Principals

5. Strength in numbers. How Professionals End Up with Client And Third Party Funds Funds that MUST go in Trust Accounts Advanced expenses Advanced fees Funds belonging to client Receipt of aggregated Non-Trust and Trust Funds Disputed funds

6. Strength in numbers. Funds that MUST NOT go in Trust Accounts Fund belonging exclusively to the professional Withdrawing earned fees from trust account Employee payroll taxes How Professionals End Up with Client And Third Party Funds (cont.)

7. Strength in numbers. Simultaneous presence of funds belonging to a professional and a client or third party in the same account Rule of Thumb – Who owns these funds? If the answer is a third party, the funds belong in a trust. Prohibition Against Commingling

8. Strength in numbers. Accounts that are small and are not being held for a substantial period of time Accounts that are to be separate and that are going to be held for substantially long periods Pooled Trust Accounts vs. Separate Trust Accounts

9. Strength in numbers. Pooled Accounts with Interest paid to Indiana Bar Foundation Funds designated to Public Interest Programs Pro bono programs Civil justice to persons of limited means Law-related education for public Research assistance in legal system Improve administration of justice, and Public service programs approved by Indiana Supreme Court IOLTA Accounts (Interest on Lawyers Trust Accounts)

10. Strength in numbers. Approved in-state Financial Institution A list of these institutions is available on the Indiana Supreme Court website Where Should Accounts be Maintained

11. Strength in numbers. Conversion and Theft of Client and Third Party Funds Unauthorized use of client and/or third party funds is a crime. Indiana Professional conduct Rule 8.4(b) prohibits a lawyer from committing a criminal act that reflects adversely on the lawyers honesty, trustworthiness or fitness to practice law. Funds belonging to a client or third party should never be used for attorney’s own benefit, for the benefit of another client, or for the benefit of anyone else.

12. Strength in numbers. Handling Disbursements from Trust Trust account disbursements should only be done by way of a fully documented transaction A trust check should never be made payable to cash or bearer Withdrawals from a trust should never be made by way of a cash withdrawal from an automated teller machine

13. Strength in numbers. Handling Disbursements from Trust (cont.) Cash should never be received back when making a trust deposit Earned fees should be paid out of trust in the form of a trust check and documented as being earned fees Similarly, expenses incurred by the professional should be paid out of trust in the form of a trust check and documented as being expenses

14. Strength in numbers. Fundamental Concepts in Trust Account Management A.Although client funds are often maintained in pooled trust account, they must be treated as though each client’s funds are held in a separate account The funds of one client can NEVER be used to cover disbursements on behalf of another client The tool for maintaining the separate identity of each individual client’s funds is a subsidiary ledger for each client who has funds in the trust account.

15. Strength in numbers. Fundamental Concepts in Trust Account Management (cont.) B.Funds should never be paid out of trust on behalf of a client until the funds on which a trust check is written have been collected through banking channels.

16. Strength in numbers. Fundamental Concepts in Trust Account Management (cont.) C.The lawyer should never issue a post-dated trust check D.Maintain an Audit Trail 1.An audit trail consists of source documents that reflect all transactions in and out of the account. Source documents include: Copy of deposit ticket, receipt or bank credit memorandum Bank statement showing the credit of deposited funds Checkbook stub or checkbook register Check or bank debit memorandum Bank statement showing the debit of disbursed funds

17. Strength in numbers. Fundamental Concepts in Trust Account Management (cont.) 2.Deposit tickets should be annotated to identify each deposited item (whether cash or instrument), client’s name (or file number) and the source of the funds. (No unidentified deposits should be made.) 3.Checks should be annotated to identify the client’s name (or file number) and the purpose of the check. 4.The deposit ticket and the check should be annotated well enough to direct the lawyer to the client matter file corresponding to the receipt or disbursement.

18. Strength in numbers. Mechanics of Trust Account Maintenance The following is an outline of the steps that should be taken to maintain client trust accounts : 1.Handling Deposits – Immediately obtain endorsements and deposit trust funds; 2.Handling Disbursements – Immediately disburse funds with client and/or third party consent in writing 3.Reconcile balances monthly

19. Strength in numbers. Other Issues in Trust Account Management Interest on Trust Accounts Unless an IOLTA, other pooled trust accounts should not be interest bearing More cost beneficial for trust funds to be held at interest in separate accounts that are long term or have a substantial amount of money In no event is any interest earned on trust funds considered lawyers’ own funds IOLTA rules issued by the Indiana Supreme Court are found at Indiana Rule of Professional Conduct 1.15(f) through (k)

20. Strength in numbers. Other Issues in Trust Account Management (cont.) Trust account Overdraft Reporting Banks that are approved as depositories will report all overdrafts to the Disciplinary Commission It is not the bank’s obligation to guess whether or not an account is subject to overdraft reporting – the lawyer must provide notice to the bank. Upon receipt of the notice of overdraft, the Disciplinary Commission will send notice to the lawyer requesting a written and documented explanation within 10 business days.

21. Strength in numbers. Other Issues in Trust Account Management (cont.) Unclaimed Trust Funds Every effort should be made to promptly forward trust funds to their rightful owner. If lawyer loses track of client and cannot pay funds to the client, the lawyer should proceed pursuant to the terms of IC 32-34-1-1, et seq., the Unclaimed Property Act.

22. Strength in numbers. On-line Resources Indiana Supreme Court Website www.in.gov/judiciary/discipline/trust.html This page includes links to: Indiana Professional Conduct Rules Indiana Rules for Admission to the Bar & the Discipline of Attorneys List of Approved Trust Account Depositories Trust Account Management