Ins and outs of the lawyer trust account


by Alecia M. Chandler   |   Michigan Bar Journal

Most lawyers in private practice are required to maintain a lawyer trust account, primarily to hold prepayments for legal services, legal costs, or settlement proceeds. While it is something that is used quite frequently, mismanagement can lead to disciplinary action. The Attorney Discipline Board 2020 Annual Report shows that nearly half the attorneys disciplined that year violated MRPC 1.15 and MRPC 1.15A, the trust accounting rules.1 Every lawyer has a fiduciary duty to their client, and anything belonging to the client that comes into the lawyer’s possession must be maintained with care — and that includes funds.


Per MRPC 1.15 and MRPC 1.15A, all third-party or client funds must be deposited into an Interest on Lawyer Trust Account (IOLTA) or a non-IOLTA. For most lawyers, this means setting up a traditional IOLTA where retainers paid in advance for legal services to be rendered or settlement proceeds are deposited. However, a lawyer must not deposit or maintain their own funds in the account1 so there should be no buffer like many people use in their personal accounts to avoid the possibility of an overdraft.2 Additionally, while overdraft protection is likely available, the financial institution is still obligated to notify the Attorney Grievance Commission that funds in the IOLTA to cover outstanding liabilities were insufficient.3

It is important to remember that all partners of a law firm may be held liable for commingling, conversion, or other mishandling of client or third-party funds, and lack of actual knowledge, inexperience, or delegating responsibility does not absolve liability.4 To avoid overdrafts, it is important to keep accurate accountings that assign every dollar within the IOLTA to a client.


Mistakes happen! The most common mistake is making a payment out of the IOLTA when the funds should have come from the operating account. This is an understandable, but avoidable, mistake.

If you use physical checks, ensure that the color of the checks for the operating account and the IOLTA are different. Additionally, consider adding a picture or large note on the checkbook cover. In my former firm, both methods were used.

If you use online accounts, many financial institutions allow you to title your accounts differently. For example, you may wish to title the account “STOP – IOLTA,” since only those who access the accounts can see the titles.


The State Bar of Michigan “Scams Targeting Attorneys Reported in Michigan” webpage lists scams that have been reported to the Bar.5 The site also provides information and resources for reporting scams. The various reports on this site are only a small sample of the types of scams perpetrated on Michigan attorneys. Even cashier’s checks can be fraudulent, and many attorneys have fallen victim to the ramifications of scams involving cashier’s checks and fraudulent electronic transfers into IOLTAs.6 The perpetrators provide very realistic documents and impersonate executives on the phone and during video conferences; the funds are remitted using wire transfers or forged cashier’s checks.


Premature disbursement of funds resulting from very sophisticated scams has cost lawyers millions of dollars.7 In these cases, the lawyer is responsible for repaying the bank for the improperly remitted funds and working with law enforcement to attempt to recover funds from the fraudsters, which is often impossible.8

Fortunately, this situation is easy to avoid. Before disbursing funds from an IOLTA, lawyers must ensure that the payment into the IOLTA has cleared and is not simply “available” pursuant to the Expedited Funds Availability Act, which requires financial institutions to make funds available for withdrawal pursuant to a schedule.9 However, while the funds are available, the payment can be reversed, causing an overdraft if those funds have been remitted to the client or a third party. Clients often pressure lawyers to remit their portion of the funds as soon as possible, yet the lawyer must wait until the funds have cleared, which can take up to 30 days depending on how the lawyer received the funds. For example, payments from overseas financial institutions take additional time to officially clear.

Unfortunately, there is no set timeframe to ensure a check or other transfer has cleared. Therefore, it is important to recognize that just because the funds appear to be in the IOLTA, that does not mean they are not subject to reversal either by a stop payment or because the payment was fraudulent. Lawyers should check with their banks about their clearing procedures.

The first step is determining your financial institution’s policies regarding deposits. Under certain circumstances, the financial institution may have a policy that covers most deposits. One such example is the financial institution I used in private practice, which advised that all transactions within the United States less than $200,000 would clear within 10 days. So, with the exception of large settlement checks and international wire transfers, we utilized the 10-day rule before disbursing funds. For international transactions, I advised my clients that the funds would not be remitted until the transfers were confirmed as cleared. I set these expectations with my clients the first time they came to the office and we foresaw the funds were coming from a foreign country. Fortunately, I can’t recall one that took more than 12 days to officially clear.

It’s important to note that not all financial institution employees understand the difference between expedited funds availability and the payment officially clearing. We are aware of several scenarios where someone at a financial institution advised an attorney that the funds cleared — and the payments were later reversed. It helps to have a banker who understands IOLTAs.10


Another reason payments are reversed is because the signatures required to deposit the check are missing. If a check is made payable to the lawyer and a third party, MCL 440.3110(4) provides that “(i)f an instrument is payable to 2 or more persons not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them.” The Michigan Court of Appeals in University of Michigan Regents v. Valentino concluded that an attorney cannot “overcome the requirements of MCL 440.3110(4) by simply depositing any check bearing his name into an IOLTA account.”11 Therefore, if a check is made payable to the lawyer or law firm and a client or third party, both signatures are required.

Some lawyers obtain properly executed limited powers of attorney from the client if the client will be unable to endorse the check. We do not recommend placing this power of attorney in the attorney fee agreement for three reasons:

1. If the financial institution requires a copy of the power of attorney, you may be exposing client confidential information contained in the fee agreement in violation of MRPC 1.6;

2. It is best practice to use a formal limited power of attorney that can be placed on file with the financial institution; and

3. When the lawyer has received previous complaints, the Attorney Grievance Commission (AGC) may give the file extra scrutiny for misappropriation.


Under MRPC 1.15, lawyers are required to maintain certain trust account records for five years. Lawyers should review additional statutes, case law, or court rules that may require maintenance of records (i.e., tax documents) for a longer period. It is best practice to establish a plan for accounting and record-keeping that includes a monthly reconciliation between client ledgers, financial institution statements, and IOLTA records.


Don’t panic! The worst thing any lawyer can do is bury their head in the sand. Take a breath and review the following steps:

1. Contact the financial institution to determine what happened and request the information be provided to you in writing.

2. Consider your state of mind and the facts surrounding the overdraft. If it’s a financial institution error, you may consider tak ing the steps below on your own. However, if it involves intentional conduct, failure to institute proper accounting processes, or if you are concerned about liability, consider contacting an attorney who specializes in ethics defense to assist you with your answer. Some malpractice insurance policies cover grievance defense, so lawyers should also contact their carriers.

3. Send a letter to the grievance administrator reporting and explaining what occurred and which steps have been taken or will be taken to correct the problem either on your own or through retained ethics counsel. Review the letter carefully before sending.

4. Follow through with the steps you told the grievance administrator you would take.

5. If the financial institution dishonored an instrument, immediately contact the intended recipient of the funds and let them know what has occurred and how the situation will be remedied. Confirm this contact in writing.

6. Expect correspondence from the grievance administrator requesting additional information including financial institution records. MRPC 1.15 requires lawyers to “preserve complete records of such account funds and other property for a period of five years after termination of the representation.“

7. Use the request for investigation as an outline for your response. Determine if you need to order records from the financial institution to fully respond and, if so, order the records right away. Review your answer for content, accuracy, and references to attachments. Make sure your answer conveys a cooperative attitude toward the proceedings.

8. Send an answer to the request for investigation and all other requests from the grievance administrator. Don’t be disciplined for failure to respond. If you are drafting your own answer, have someone review and proofread it. Remember, the person at the AGC reviewing your answer has no knowledge of the underlying facts and circumstances pertaining to the financial transaction(s) at issue.

9. Continue to communicate with the AGC if relevant information becomes available or additional questions are asked.


IOLTAs are a commonly used tool for practicing attorneys. To avoid discipline, it is imperative for attorneys using IOLTAs to know about proper management. It’s a lawyer’s fiduciary duty and ethical responsibility to safeguard client funds whether it be from a retainer for legal services yet to be performed, prepaid costs, or settlement proceeds.

For an overview of ethical management of lawyer trust accounts including the analysis used in processing client or third-party funds and an in-depth focus on recordkeeping requirements, consider attending the Lawyer Trust Account Seminar: Management Principles and Record Keeping Resources, which is open to lawyers and their staff members. It is an excellent opportunity for participants opening new IOLTAs and can serve as a refresher on trust account management focusing on MRPC 1.15 and 1.15A.

“Ethical Perspective” is a regular column providing the drafter’s opinion regarding the application of the Michigan Rules of Professional Conduct. It is not legal advice. To contribute an article, please contact SBM Ethics at


1. Under MRPC 1.15(f), a lawyer may deposit a reasonable amount of their own funds into a trust account solely to prevent use of client or third-party funds to pay financial institution service fees.

2. “Maintaining earned fees in a lawyer’s trust account or depositing the lawyer’s own funds into his or her trust account constitutes commingling,” Pozehl and Dajani, Common Trust Accounting Pitfalls and Avoiding Trust Account Overdraft Notifications, 94 Mich Bar J 34 (2015), available at [].

3. MRPC 1.15A(b), “financial institutions must file with the State Bar of Michigan a signed agreement, in a form provided by the State Bar of Michigan, that it will submit the reports required in paragraph (d) of this rule to the Grievance Administrator and the trust account holder when any properly payable instrument is presented against a lawyer trust account containing insufficient funds or when any other debit to such account would create a negative balance in the account, whether or not the instrument or other debit is honored and irrespective of any overdraft protection or other similar privileges that may attach to such account.” Emphasis added.

4. MRPC 5.1, MPRC 5.3, and Ethics Opinion R-7 (April 27, 1990). The MRPC and Ethics Opinions are available at [].

5. Available at [].

6. Fake Check Scams, Consumer Alerts, Michigan Dept of Attorney General [].

7. Reported to the author by frantic Michigan attorneys calling the Ethics Helpline. For an example demonstrating the risk to all lawyers of all types, see Jackson, Scammers intercepted emails of law firm hired to oversee stock sale, benefitsPRO (July 31, 2020) [].

8. Bagger, Lawyer Beware: Four Tips to Avoid Email Scams Targeting Lawyers, ABA (June 17, 2020) [] and Sarrouf Law LLP v First Republic Bank, 97 Mass App Ct 467; 148 NE3d 1243 (2020).

9.12 USC 41.

10. Greenberg, Trager & Herbst, LLP v HSBC Bank USA, 17 NY3d 565; 958 NE 2d 77 (2011). See also Internet Scams Targeting Attorneys, USI Affinity (May 24, 2017) [].

11. University of Mich Regents v Valentino, unpublished per curiam opinion of the Court of Appeals, issued December 20, 2020 (Docket No. 349942), p 7.