Ethics Articles: Lawyer Trust Accounts—Frequently Asked Questions
Focus on Professional Responsibility
NOTE: Various provisions of this article have been superseded by amendments to the Michigan Rules of Professional Conduct 1.15 and 1.15a and examined through various ethics opinions since the writing of this article. For more detailed information, please visit the Ethics FAQs found here, review ethics opinions, and contact the Ethics Helpline at (877) 558-4760.
MBJ November, 1999
Thomas K. Byerley, Regulation Counsel
Lawyer Trust Accounts—Frequently Asked Questions
Lawyers frequently call the Ethics Hotline [517-485-ETHX] with questions concerning the proper use of a lawyer's trust account. This article will summarize the most frequently asked questions concerning trust accounts and will offer ethics guidance for each question.
1.If I am in private practice, must I open and maintain a trust account?
Under MRPC 1.15(d), every lawyer or law firm receiving client funds must have an interest-bearing pooled trust account separate and distinct from the lawyer's or firm's business operating account, unless there is a separate interest-bearing trust account established for the individual client. The interest earned on the pooled account [IOLTA] must be remitted to the Michigan State Bar Foundation unless the account is set up to have the interest go directly to the client. MRPC 1.15(d) has other detailed rules concerning the establishment and maintenance of client trust accounts.
2.If I deposit a "retainer" or unearned fees into the trust account, how may I draw from those funds when the fees become earned?
Unearned fees received by the lawyer must be deposited in the lawyer's trust account. These funds may not be withdrawn until the fee is earned and the client is provided with an accounting. At that time, the lawyer may transfer the earned portion of the fees held in trust to the lawyer's business operating account for use. See ethics opinion R-007.
3.If I hold client funds in trust that are ready for disbursement (such as the receipt of a case settlement check), but there is a dispute as to the amount of funds to be used for the lawyer's fee, can I disburse any funds?
When a lawyer receives funds belonging to a client or third party, the lawyer must promptly notify the party that the funds are in the lawyer's possession. An accounting of these funds must be given to the client or third party upon request. The funds that are not disputed must be immediately disbursed. The lawyer must hold the funds that are in dispute in trust until the dispute is resolved. See ethics opinion R-007.
4.How detailed must my records be for my client trust account?
A lawyer must keep accurate, complete and timely records of trust account deposits and withdrawals, detailing the deposits and withdrawals for each client. The Ethics Committee, in ethics opinion R-007, has recommended the following trust account books and records be kept by the lawyer or law firm:
"a.Bank statements, cancelled checks, duplicate deposit slips, and bank reports pertaining to the account.
b.A record identifying all trust accounts maintained.
c.Records of all non-cash client property in the attorney's possession, including information on receipt and delivery.
d.Cash receipts journal chronologically documenting the date and source of all receipts.
e.Cash disbursements journal identifying chronologically the date, amount, purpose and recipient of all disbursements.
f.Trust account checkbook register listing deposits and disbursements in sequential order."
5.Must "nonrefundable" retainers be deposited into the client's trust account?
A true "nonrefundable" retainer, if the lawyer has properly established this type of fee payment, is earned at the time of receipt and should not therefore be placed in the client's trust account. See RI-069.
6.I have been holding funds belonging to my client in the client's trust account. However, after due diligence, the client cannot now be located. What must I do with the funds?
Ethics opinion RI-038 opines that a lawyer holding trust account funds for a missing client who cannot be located by reasonable effort may treat the funds as abandoned property pursuant to law, if there is no conceivable third party claim for the funds. If the client fails to make contact with the lawyer during the seven-year statutory period, and the lawyer is again unable to locate the client after making reasonable effort, the lawyer may deliver the funds to the State Board of Escheats pursuant to statute.
A different result is available for legal services organizations that carefully draft retainer agreements. In RI-067, the Ethics Committee opined that a legal services organization may provide in its retainer agreement that funds belonging to clients who cannot be located at the time disbursement is to be made will be used to fund the organization's services to other indigent clients.
7.If I am licensed in Michigan but practice in another state that has different trust account rules, which rules control?
Ethics opinion RI-070 states that when a lawyer participates in an IOLTA program in another state where the law office is situated, the lawyer's ethical obligation is satisfied by compliance with the IOLTA rule of the state in which the office is situated. However, a lawyer who actively practices in Michigan and in another state where ethics rules are inconsistent with ethics rules in Michigan must abide by Michigan ethics rules in legal matters conducted in Michigan or matters governed by Michigan law.
8. I have received a fee in a case that may be subject to a referral fee claim by another lawyer. What should I do with those funds?
A lawyer who receives fees that are subject to a claim for a referral fee by another lawyer must notify the other lawyer that the fees have been received and must provide an accounting of the fees received to the other lawyer. The disputed fees must be maintained in a segregated trust account pending resolution of the dispute. The funds may be distributed only after the dispute is resolved. See RI-224.
The Michigan State Bar Foundation has detailed information available to assist Michigan lawyers in establishing and maintaining trust [IOLTA] accounts. Formal ethics opinion R-007 also contains considerable guidance to Michigan lawyers for maintaining funds in trust. Hopefully, with this guidance, lawyers can avoid any ethics violation claims for improperly holding client funds.