The primary objectives of the disciplinary system are to safeguard the public and to maintain the integrity of the legal profession. In re Neff, 83 Ill.2d 20, 413 N.E.2d 1282 (1980).

With regards to client trust accounts, twenty-one years ago in In re Clayter, 78 Ill.2d 276, 278, 399 N.E.2d 1318, 1319 (1980), the Illinois Supreme Court admonished lawyers:

Despite the Court's admonition in Clayter, the mishandling of client funds continues to be a problem. The improper handling of client funds has consistently been the most frequent area alleged in formal complaints filed before the Hearing Board.

In a recent disciplinary case, the Hearing Board observed:

The ARDC investigative staff approach every complaint that suggests the mishandling of client funds as a potentially serious case meriting close scrutiny. Such complaints usually require intensive inspection of a lawyer's account records, related client files, and bank records to assure that no impropriety has occurred. 

Where the evidence shows misuse of funds, formal charges will be pursued whether or not the client has ultimately been reimbursed. Sanctions for improper handling of client funds range from censure to disbarment. In any case where the evidence suggests dishonest motives or reckless disregard for the client's or third person’s property, disbarment or a lengthy suspension will be sought.

Whenever a lawyer holds the property of a client or third person in connection with a representation, Rule 1.15 applies. Rule 1.15 governs the requirements and procedures a lawyer must follow while holding that property. Entitled "Safekeeping Property," Rule 1.15 applies to both funds and tangible property. Since lawyers are most frequently holding funds on behalf of a client, this Handbook will discuss the requirements of Rule 1.15 mainly in the context of holding client funds. Nevertheless, the requirements and duties expressed in Rule 1.15 apply with equal force to tangible property held in trust by the lawyer. Also, by using the word “safekeeping” in its title, Rule 1.15 requires the lawyer to do more than just hold property, the lawyer must take adequate precautions to “safekeep” or protect the property from actual or potential loss.

A. Definitions

1. "Trust" Account

The word "trust" is used to reflect the fiduciary role in which a lawyer receives or holds property on behalf of a client or a third person. When such property takes the form of funds, the word “trust” is an important label to distinguish those accounts where funds are being held in trust from the accounts containing the lawyer's own property. Gurnett v. Mutual Life Insurance Co. of New York, 356 Ill. 612, 191 N.E. 250 (1934).

2. Commingling

Commingling occurs when a lawyer either deposits funds belonging to a client into the lawyer's own personal or business account or when the lawyer deposits the lawyer’s own personal funds into the trust account where client funds are maintained. In re Clayter, 78 Ill.2d 276, 399 N.E.2d 1318 (1980).

3. Conversion

Conversion has been defined by the Illinois Supreme Court as " 'any unauthorized act, which deprives a man of his property permanently or for an indefinite time.' " In re Thebus, 108 Ill.2d 255, 259, 483 N.E.2d 1258 (1985), quoting Union Stock Yard & Transit Co. v. Mallory, Son & Zimmerman Co., 157 Ill. 554, 563 (1895). Conversion of trust funds occurs when a lawyer uses those funds for a purpose other than that for which they were delivered. Conversion is typically proven when the trust account is either overdrawn or when the lawyer allows the balance in the trust account to become less than the total amount the lawyer is holding in trust, even if the lawyer has other funds. In re Ushijima, 119 Ill.2d 51, 58, 518 N.E.2d 73, 76 (1987); In re Cheronis, 114 Ill.2d 527, 502 N.E.2d 722 (1986).

4. Client Trust Accounts

It is a "special" bank account, usually a checking or savings account, that is a depository for all funds belonging to clients and other persons coming into the lawyer's possession in connection with a representation. See Rule 1.15(a). Typically, it will be an account opened on behalf of one client (usually in situations where there is a large amount of money being held for a long period of time), where the interest earned on the account can be calculated and remitted to the individual client or it will be a pooled account where the moneys of several clients are held (usually nominal or short-term funds), where the interest earned on the account goes to the IOLTA program (see discussion of IOLTA accounts below). A lawyer may have one or more trust accounts depending on need.

In determining the type of account to deposit funds for a client, the lawyer or law firm must take into consideration the amount of interest that the funds would earn for a client during the period they are expected to be held, the cost of establishing and maintaining the account, and the capability of the financial institution, through subaccounting, to calculate and pay interest earned by each client’s funds, net of any transaction costs, to the individual client. See Rule 1.15(e). Regardless of the type of account the lawyer decides to deposit funds, it is axiomatic that a lawyer cannot take the interest earned on the funds held in trust. See In re Kitsos, 127 Ill.2d 1, 535 N.E.2d 792 (1989).

5. IOLTA Trust Accounts

Nominal or short-term funds of clients or third persons must be deposited in what is called an IOLTA trust account. IOLTA is the acronym for the Interest on Lawyers Trust Accounts program run by the Lawyers Trust Fund of Illinois, a non-profit corporation incorporated in 1981 by the Illinois State Bar and Chicago Bar associations. IOLTA trust accounts are pooled, interest-bearing or dividend-earning accounts, where the moneys of several clients are being held for different periods of time.

The net interest or dividends earned on IOLTA trust accounts is paid directly to the Lawyers Trust Fund, which uses the money to fund legal assistance and other programs benefitting the public throughout the state, specifically approved by the Supreme Court of Illinois.

The Lawyers Trust Fund of Illinois is located at Two Prudential Plaza, 180 North Stetson Avenue, Suite 820, Chicago, IL 60601  (312) 938-2906 [Main Phone]  (312) 938-3091 [Fax]  1-800-624-8962 [Toll Free].  Inquiries concerning the IOLTA program may be directed to Ruth Ann Schmitt, Executive Director, Lawyers Trust Fund of Illinois, at the above address or phone number or you may visit the Lawyers Trust Fund website at www.ltf.org .

The decision as to whether funds are nominal in amount or are expected to be held for a short period of time rests exclusively within the sound judgment of the lawyer or law firm and no charge of ethical impropriety or breach of professional conduct will result from the lawyer’s or law firm’s judgment on what is nominal or short term. See Rule 1.15(d)(5).

The Lawyers Trust Fund successfully persuaded many financial institutions in Illinois to waive all or most of the service charges and handling fees on IOLTA accounts.  The Lawyers Trust Fund sends a copy of a listing of those institutions (the Honor Roll) each year to every attorney and firm with an IOLTA account.  To obtain a copy of the Honor Roll, please contact the Lawyers Trust Fund of Illinois at (800) 624-8962 or (312) 938-2906 or visit the Lawyers Trust Fund website at www.ltf.org.

B. Key Characteristics of Holding Trust Funds and Property

To understand and fulfill the requirements of Rule 1.15, property held in trust must have all of the following three distinct and essential characteristics: 1) separate; 2) accountable; and 3) identifiable. Although Rule 1.15 does not expressly prescribe any particular accounting procedures or methods that lawyers must employ to fulfill the duties of “safekeeping” trust property, a lawyer cannot discharge those duties unless the way in which the property is held in trust can satisfy all of these requirements. See Rule 1.15(a).

1. Separate

All property of clients or third persons that is in a lawyer’s possession must be kept separate from the lawyer’s own property. Funds must be maintained in an account that is separate from the lawyer's personal and business accounts. See Rule 1.15(a). Holding client or third person funds in a safe deposit box, file cabinet or desk drawer is usually not an acceptable way of safekeeping trust funds and has been condemned by the Supreme Court which has stated that "such a covert method of handling a client's funds is highly unprofessional and one which can only create suspicion and harmful inference." In re Lingle, 27 Ill.2d 459, 463-64, 189 N.E.2d 342 (1963); In re Ashbach, 13 Ill.2d 411, 419, 150 N.E.2d 119 (1958). Due to the danger of conversion or other risk of loss, "it is essential that a client's money be held in such a manner that there can be no doubt that the lawyer is holding it only for another and that the money does not belong to him personally." In re Johnson, 133 Ill.2d 516, 531, 552 N.E.2d 703, 710 (1989).

Separation:

• protects the funds from levy by the lawyer's or law firm's creditors, including levy by the IRS (see In re Enstrom, 104 Ill.2d 410, 415, 472 N.E.2d 446 (1984);
  
  

• allows the account to be found in the event the lawyer becomes ill, incompetent or dies;
  
  

• protects the funds from being considered part of the lawyer's estate in the event the lawyer files for bankruptcy, is going through divorce proceedings or dies; and
  
  

• discourages the lawyer from misappropriating client funds for the lawyer's own personal use.

2. Accountable

The lawyer must be able to make a full and accurate accounting at any time to the client or third person of how much of their funds the lawyer has received, held, and paid out from the trust account. This is done through updated and accurate record keeping. For trust funds, the lawyer MUST be able to tell the client or third person the following:

• exactly how much monies were deposited;
  
  

• how monies were disbursed; and
  
  

• how much remains in the account for each client or third person on whose behalf the funds are being held.

3. Identifiable

The account must be clearly labeled as a trust account. Therefore, the account must be opened as a trust account, with the checks and deposit slips imprinted with that title. Merely opening an account in the lawyer’s or law firm’s name and treating the account as a trust account is not enough. See In re Clayter, 78 Ill.2d 276, 281, 399 N.E.2d 1318 (1980) (savings account, which was in the name of respondent who testified that he kept clients' funds in this account and that he had written "clients trust account" on the face of the passbook, was not a separate and identifiable trust account).

Identifying the account as a trust account serves as notice to the world that the funds in this account are not the lawyer's or law firm's personal or business assets and further safeguards the trust funds from any attempts to get at the lawyer's or law firm's assets through the trust fund account.

C. General Duties under Rule 1.15

Rule 1.15 imposes several affirmative duties upon lawyers governing their handling of property held in trust for clients or third persons in connection with a representation. Those duties include:

1. Duty to Notify Promptly - A lawyer has a duty to notify clients or third persons promptly upon the receipt of funds or other property in which the client or third person has an interest. The rationale for this duty is that the funds belong to the client or third person and the client or third person must make necessary decisions about what to do with the property which they are entitled to receive. See Rule 1.15(b).
   
   

2. Duty to Segregate - This duty requires the lawyer to keep client or third person funds or property separate from the lawyer's own property, so that the property is protected from actual or potential loss. See Rule 1.15(a).
   
   

3. Duty to Maintain Complete Records - A lawyer has a duty to properly maintain complete trust accounting records for a period of no less than seven years after the end of the representation. See Rule 1.15(a); S. Ct. R. 769.
   
   

4. Duty to Account to Client - A lawyer has a duty to promptly render a full accounting, upon request, to the client or third person regarding the funds or property held or distributed by the lawyer. See Rule 1.15(b).
   
   

5. Duty of Prompt Payment or Delivery of Client or Third Person Property - A lawyer has a duty to promptly pay over or deliver to the client or third person any funds or property that the client or third person is entitled to receive, so that the client or third person can make important decisions about the property. See Rule 1.15(b).
   
   

6. Duty to Preserve the Integrity of Client Funds - The single most important duty in handling trust property is the duty to refrain from using that property for any purpose whatsoever, other than as directed by the client or third person. This includes any unauthorized use by the lawyer of the client's or third person’s funds entrusted to the lawyer, including not only stealing, but also unauthorized temporary use for the lawyer's own purpose, whether or not the lawyer derives any personal gain or benefit. Misappropriation occurs not only when the lawyer uses the trust funds to pay the lawyer's own personal obligations, but also, for example, when the lawyer disburses trust funds of one client before the deposits, which are the source of the disbursement, have cleared, thereby using one client's funds to pay another client. In re Elias, 114 Ill.2d 321, 499 N.E.2d 1327 (1986).

D. Disclosure of Trust Accounts under Supreme Court Rule 756

Effective July 26, 2001, Supreme Court Rule 756 was amended to add a requirement that each lawyer must report, as part of the annual registration process any and all trust accounts maintained by the lawyer during the preceding 12 months.  See Supreme Court Rule 756(d).  If a lawyer does not maintain a trust account, the lawyer must state the reason why no such account is required.  S.Ct.R. 756(d).  A lawyer who fails to provide the trust account information required by Supreme Court 756(d) will be deemed not registered for the year and will be removed from the master roll of lawyers authorized to practice law in Illinois.  See Supreme Court Rule 756(e).  The registration materials, mailed out after October 1 of each year, include a section to provide the trust account information.  Effective January 2005, the trust account report information sent to the ARDC is considered private and confidential under Supreme Court Rule 766.

Each deposit and disbursement should describe the client and matter to which it relates.

D. There Is No Such Thing a Negative Balance

All balances are either positive (while monies are being held for clients) or zero (when the matter is closed and no monies remain in the trust account). The balance in the trust account should always equal the aggregate balance due all clients. In re Young, 111 Ill.2d 98, 488 N.E.2d 1014 (1986). If a negative balance occurs, it is, at best, a sign of negligence and, at worst, a sign of theft.

 

IV. Client Trust Accounting

Back to Top

A. Property Held in the Client Trust Account

1. What MUST be held in a Client Trust Account?

1. All funds or property belonging to a client or third person entrusted to the lawyer in connection with a representation, regardless of whether the lawyer regularly handles trust funds. E.g., filing fees; costs of retaining an investigator or expert; money to pay the client's creditors; rents collected on behalf of the client.
   
   

2. All funds to which both the lawyer and client claim an interest arising out of the course of the legal representation. E.g., settlement funds; bond refund checks.
   
   

3. All funds in which both the client and a third person have an interest which come into the lawyer's possession during the representation of the client. E.g., escrow funds held back in a real estate closing; escrow funds held pending the disposition of property in a divorce proceeding.
   
   

4. Prepayments for legal services where, under the terms of the fee agreement with the client, the advanced fees remain the client's money until the lawyer has performed services and the client agrees to the amount of fees earned and authorizes disbursement.

2. What funds MAY be held in a Client Trust Account?

1. Funds of the lawyer that are reasonably necessary to meet the bank's minimum balance requirements to open or maintain an IOLTA or non-IOLTA trust account or to pay bank charges and fees for non-IOLTA trust accounts.

3. What funds MUST NOT be held in a Client Trust Account?

1. Lawyer's own personal funds.
   
   

2. Lawyer's business and investment monies.
   
   

3. Payments for fees which, under the fee agreement with the client, are the property of the lawyer upon payment.

4. What MUST go into an IOLTA Trust Account?

Client funds that are nominal in amount or expected to be held for a short period of time are to be deposited into one or more "pooled" interest-bearing trust accounts with the interest paid to the Lawyers Trust Fund (Rule 1.15(d)). E.g., most settlement funds are considered to be short-term since they should be promptly paid to the client once the settlement check has cleared.

Rule 1.15 provides that the decision as to whether funds are long-term or short-term, substantial or nominal, rests in the sound judgment of the lawyer and no charge of ethical impropriety or other breach of professional conduct shall arise out of the lawyer's judgment on what is nominal or short-term (Rule 1.15(d)(5)).

Rule 1.15(e) sets forth the factors a lawyer shall take into consideration in exercising discretion as to whether funds should be deposited into an IOLTA or non-IOLTA account. For example:

1. the amount of interest which the funds would earn during the period they are expected to be deposited;
   
   

2. the cost of establishing and administering the account, including the cost of the lawyer's services; or
   
   

3. the capability of the financial institution, through subaccounting, to calculate and pay interest earned by each client's funds, net of any transaction costs, to the individual client.

5. Where Are Retainers and Advances for Fees Deposited?  [Revised as of July 27, 2007]

Rule 1.15(d) requires that money advanced by a client for “costs and expenses” is the client’s property and, therefore, must be deposited in the lawyer’s trust account.  However, the question of where to deposit advanced fees, general retainers, or flat or minimum fees is not explicitly addressed in Rule 1.15.  Adding to this uncertainty is the fact that up until recently there was little guidance on whether an advance fee paid by a client for legal services to be rendered in the future remained the client’s property until the services were performed, thereby necessitating that the advance be deposited in the trust account, or became the lawyer’s immediately upon payment, in which case, the lawyer could not deposit the advance in trust account but rather in the lawyer’s own account. 

 On May 3, 2007, the Illinois Supreme Court issued an opinion, in a case of first impression, recognizing the viability of advance payment retainers in Illinois. Before today, only two types of retainers were explicitly recognized by the Court: classic and security interest retainers.  Brian Dowling v. Chicago Options Associates, Inc., et al. (DLA Piper Rudnick Gray Cary (US), LLP), No. 102578, 2007 WL 1288279 (Ill. May 3) (pet. for reh’g. pending).  The .pdf format copy at the Court’s website: http://www.state.il.us/court/Opinions/SupremeCourt/2007/May/102578.pdf.

A classic retainer, also referred to as a true or general retainer, is paid by a client to the lawyer in order to secure the lawyer’s availability during a specified period of time or for a specified matter. This type of retainer is earned when paid and immediately becomes property of the lawyer, regardless of whether the lawyer ever actually performs any services for the client.

Under a security retainer arrangement, funds paid to the lawyer are not considered present payment for future services. Rather, the retainer remains the property of the client until the lawyer applies it to charges for services that are actually rendered. Any unearned funds are refunded to the client. The purpose of a security retainer is to secure payment of fees for future services that the lawyer is expected to perform. Pursuant to Rule 1.15(a) of the Illinois Rules of Professional Conduct, a security retainer must be deposited in a trust account and kept separate from the lawyer’s own property.

The Court acknowledged that lawyers can get an advance payment retainer from a client. This type of retainer consists of a present payment to the lawyer in exchange for the commitment to provide legal services in the future. Ownership of this retainer passes to the lawyer immediately upon payment. In concluding that the Illinois will now recognize this third type of retainer, the Court cited as persuasive authority the Client Trust Account Handbook (ARDC 2001). Our handbook explicitly recognizes the distinction between security retainers and advance fee payments.

“[W]ith advance fee payments, the client agrees to pay in advance for some or all of the services that the lawyer is expected to perform on a particular legal problem. The prepayment is applied against the lawyer’s hourly fee and the lawyer spends down the retainer as services are rendered. In Illinois, unless otherwise provided by statute or court order, the specific terms of the fee agreement with the client determine whether such prepayments remain the client’s funds and must be deposited in the trust account until earned or whether they are the lawyer’s funds and therefore must not be placed in the trust account. If a lawyer and a client agree in writing or orally that the lawyer will deposit the prepayment in the client trust account and bill against it as the representation proceeds, the funds remain the property of the client and must be deposited in the trust account. Withdrawals can be made only with notice to and agreement of the client. On the other hand, if the lawyer and client agree that the prepayment is immediate compensation for the lawyer’s commitment to perform future services, e.g., a flat fee agreement, the funds are the property of the lawyer and may be deposited in the lawyer’s operating or business account.” Client Trust Account Handbook, pt. IV (A)(5).

Slip op. at 9.

The Court ruled that any written retainer agreement, regardless of the type of retainer contemplated, should clearly define the kind of retainer being paid. If the parties agree that the client will pay a security retainer, that term should be used in the agreement; it should also state that the funds remain the property of the client until used to pay for services rendered and that the funds will be deposited in a client trust account. If the parties determine that an advance payment retainer best meets the client’s needs, the written agreement must use that term and clearly state that the funds become the property of the lawyer when paid and that they will not be held in a client trust account.

Importantly, “advance payment retainer agreements must be in writing and they must clearly disclose to the client the nature of the retainer, where it will be deposited, and how the lawyer or law firm will handle withdrawals from the retainer in payment for services rendered.” (Slip op. at 12; emphasis supplied).  Further, the Court ruled that:

A written agreement providing for an advance payment retainer must contain language advising the client of the option to place his or her money into a security retainer. The agreement must clearly advise the client that the choice of the type of retainer to be used is the client’s alone; provided, however, that if the attorney is unwilling to represent the client without receiving an advance payment retainer, the agreement must so state, including the attorney’s reasons therefor. In addition, an advance payment retainer agreement must set forth the special purpose behind the retainer and explain why an advance payment retainer is advantageous to the client.

Finally, in the event that the parties’ intent cannot be gleaned from the language of their agreement, we conclude that the agreement must be construed as providing for a security retainer....construing an unclear retainer agreement to establish a security retainer will provide the greatest protection for a client’s funds, since they will not be subject to the lawyer’s creditors and withdrawals from the funds may be made only with notice to and agreement of the client. Reimbursement to the client of any unearned fees may also be facilitated by construing an unclear agreement as a security retainer, since the funds must be held separate from the lawyer’s own funds.  See Client Trust Account Handbook pt. IV(A)(5).”

Slip op. at 13.

Rule 1.15(d) requires that money advanced by a client for "costs and expenses" be deposited in the lawyer's trust account. However, the question of where to deposit advanced fees, general retainers, or flat or minimum fees is not explicitly addressed in either Rule 1.15 or by Illinois Supreme Court precedent. The decision of where such funds must be deposited is determined by an application of the principles of Rule 1.15 to the terms of the fee agreement.

A retainer fee can have one of two purposes. It can be a fee prepaid by the client for the lawyer's agreement to be available to provide legal services when needed during a specified time period, or it can be an advance deposit for some or all of the legal services to be rendered in the future representation.

It is well-established that payments made to ensure the lawyer's availability are earned when paid since the lawyer is entitled to the money regardless of whether he or she ever actually performs any services for the client. Such types of retainers are variously called the "true," "classic," or "general" retainer. A typical example of such a retainer is where a business pays a lawyer a monthly or annual fee to be available to review contracts, answer questions, and consult on any legal matter that arises during the defined time period. Because this type of retainer is earned upon receipt by the lawyer, it must not be deposited into the lawyer's client trust account, but may be deposited into the lawyer's business account.

In contrast, with advance fee payments, the client agrees to pay in advance for some or all of the services that the lawyer is expected to perform on a particular legal problem. The prepayment is applied against the lawyer's hourly fee and the lawyer spends down the retainer as services are rendered. In Illinois, unless otherwise provided by statute or court order, the specific terms of the fee agreement with the client determine whether such prepayments remain the client's funds and must be deposited in the trust account until earned or whether they are the lawyer's funds and therefore must not be placed in the trust account.

If a lawyer and a client agree in writing or orally that the lawyer will deposit the prepayment in the client trust account and bill against it as the representation proceeds, the funds remain the property of the client and must be deposited in the trust account. Withdrawals can be made only with notice to and agreement of the client. On the other hand, if the lawyer and client agree that the prepayment is immediate compensation for the lawyer's commitment to perform future services, e.g., a flat fee agreement, the funds are the property of the lawyer and may be deposited in the lawyer's operating or business account.

Difficulties of interpretation arise where the lawyer and client do not have an explicit agreement. The Illinois Supreme Court has not definitively addressed the issue of whether advance fee payments in such cases constitute client funds or property of the lawyer for purposes of determining where the payments must be deposited. Nevertheless, in one case, the Court concluded that an unearned retainer paid as consideration for expected legal services did not constitute client funds. In re Taylor, 66 Ill.2d. 567, 363 N.E.2d 845, 848 (1977). Other courts and sources also characterize Illinois as holding the view that advanced fee payments do not constitute client funds unless the fee agreement specifically provides that the payment is to be held in the trust account. In re McDonald Bros. Construction Co., 114 B.R. 989, 997-98 (1990) citing ISBA Op. No. 703 (1980); see ABA/BNA Lawyer's Manual on Professional Conduct, sec. 45:109-110, at p. 13-14 (1993); Brickman, Lester, The Advance Fee Payment Dilemma: Should Payments Be Deposited to the Client Trust Account or to the General Office Account?, 10 Cardozo L.Rev. 647, 650 fn. 20 (1989). See also ISBA Op. No. 90-10 (1991); ABA Model Rule 1.15(c), added in February 2002, expressly provides that legal fees and expenses paid in advance must be deposited in the trust account and withdrawn as fees are earned or expenses incurred. .

Because the character of the funds is determined by the fee agreement, it is wisest and most consistent with a lawyer's fiduciary obligations to assure that you and the client explicitly agree on how the advanced fees should be held and to reduce that agreement to writing. If you do not do so, you risk being second-guessed, in hindsight, often when your relationship with the client has soured, when there is a disagreement about what services were promised, and when the retainer has already been spent. Bear in mind that Rule 1.5(b) requires that when the lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client before or within a reasonable time after commencing the representation.

A word of caution -- no matter where a lawyer deposits advanced fees, it is subject to a lawyer's duty to refund any unearned fees under Rule 1.16(e). A client has an unqualified right to discharge a lawyer. If a client discharges you after having paid a fee advance or flat fee, you can retain only a sum that is reasonable in light of the services you performed prior to being discharged and in light of the factors set forth in Rule 1.5. The remainder must be promptly refunded to the client. Violations of that duty are a relatively frequent subject of formal disciplinary charges.

If you want to avoid ethical problems arising from the handling of advanced fees, you should not spend any part of the advance that has not been earned, regardless of whether the retainer must be held in the trust account. For retainers that may be deposited in the lawyer's own business accounts, some lawyers find it a better practice to establish a separate office account for fees in addition to an operating account. Such retainers are then deposited in the fee account and funds are transferred to the operating account only after the fees have been earned.

B. Unclaimed Client Funds and Unidentified Excesses

Situations may arise where there is an excess amount of funds in the trust account due to (1) the disappearance of a client before a trust account check could have been issued to the client; (2) a client who has not cashed a trust account check; or (3) an unexplained amount of money that cannot be traced as belonging to either a client or the lawyer. Whatever the situation, the bottom line is that the lawyer is not entitled to take the money.

Where the client has disappeared before the lawyer has issued a check to the client, the lawyer must first take all reasonable steps to locate the client. How much effort a lawyer must undertake to find the missing client will vary in each case. Typically, a lawyer would check with the post office to see if the client left a forwarding address. The lawyer would then send a letter to the client’s last known address by regular mail and by certified return receipt advising the client that the lawyer is holding the client’s funds and asking the client for direction in disbursing the money. In cases where a great deal of money is involved, the lawyer may have to contact the client’s relatives, employers, neighbors and friends, publish notice in places the client might frequent, use an investigator or check with the Social Security Administration. See Michigan State Bar Opinion RI-38 (November 20, 1989). 

If the client cannot be located and the funds have remained unclaimed by the client for five years, under the Uniform Disposition of Unclaimed Property Act, 765 ILCS secs. 1025/1 et seq. (1992), the funds are presumed abandoned and the lawyer may remit the funds to the Illinois Unclaimed Property Division of the Illinois State Treasurer. See ISBA Op. No. 845 (Nov. 8, 1983) (what to do with client funds when client cannot be located); see also In re Walner, 119 Ill.2d 511, 525, 519 N.E.2d 903 (1988) (censure given to lawyer who settled client's claim without consent and endorsed client's name on and release and settlement check, without authorization, where no prejudice resulted and attorney acted out of a "misguided sense of efficiency"); ISBA Op. No. 95-11 (January 1996) (absent a narrowly drawn power of attorney, a law firm cannot negotiate a check on behalf of a missing client). For further information on remitting unclaimed property to the state, you may call the Unclaimed Property Division at (217) 782-4072 or go to the State Treasurer website at www.cashdash.net.

The same analysis applies if a trust account check was issued but not cashed by the client. The lawyer should contact the client at the client’s last known address and advise the client that the client has not cashed the trust account check and that unless the client advises the lawyer to issue a replacement check, the funds will be presumed to be abandoned in accordance with the Uniform Disposition of Unclaimed Property Act and the funds will be remitted to the Illinois Unclaimed Property Division.

Sometimes ownership of the funds cannot be traced to either a client or the lawyer typically due to a mathematical error. In these situations, if the lawyer cannot determine with any reasonable certainty if the amount left over in the account belongs to either the lawyer or a client, the safest course is to treat the funds as abandoned property and proceed as discussed above.

C. Bank Charges and Fees

For non-IOLTA trust accounts, the lawyer may deposit a reasonably sufficient amount of the lawyer's own funds to pay necessary bank charges and fees. See Hazard, G. and Hodes, W., The Law of Lawyering, sec. 1:15:200, at p. 457 (2 ed. 1992 supp.).  Although not provided for in Illinois Rule 1.15, ABA Model Rule 1.15(b), amended February 2002, makes it permissible for a lawyer to deposit the lawyer’s own funds in the trust account to the extent necessary to pay bank charges on the account.  A lawyer should maintain accurate records of the lawyer’s deposit of such funds.  See Comment [2] to ABA Model Rule 1.15.

For IOLTA trust accounts, the Lawyers Trust Fund will pay for ordinary, account-generated bank charges and fees out of the interest earned. However, IOLTA cannot pay for certain charges such as NSF, stop payment or bank reconciliation charges or "special" services such as wire transfers; these charges are the lawyer's own responsibility. The Lawyers Trust Fund has an “Honor Roll” list of financial institutions that have agreed to either reduce or eliminate their service charges on IOLTA accounts. A copy of the “Honor Roll” may be obtained by calling the Lawyers Trust service at (800) 624-8962 or (312) 372-5906 or from the Lawyers Trust Fund website at www.ltf.org.

Additionally, for either IOLTA or non-IOLTA trust accounts, a lawyer may maintain a sufficient amount of the lawyer's own funds in the trust account if this amount is required by the bank to open or maintain a minimum balance.

D. Trust Property Other Than Cash

When the lawyer receives non-cash trust property, as with money held in trust, the lawyer must (1) identify or label it as such; (2) keep it separate from the lawyer's own property; and (3) take appropriate safeguards to protect and preserve it. This means that the lawyer should identify and label the client property promptly upon receipt and place it in a safe deposit box or other place of safekeeping as soon as possible. The safe deposit box, like the trust account, should bear a label that clearly identifies it as the repository of property not belonging to the lawyer but property held in trust on behalf of clients, such as “Clients’ Safe Deposit Box,” and must not contain any of the lawyer’s property. 

The lawyer must also keep records that sufficiently describe the items that are being held in trust, for whose benefit, and where they are being held. Below is an example of the type of record that should be made with respect to items being held in a safe deposit box:

Trust Safe Deposit Receipt

Received this _____day of _____, 19__, by _________________.

___________________________________________________________
___________________________________________________________
___________________________________________________________
(Description of item(s) being placed into safe deposit box -- if items are numbered such as stocks or bonds, specify numbers.)

Item(s) being held in trust for: ____________________________________

Firm Name: _________________________________________________
Client Name:________________________________________________
Item(s) being placed into safe deposit box by:________________________

Any questions regarding contents should be addressed to: _______________

Name and Address of Bank Where Safe Deposit Located ______________________

Safe Deposit Box ID Number: ________________

Anticipated period item(s) will be held:_____________________

A. Practice Tips for Opening and Operating the Trust Account

1. Form - Generally, the trust account can be a savings account, checking account or certificate of deposit at a federally insured bank or savings and loan. For IOLTA trust accounts, the account must be an interest-bearing account and an account that is subject to withdrawal promptly upon request (a corporate/business checking account, such as a NOW account). See Rule 1.15(d)(1).
   
   

2. Location - The account must be maintained in the state where the lawyer's office is located or elsewhere with the client's consent.  See Rule 1.15(a).  If the trust account is located outside of Illinois because the lawyer is licensed and practices in that other jurisdiction, care must taken that the trust account complies with that state’s trust accounting rules. See Rule 8.5(b) (choice of law). In situations where the client wants the trust account opened for the client’s benefit in another state, it is advisable to get the client’s consent in writing.

For IOLTA trust accounts, the trust account must be established with a federally insured bank, savings bank or savings and loan association authorized by federal or state law to do business in Illinois.  See Rule 1.15(d)(1).  

Practice Tip: Know Your Financial Institution - Go to a financial institution that does business with lawyers and knows something about lawyers’ trust accounts. The “Honor Roll” of banks complied by the Lawyers Trust Fund of Illinois is a good place to start. Talk to other lawyers. Know the financial institution’s charges and fees for maintaining such accounts and have a copy of the account agreement with the financial institution. Know the financial institution’s schedules for posting and crediting deposits. Know what the federally insured limits are on deposits. Investigate the financial institution's requirements for opening and maintaining a trust account such as the minimum balance to earn interest, bank charges to handle the account, check printing charges, and the collection process to clear intrastate and interstate checks and other instruments.  The Lawyers Trust Fund website (www.ltf.org) has a section on its site with information for financial institutions describing the IOLTA program, the forms necessary to set up an IOLTA account and how interest is to be reported and remitted.

3. Naming the Trust Account - An IOLTA trust account would bear the lawyer or law firm's name and include the designation "Client Trust Account," "Client Escrow Account," "Attorney Trust Account" or "Real Estate Funds Account" (as provided in Rule 1.15(g)) or any other name which would clearly identify it as a trust account. Illinois does not require a particular form of identification on the trust account but the name of the account must be sufficiently clear to serve as notice to the world that it is a trust account and not an account belonging to the attorney. See Rule 1.15(a).  For IOLTA accounts, do not identify the Lawyers Trust Fund of Illinois as designee, trustee or owner of the account.  For non-IOLTA trust accounts, which are opened for the benefit of a particular client, the name of the account would include that fact.
   
   

4. Opening an IOLTA Trust Account - For an IOLTA account, the lawyer or firm enrolls in the IOLTA program by completing the sign-up forms (Notice to Financial Institution to Establish IOLTA Account, Notice of Enrollment and Interest Remittance Report) and submitting the forms to the bank.  The enrollment forms instruct the bank to establish an IOLTA account.  The taxpayer identification number (TIN) on the account is the Lawyers Trust Fund of Illinois.  The IOLTA sign-up forms may be downloaded from the Lawyers Trust Fund website at www.ltf.org or obtained by contacting the Lawyers Trust Fund at (800) 624-8962 or (312) 938-2906.
   
   

5. Select Trust Account Checks that are Distinguishable from Business Account Checks - Select checks that have the trust account name on them and are of a different color than those of the operating account so that checks written on the trust account can be more easily distinguished from checks written on the attorney's operating account. Also, some lawyers maintain their business and personal accounts at a different financial institution from where they have their trust accounts so that no trust account moneys will be inadvertently accessed.
   
   

6. Select Signatories with Care - Illinois does not prohibit a lawyer from delegating check-signing authority to someone other than the lawyer. However, the lawyer has a non-delegable duty to protect and preserve the funds in the trust account (see In re Vrodolyk, 137 Ill.2d 407, 560 N.E.2d 840 (1990)) and can be disciplined for failure to supervise subordinates. See In re Waddy, 95 CH 686 (M.R. 13084, January 30, 1997).

Practice Tip: You should have a practice where you reconcile all of your accounts on at least a monthly basis, regardless of whether you do your own accounting or you have someone assisting you. If you fail to reconcile, you may not be aware of bank errors, miscalculations and employee embezzlement. See discussion on monthly trust account reconciliation below.

 

CASH RECEIPTS JOURNAL TRUST ACCOUNT NO. ____________________
DATE	SOURCE	CLIENT	DEPOSIT	AMOUNT

2. Cash disbursements journal. This journal lists chronologically all trust account disbursements and identifies the recipient, purpose and date of each disbursement.

 

CASH DISBURSEMENTS JOURNAL TRUST ACCOUNT NO. _________________
DATE	CHECK	PAYEE	PURPOSE	CLIENT	AMOUNT

3. Client subsidiary ledger. This ledger records chronologically for each client all receipts, disbursements and balances, and includes:

1. Separate page for each client.

2. Posting transactions (receipts and disbursements) by date, purpose and amount.

3. If the account is a separate one for the client's benefit or if the account allocates interest to each client, any net interest (accrued interest less service charges) credited to the client.

 

CLIENT SUBSIDIARY LEDGER PAGE Name of Client: _____________________________________ Legal Matter/Adverse Party: ___________________________ File or Case Number: ________________________________
DATE	DESCRIPTION OF TRANSACTION	CHECK	FUNDS PAID	FUNDS RECEIVED	BALANCE

4. Checkbook register. A trust account checkbook register is like any other checkbook register. It records deposits and trust account checks in sequential order. It also maintains a running balance.

 

CHECKBOOK REGISTER
CHECK	DATE	PAYEE OR DEPOSIT SOURCE	AMOUNT OF CHECK	DEPOSIT AMOUNT	BALANCE

3. Retention of Records

All financial records related to the lawyer's practice of law must be maintained for a minimum of seven years after the fiduciary obligation ends (Rule 1.15(a); S.Ct.Rule 769). Financial records include, but are not limited to, bank statements, time and billing records, checks, check stubs, journals, ledgers, audits, financial statements, tax returns and tax reports (S.Ct.Rule 769(2)).

B. Depositing Trust Account Funds

1. Deposit client funds in the trust account promptly upon receipt. Generate the following:

a. Deposit slip, (receipt for cash), which identifies client or file for whom deposit is being made;

b. Checkbook register deposit entry;

c. Client subsidiary ledger entry; and

d. Cash receipts journal entry.

2. Checks payable jointly to the client and the lawyer should be deposited in the trust account and not endorsed over to the client.

 

C. Disbursing Trust Account Funds

Back to Top

1.  Disbursements to the client or on behalf of the client must be made promptly after the deposit has been credited. Generate the following:

1. Check made payable to the client or third party, with notation of the client matter and purpose in memo portion of the check;
   
   

2. Checkbook register disbursement entry;
   
   

3. Client subsidiary ledger entry; and
   
   

4. Cash disbursements journal entry.

2. Proper Methods For Withdrawing Legal Fees

1. Before an earned legal fee may properly be withdrawn from a trust account, the client should be given notice of the nature of the services rendered and the amount of the legal fee proposed to be paid to the lawyer. See In re Smith, 63 Ill.2d 250, 347 N.E.2d 133 (1976). If no objection is received within a reasonable time, the lawyer may withdraw the fee from the trust account.
   
   

2. Moreover, if no dispute over the fee exists, the lawyers' fees which are justly due and owing, may not remain in the trust account, but MUST be promptly withdrawn. If not, the lawyer is commingling his or her own funds with the clients' funds and, as a consequence, is endangering the integrity of the trust account. See In re Enstrom, 104 Ill.2d 410, 472 N.E.2d 446 (1984).
   
   

3. Disbursements out of the trust account for earned legal fees should be made payable to the lawyer and not to a third party creditor of the lawyer. Otherwise, a lawyer creates the appearance of using the trust account for the lawyer's own personal or business expenses. This could potentially subject the trust account to attachment by the lawyer's creditors, thereby endangering existing client funds and the status of the account as a trust account.

D. Reconciling Account Records with Monthly Bank Statements

1. Before a trust account can be reconciled with the monthly bank statement, the balances of:

• the cash receipts and cash disbursement journals;
  
  

• the client subsidiary ledgers; and
  
  

• the checkbook register

must equal one another.

a. Add together the monthly ending balances of all client subsidiary ledgers.

b. Take the figure you arrived at the previous month when you reconciled your cash receipts and cash disbursements journals. Add the cash receipts journal balance for the month in question, subtract the cash disbursements journal balance for that month.

c. Take the balance in the checkbook register at the end of the month in question.

d. The figures for a, b, and c must be equal. If they are not, look for entries that don't match or addition or subtraction errors, until all three figures are the same.

2. Interest and Bank Costs

a. For IOLTA accounts, interest credits are paid by the financial institution directly to the Lawyers Trust Fund, and certain legitimate and reasonable bank costs are paid by the Fund directly to the bank. If your monthly bank statement reflects interest credited but not yet paid out to the Lawyers Trust fund or bank charges not yet paid by the Fund, you should adjust the balance shown on the monthly bank statement accordingly. The interest and the charges should not be entered on your ledgers, cash journals, or checkbook register.

b. If you have an account where interest is credited to individual clients whose funds are held in the account, after bank costs are deducted, you will not adjust the balance shown on the bank statement, but you must add the net interest to your client subsidiary ledgers, your cash receipts journal, and your checkbook register.

3. Monthly Trust Account Reconciliation.

The bank statement balance is reconciled with the other balances as follows:

a. Take the balance shown on the monthly bank statement. (For IOLTA accounts, that balance may have to be adjusted as discussed in (2)(a) above.)

b. Add any deposits not credited on the bank statements.

c. Subtract checks not debited on the bank statement.

d. The balance should be equal to the three balances described in (1)(a), (b) and (c) above -- the client subsidiary ledgers balance, the cash disbursements and receipts journals balance, and the checkbook register balance.

E. Sample Trust Account Transactions, Trust Account Trial Balances and Trust Account Reconciliation

1. Sample Trust Account Transactions

Julia Dolan is a sole practitioner. On September 30, 1994, the bank statement balance for Dolan's IOLTA trust account is $10,241.66. These funds are identified as follows:

a. $10,000 represents escrow money which was deposited into Dolan's trust account on September 1, 1994, on behalf of her client Ron Roper.

b. $200 represents funds of Julia Dolan which were deposited into the trust account in order to maintain a minimum balance necessary to avoid bank service charges.

c. $41.66 represents the interest credited for the month of September which has yet to be paid by the bank to IOLTA.

The only subsidiary ledgers with outstanding balances on September 30, 1994, are those for Roper and Dolan. Because this is an IOLTA account, the interest figure ($41.66) does not appear on the subsidiary ledger.

 

CLIENT SUBSIDIARY LEDGER PAGE TRUST ACCOUNT NO. 123-456 Name of Client: Ron Roper Legal Matter/Adverse Party: Real Estate Escrow - Hadley File or Case Number: 94-161
DATE	DESCRIPTION OF TRANSACTION	CHECK	FUNDS PAID	FUNDS RECEIVED	BALANCE
09/01/94	Deposit - Escrow			$10,000	$10,000

 

CLIENT SUBSIDIARY LEDGER PAGE TRUST ACCOUNT NO. 123-456 Name of Client: Julia Dolan, Attorney at Law Legal Matter/Adverse Party:  None File or Case Number: None
DATE	DESCRIPTION OF TRANSACTION	CHECK	FUNDS PAID	FUNDS RECEIVED	BALANCE
01/01/94	Minimum balance amount to avoid service charge			$200	$200

On October 1, 1994, Joan Smith, a client, gives Dolan a $1000 retainer. The fee agreement with Smith provides that the retainer is to be placed in the trust account and withdrawn as earned.

 

CLIENT SUBSIDIARY LEDGER PAGE TRUST ACCOUNT NO. 123-456 Name of Client: Joan Smith Legal Matter/Adverse Party: Marital Dissolution File or Case Number: 94-1057
DATE	DESCRIPTION OF TRANSACTION	CHECK	FUNDS PAID	FUNDS RECEIVED	BALANCE
01/01/94	Retainer - Smith			$1,000	$1,000

 

CASH RECEIPTS JOURNAL TRUST ACCOUNT NO. 123-456 OCTOBER 1994
DATE	SOURCE	CLIENT	DEPOSIT	AMOUNT
10/01/94	Smith check #2398	Joan Smith	50062	$1,000

On October 5, 1994, client James Johnson is ordered to endorse his federal and state tax refunds of $2,000 and deposit them into Dolan's trust account. The refunds will be distributed upon further order of the court.

 

CASH SUBSIDIARY LEDGER PAGE TRUST ACCOUNT NO. 123-456 Name of Client: James Johnson Legal Matter/Adverse Party: Dissolution File or Case Number: 93-1058
DATE	DESCRIPTION OF TRANSACTION	CHECK	FUNDS PAID	FUNDS RECEIVED	BALANCE
10/05/94	Fed/State Refund			$2,000	$2,000

 

CASH RECEIPTS JOURNAL TRUST ACCOUNT NO. 123-456 OCTOBER 1994
DATE	SOURCE	CLIENT	DEPOSIT	AMOUNT
10/01/94	Smith check #2398	Joan Smith	50062	$1,000
10/05/94	Fed & State Refund	James Johnson	50145	$2,000

On October 13, 1994, Dolan receives a settlement check in the amount of $15,000 from Ace Insurance Company for her client Bill Grey. Dolan prepares a written settlement statement, in accordance with the terms of the written contingent fee agreement and Rule 1.5(c):

 

Personal Injury Settlement Statement Bill Grey vs. Ace Insurance Co.
Settlement Amount from Ace Insurance Co.		$15,000.00
Court Reporter Inc.	$400.00
Process Server Inc.	$ 60.00
Dr. Bailey, Expert	$340.00
Total Expenses		$ 800.00
Attorney Fees (1/3 gross rec.)		$ 5,000.00
Amount Due Bill Grey		$ 9,200.00

On October 20, 1994, Dolan makes the disbursements in accordance with the settlement statement after allowing seven days for the insurance company check to clear.

 

CLIENT SUBSIDIARY LEDGER PAGE TRUST ACCOUNT NO. 123-456 Name of Client: Bill Grey Legal Matter/Adverse Party: Personal Injury-Ace Ins. Co. File or Case Number: 91-1002
DATE	DESCRIPTION OF TRANSACTION	CHECK	FUNDS PAID	FUNDS RECEIVED	BALANCE
10/13/94	Ace Insurance Co.			$15,000	$15,000
10/20/94	Court Reporter Inc.	1005	$400		$14,600
10/20/94	Process Server Inc.	1006	$60		$14,540
10/20/94	Dr. Bailey	1007	$340		$14,200
10/20/94	Bill Grey	1008	$9,200		$5,000
10/20/94	Julia Dolan-Fees	1009	$5,000		$0

 

CASH RECEIPTS JOURNAL TRUST ACCOUNT NO. 123-456 OCTOBER 1994
DATE	SOURCE	CLIENT	DEPOSIT	AMOUNT
10/01/94	Smith check #2398	Joan Smith	50062	$1,000
10/05/94	Fed & State Refund	James Johnson	50145	$2,000
10/13/94	Ace Insurance Co.	Bill Grey	62001	$15,000

 

CASH DISBURSEMENTS JOURNAL TRUST ACCOUNT NO. 123-456 OCTOBER 1994
DATE	CHECK	PAYEE	PURPOSE	CLIENT	AMOUNT
10/20/94	1005