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CLIENT TRUST ACCOUNT HANDBOOK
Revised July 15, 2009
 
and
Updated with Rule 1.15 of the 2010 Illinois Rules of Professional Conduct (eff. Jan. 1, 2010)

Table of Contents

I. Introduction - The Importance of Client Trust Accounting 
A. An Attorney’s Ethical Obligations
B. Disciplinary Treatment of Management of Client Property and Funds

II. Trust Account Rules
A. Definitions of Trust Account Terms, Including IOLTA Accounts
B. Key Characteristics of Holding Trust Funds and Property
C. General Duties Under Rule 1.15
D. Disclosure of Trust Accounts under Supreme Court Rule 756

III. Key Trust Accounting Concepts 
A. Separate Clients Should Be Thought of as Separate Accounts
B. You Can’t Spend What You Don’t Have or Timing is Everything
C. Always Maintain a Paper Trail
D. There is No Such Thing as a Negative Balance

IV. Client Trust Accounting 
A. Property Held in the Client Trust Account
B. Unclaimed Client Funds and Unidentified Excesses
C. Bank Charges and Fees
D. Trust Property Other than Cash

V. General Procedures and Practice Tips for Opening and Operating a Trust Account 

VI. Trust Accounting 
A. Accounting Systems
B. Depositing Trust Account Funds
C. Disbursing Trust Account Funds
D. Reconciling Account Records with Monthly Bank Statements
E. Sample Trust Account Transactions, Trust Account Trial Balances and Trust Account Reconciliation

VII. Where to Find Help

APPENDIX

RULE 1.15 Safekeeping Property

Suggested Sources for Researching Ethics Issues

I. Introduction - The Importance of Client Trust Accounting

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A. An Attorney's Ethical Obligations

The ethical importance of the creation and maintenance of the client trust account is rooted in the general principle that a lawyer who holds the funds or property of a client or third person in trust, even if for a brief time or intermittently, has the duty as a fiduciary to safeguard and segregate those assets from the lawyer's personal and business assets. 

Rule 1.15 sets forth the ethical duties a lawyer must fulfill in holding the funds of clients or third persons that are received by the lawyer in connection with a representation. The duties set forth in Rule 1.15 are intended to eliminate not only the actual loss of client or third person funds but also their risk of loss while in the lawyer's possession. See In re Bizar, 97 Ill.2d 127, 132, 454 N.E.2d 271, 273 (1983). To fulfill the duties set forth in Rule 1.15, a lawyer's handling of trust funds must be: (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.

Holding property in trust is a non-delegable, personal fiduciary responsibility as long as that property remains in the lawyer’s possession. This responsibility cannot be transferred and is not excused by ignorance, inattention, incompetence or dishonesty of the lawyer or by the lawyer’s associates or non-lawyer employees. Although a lawyer may employ others, through adequate training and supervision, to assist the lawyer in fulfilling his or her duties under Rule 1.15, the lawyer is solely responsible for ensuring that the duties imposed by Rule 1.15 are being met. 

The need to handle with scrupulous care funds entrusted to a lawyer by a client or third person should be self-evident. Nonetheless, cases continue to arise where practicing lawyers, either inadvertently or intentionally, mishandle trust funds, subjecting clients and third persons to the risk of economic hardship and seriously undermining public confidence in the legal profession. The purpose of this Handbook is three-fold:

1. To describe the rules for handling trust funds and property; 

2. To provide a practical guide to creating and maintaining the trust account; and

3. To give guidance on certain unresolved questions concerning the handling of trust funds.

The Handbook will serve its purpose if it promotes better safeguarding of trust funds, facilitates greater accountability and reduces the number of complaints annually received relating to the maintenance of trust funds. It is not intended to address all the complex legal issues that might arise when handling client or third person property. To help you find answers to these and other questions about your professional responsibilities, you may call the ARDC Ethics Inquiry Program at either the Chicago office at: 312/565-2600 or 800/826-8625 or the Springfield office at: 217/522-6838 or 800/252-8048.  The program provides general research and guidance on hypothetical questions regarding ethics issues and the Rules of Professional Conduct. We encourage your input regarding this Handbook or any of its provisions.

B. Disciplinary Treatment of Management of Trust Property and Funds

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:

This case presents this court with an opportunity to admonish the bar of the State that it is absolutely impermissible for an attorney to commingle his funds with those of his client or with money he holds as a fiduciary. Unfortunately, many attorneys are either unaware of, or indifferent to, this proscription.

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 disciplinary case involving Rule 1.15 violations, the Hearing Board observed:

Fourteen years after [the Supreme Court's admonition in Clayter], we are still contending with attorneys who are either ignorant or scornful of the rule. At some point, something must be done to get the Bar's attention . . . . We hope we are beyond having to discuss the seriousness of commingling, but it bears repeating that the harm to the public is no less if the attorney who commingles does so with a pure heart. The Court observed in In re Enstrom, 104 Ill.2d 410, 417, 472 N.E.2d 446, 449 (1984) that commingled funds may become subject to the claims of an attorney's creditors or otherwise encumbered by operation of law. A tax lien, insolvency, a dissolution of marriage proceeding, or the death or incapacity of the attorney are just a few events that can tie up a client's assets for years, if not permanently deprive him or her of those assets. As the Court said in In re Enstrom, 104 Ill.2d 410, 417, 472 N.E.2d 446, 449 (1984): "The rule is intended to guard not only against the actual loss of the funds but also against the risk of loss." Citing In re Bizar, 97 Ill.2d 127, 132, 454 N.E.2d 271, 273 (1983).

Respondent's assertion that the nature of his practice did not require him to have a client trust account does not excuse his failure to comply with Rule 1.15(a). Had Respondent deposited the check into a separate, identifiable trust account and then disbursed the proceeds promptly upon the written direction of the parties, this case would never have occurred and the funds would have been safe. The risk of loss of client funds strongly militates in favor of strictly enforcing the rules regarding their safekeeping.  (In re Van Beek, 93CH 34 (4/15/94 HB Report at p. 16).

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.

II. Trust Account Rules

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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. See 2010 Rule 1.15, cmt. [1].  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)), other than as permitted by Rule 1.15(d)(5) [2010 Rule 1.15(b)] for the sole purpose of paying bank services charges.

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) [2010 Rule 1.15(g)]. 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

Rule 1.15(d) [2010 Rule 1.15(f)] requires all 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.  Rule 1.15(f)(1) [2010 Rule 1.15(h)(1)] defines “IOLTA account” as “an interest or dividend-bearing trust account benefiting the Lawyer Trust Fund of Illinois established in an eligible institution for the deposit of nominal or short-term funds of clients or third person as defined in (d) [(f)] and from which funds may be withdrawn upon request as soon as permitted by law.”   

The IOLTA account is operationally different from a non-IOLTA trust account in two respects, one, that the taxpayer identification number (TIN) on the account is the Lawyers' Trust Fund's and not the client's, the lawyer's or the law firm's and, second, the interest earned on the account is collected by the bank, and is sent, along with the remittance report, to the Lawyers' Trust Fund.

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 benefiting 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) [2010 Rule 1.15(f)(7)].  

As of June 1, 2007, IOLTA accounts must be maintained only at financial institutions approved by the Lawyers Trust Fund of Illinois, thereby ensuring that IOLTA trust accounts will receive the same interest as other types of similar accounts.   Eligible financial institutions now include banks and savings banks insured by the FDIC, as well as investment companies that register with the CED, who offer money market funds collaterized by US government obligations.  The Lawyers Trust Fund website (www.ltf.org) has a listing of those institutions, which it updates frequently.  To contact by phone the Lawyers Trust Fund of Illinois, please call (800) 624-8962 or (312) 938-2906.

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) [2010 Rule 1.15(d)].

  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) [2010 Rule 1.15(d)].

  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) [2010 Rule 1.15(d)].

  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(g).  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(a)(10).

III. Key Trust Accounting Concepts

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A. Separate Clients Should Be Thought Of As Separate Accounts

As a practical matter, a lawyer need not open a separate trust account for each client's funds. Rather, a lawyer has the discretion under Rule 1.15 to "pool" the funds of more than one client into one or more trust accounts. If the amounts being held in trust are nominal or are expected to be held for a short period of time, the lawyer must deposit the funds into a pooled, interest-bearing IOLTA trust acccount. With pooled trust accounts, it is important to keep in mind that while more than one client's funds are deposited in the trust account, each client's funds must be thought of and treated as separate. Client A's funds have nothing to do with Client B's funds. NEVER allow one client's funds to be used, even momentarily, to satisfy another client's obligations. Separation is obtained by maintaining a separate log or client ledger sheet for each client. In this way, the lawyer will be able to account exactly for all money received or paid out on behalf of each client at any given time.

B. You Can't Spend What You Don't Have or Timing Is Everything

A deposit in the trust account cannot be disbursed until the deposited item has cleared the banking process and been credited to the trust account. The funds in the trust account cannot be used by anyone other than the client or third person who owns them, and the lawyer is responsible for assuring that the funds are not, even inadvertently, diverted to another. The rule of uncollected funds is simply: if you write a check from the trust account after you have deposited a check or draft on behalf of a particular client, but before the deposited monies have cleared the banking process and have been credited to the trust account, if the check is presented, either it will bounce or you will be drawing on funds which belong to other clients. This is considered conversion even if you have no dishonest motive and no client is ultimately harmed. In re Clayter, 78 Ill.2d 276, 283, 399 N.E.2d 1318 (1980) Conversion is defined as any unauthorized use of trust funds that deprives the client or third person of the use of those funds even temporarily. See In re Lenz, 108 Ill.2d 445, 484 N.E.2d 1093 (1985).

For example, do not be tempted to do your client a favor by writing a check to the client for settlement proceeds before the settlement check has cleared on the theory that there is other money in the trust account. By doing so, you are putting other clients’ funds are risk. See In re Reeves, 93 SH 599 (M.R. 11056, May 26, 1995) (lawyer suspended for, inter alia, conversion of client funds where the lawyer would often issue a client a check drawn on the trust account prior to the deposited settlement check clearing and its proceeds being posted to the trust account. His clients would frequently cash their checks on the same day the trust account check was issued and the lawyer's bank would pay out on the check from the funds currently in the account belonging to other clients).

Therefore, it is important to know the financial institution’s check clearing procedures and schedules of when funds can be withdrawn. The time it takes for funds to become available after deposit can vary between a day to several weeks depending on the form in which the money is deposited. Ask your financial institution for their schedule of when deposits are posted to the account. Many banks have automated account information systems where you can check the activity on an account.

Practice Tip: Normally, checks will be presumed good and many financial institutions will automatically honor and credit a deposit a certain number of banking days after deposit without actually having received verification from the drawee bank that the funds have been paid. In such cases, the lawyer can safely disburse funds against the check when the lawyer’s bank credits the deposit to the account. However, even after an item has been posted to an account, it still may be returned due to insufficient funds, stop payment or improper endorsement and a lawyer may not learn of the dishonor until several days after the item was posted. When a lawyer has any concerns that a check might be dishonored, the safest way to determine that an item has cleared is to copy the deposited check and call the bank upon which it is drawn to find out if the item has been honored.

Real Estate Transactions: Lawyers who act as the closing agents for real estate transactions face the dilemma of the commercial necessity of immediately issuing checks from the trust account on funds that have not even been deposited, much less cleared the banking process. Rule 1.15(g) [2010 Rule 1.15(i)] permits lawyers in the closing of a real estate transaction to disburse funds deposited, but not yet collected, so long as the lawyer deposited the funds into a segregated Real Estate Funds Account (REFA), established prior to the closing and maintained solely for the receipt and disbursement of such funds.  Also, the lawyer must either be acting as a closing agent as prescribed in subparagraph (g)(1) [(i)(1)] or the instrument for deposit must meet the "good-funds" requirements set forth in subparagraph (g)(2)[(i)(2)].  However, while the rule protects a lawyer from any disciplinary consequences in this context, a lawyer would remain civilly liable if any deposit does not clear.

C. Always Maintain a Paper Trail

Accountability requires that all aspects of the transaction be traceable from the time of receipt of the funds, up to and including the disbursement of the funds by check, proper negotiation of that check by the payee and clearance through the banking process. In the typical transaction, where the client gives money to the lawyer, who then deposits it in the client trust account and pays the money out at the direction of the client, the following documents would provide a paper trail for the lawyer of what actions were taken:

  • the initial deposit slip or copy of a bank receipt, which would show the date of deposit, the amount of deposit, the name of the client on whose behalf the money has been received, the source of the funds and the date stamp showing the date the deposit was received by the bank;

  • the bank statement, which would show that the bank credited the deposit and when it was credited;

  • the checkbook stub, which would show when disbursements were made and to whom;

  • the disbursement check, which would show the date it was drawn, the amount and the name of the payee, the purpose of the check, the order of negotiation (from the endorsements) and the date deposited for collection; 

  • the bank statement, which would show the date the trust account was actually charged for the check; and 

  • any file documentation that would explain the deposit or the authority for how the money should be distributed, such as a closing statement, a court order or a signed authorization by the client for the disbursement of funds.

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

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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. See Rule 1.15(a).  E.g., advances for filing fees or 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. See Rule 1.15(c) [2010 Rule 1.15(e)]. 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.  See Rule 1.15(c) [2010 Rule 1.15(e)]

  4. Funds to secure payment of legal fees and expenses to be withdrawn by the lawyer only as fees are earned and expenses incurred. See 2010 Rule 1.15(c).  See infra part IV.A.5.

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

  1. Funds of the lawyer necessary to pay bank services charges such as the bank's minimum balance requirements to open or maintain the client trust account.   See Rule 1.15(d)(5) [2010 Rule 1.15(b)].

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. Fees that have been earned and funds received in advance as a fixed fee, a general retainer or an advance payment retainer [under 2010 Rule 1.15(c)].   See infra part IV.A.5.

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)) [2010 Rule 1.15(f)]. 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)) [2010 Rule 1.15(f)(7), cmt.[6].]

Rule 1.15(e) [2010 Rule 1.15(g)] 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? 

Effective January 1, 2010, Rule 1.15(c) governs how legal fees and expenses received in advance are to be handled.  If the funds advanced by a client are to secure payment of legal fees and expenses, to be withdrawn as fees are earned and expenses incurred, the funds are the client's property and therefore must be deposited in the lawyer’s trust account.  Funds received as a fixed fee, a general retainer, or an advance payment retainer and are by agreement with the client the lawyer's property upon payment, the funds shall be deposited in the lawyer's own personal or business account and not in the trust account.  Comment [3B] instructs that Rule 1.15(c) must be read in conjunction with the Illinois Supreme Court's decision in Dowling v. Chicago Options Associates, Inc., 226 Ill.2d 277, 875 N.E.2d 2d 1012 (2007).  In Dowling, the Court recognized the following three types of retainers: 

1) the classic retainer, also referred to as a true or general retainer, which 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;

2) the security retainer  where funds paid to the lawyer are not considered present payment for future services but are intended to secure payment of fees for the future services the lawyer is expected to perform. This type of retainer remains the property of the client and, therefore, must be deposited in a trust account and kept separate from the lawyer’s own property until the lawyer applies it to charges for services that are actually rendered.  Any unused portion of the retainer is refunded to the client under Rules 1.15(b) and 1.16(d) of the Illinois Rules of Professional Conduct; and

3) the advance payment retainer which is 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 and the retainer may not be deposited in the trust account.    Comment [3C] further describes the advance payment retainer as follows:

An advance payment retainer should be used sparingly, only when necessary to accomplish a purpose for the client that cannot be accomplished by using a security retainer. An advance payment retainer agreement must be in a written agreement signed by the client that contains the elements listed in paragraph (c). An advance payment retainer is distinguished from a fixed fee (also described as a “flat” or “lump-sum” fee), where 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. Unlike an advance payment retainer, a fixed fee is generally not subject to the obligation to refund any portion to the client, although a fixed fee is subject, like all fees, to the requirement of Rule 1.5(a) that a lawyer may not charge or collect an unreasonable fee.

2010 Rule 1.15(c) further proscribes the terms of an advance payment retainer.  An advance payment retainer must be in writing, signed by the client and must use the term "advance payment retainer" to describe the retainer and state the following:

1) the special purpose for the advance payment retainer and an explanation why it is advantageous to the client;

 

(2) that the retainer will not be held in a client trust account, that it will become the property of the lawyer upon payment, and that it will be deposited in the lawyer’s general account;

 

(3) the manner in which the retainer will be applied for services rendered and expenses incurred;

 

(4) that any portion of the retainer that is not earned or required for expenses will be refunded to the client (see Comments [3B] through [3D] to Rule 1.15 and Rule 1.16(d));and

 

(5) that the client has the option to employ a security retainer, provided, however, that if the lawyer is unwilling to represent the client without receiving an advance payment retainer, the agreement must so state and provide the lawyer’s reasons for that condition.

 

In determining the type of retainer that is appropriate, the guiding principle is the protection of the client's interests.  See 2010 Rule 1.15, cmt. [3D].  Also, the reasonableness, structure, and division of legal fees is governed by Rule 1.5, and other applicable law.  See 2010 Rule 1.15, cmt. [3A].

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) 785-6998 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

Rule 1.15(d)(5) [2010 Rule 1.15(b)] specifically provides that “[a] lawyer may deposit the lawyer's own funds in the trust account for the sole purpose of paying bank service charges on that account, but only in an amount necessary for that purpose."  For IOLTA account, the Lawyers' Trust Fund will pay certain "[a]llowable reasonable fees," defined in Rule 1.15(f)(5) [2010 Rule 1.15(h)(5)] as “per check charges, per deposit charges, a fee in lieu of a minimum balance, federal deposit insurance fees, automated investment ("sweep") fees, and a reasonable maintenance fee, if those fees are charged on comparable bank accounts maintained by non-IOLTA depositors. All other fees [e.g., NSF, stop payment or bank reconciliation or “special” services such as wire transfers] are the responsibility of, and may be charged to, the lawyer or law firm maintaining the IOLTA account.”  

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.  See 2010 Rule 1.15, cmt. [1].

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 _____, 20__, 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:_____________________

V. General Procedures for Opening and Operating a Trust Account

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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 or dividend-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) [2010 Rule 1.15(f) & (h)(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 and certified by the Lawyers Trust Fund of Illinois to maintain IOLTA trust accounts.  See Rule 1.15(d)(1) [2010 Rule 1.15(f)(1)]

  1. Know Your Financial Institution - 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.  In November 2008, the FDIC extended unlimited deposit insurance coverage to client funds deposited in IOLTA accounts at participating financial institutions under the FDIC’s Temporary Liquidity Guarantee Program at least until December 31, 2009, unless extended. Financial institutions are required to post disclosures stating their participation in the program, or their decision to opt out of the additional coverage.  The final rule is available at: http://www.fdic.gov/regulations/resources/TLGP/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, how to become certified by the Lawyers Trust Fund, the forms necessary to set up an IOLTA account and how interest is to be reported and remitted.
     

  2. 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) [2010 Rule 1.15(i)]) 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.

  3. 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 submitted electronically or 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) 938-3001.

  4. 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.

  5. 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).
     

  6. Reconcile Monthly - 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.
     

  7. Avoid ATM Withdrawals - Because the lawyer has a duty to account to the client or third person as to how the trust property was handled, writing a check from the trust account creates an automatic audit trail that makes it easy to trace who the money came from and where it went. A trust account with ATM access makes it possible for a lawyer and anyone else with the access code to withdraw the client’s money in cash and it is very hard to account for cash. ATMs are an audit trail disaster. With an ATM withdrawal, the only record of what happened to the money is a little slip of paper that shows the date and the amount of the withdrawal; there is nothing that shows which client’s or third person’s money was withdrawn, who withdrew it or to whom the money was paid. ATM withdrawals are a bad practice for all purposes, including withdrawing lawyers’ fees, since there is no paper trail recording the case from which the fees are owed. Even if you put all the descriptive information on an ATM receipt, it is not good proof of what happened to the money if there is an ARDC investigation.

  8. Don’t Share Trust Accounts With Lawyers Not in the Same Firm - A lawyer has a non-delegable fiduciary duty to safeguard client or third person property entrusted to the lawyer during a representation. If you are in a law firm, each lawyer in the law firm need not open up a separate trust account for each lawyer in the firm. However, you must not allow lawyers that are not in your law firm to deposit trust funds into the law firm’s trust account; you are responsible for those funds. Conversely, if you deposit funds entrusted to you by a client or third person for safekeeping, you cannot deposit those funds into another lawyer’s trust account.

  9. If a Mistake Happens, Don’t Panic - If you find that an error occurred in making calculations or deposits, don’t panic. Take remedial action. Call your financial institution. Failure to act not only may compound the problem but failure to notify the financial institution of any errors, forgeries, unauthorized signatures or alterations within a certain period of time may waive all claims that you may have against the financial institution regarding these problems.

  10. Do Not Withdraw Your Fees in the Form of Trust Checks Payable for Your Own Personal Expenses - Only client related charges, such as court costs, expert witness fees or lawyers’ fees, may be paid out of the trust account. The lawyer should not withdraw earned fees from the trust account in the form of trust checks payable to the lawyer’s own creditors. An earned fee must be withdrawn promptly from the trust account and deposited in the lawyer's own personal or business account. For example, a trust check made payable to the gas or electric company to pay the lawyer's gas or electric bill creates the appearance that the lawyer is using the trust account as a personal account and thereby endanger its status as a trust account, or that the lawyer is using client funds for personal purposes.

  11. Let Deposits Clear Before Writing Checks - The important thing to remember is that disbursing funds before the deposit has cleared puts other clients’ funds at risk of loss, thereby resulting in conversion. See discussion “You Can’t Spend What You Don’t Have or Timing is Everything” above.

  12. Withdraw Your Fees Promptly from the Trust Account Once You have Earned Them - When a fee has been earned, the lawyer must promptly write a check, payable to the lawyer or the lawyer's law firm, for the full amount of the fee earned.  The lawyer must not let earned fees accumulate in the trust account and withdraw fees on an "as needed" basis; otherwise, commingling occurs and, consequently, the trust funds are put at risk.  Also, the appearance is created that the lawyer is hiding money in the account to avoid creditors or income taxes.  In which case, the trust account could be subject to attachment or levy by the lawyer's creditors. 

  13. Have an Accounting System - You must have a way of accounting to a client or third persons as to how their funds were handled. Rule 1.15 does not prescribe any particular accounting system or method. Some common accounting record systems are discussed below. However, you must have a system that you and anyone else looking at your records can understand. If you don’t know how to set up an accounting system, consult with an accountant. See In re Sebela, 92 CH 577 (M.R. 10859, March 27, 1995) (conversion of client funds occurred because lawyer had no accounting system, withdrew his fees on an "as needed" basis based on his memory and, consequently, paid himself more than what he was entitled).

VI. Trust Accounting

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A. Accounting Systems

Rule 1.15 requires lawyers to do more than just deposit client or third person funds into a separate and identifiable account, the lawyer must also be able to account to that client or third person concerning how their property was handled by the lawyer.

Rule 1.15 does not specify which types of accounting records or books must be maintained in order for the lawyer to fulfill the duty to give an accurate and complete accounting to the client or third person. There are various manual and automated accounting systems that are available. In the first instance, many lawyers will consult with an accountant to set up an appropriate accounting system. Whichever accounting method or system is used it must be one that the lawyer understands, puts into practice, and follows (and that others auditing the lawyer’s account can follow).

1. Computer Accounting Software

There are some computer accounting software packages that lawyers have used in their trust accounting. Two commonly used trust accounting programs are Quicken® and QuickBooks

To guard against the potential loss of such computer-stored data, some experts suggest that you print out a hard copy of each client ledger on a monthly basis. See S.Ct.Rule 769 (Maintenance of Records). Also, it is suggested that you back up the data onto disks on a regular basis.

2. Manual Accounting System

Generally, most basic accounting systems will use these accounting books:

  1. Cash receipts journal. This lists all receipts chronologically for all clients and identifies the date and source of each receipt.

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

  1. 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
           
           

  1. 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
           
           

  1. 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

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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

Court Reporter Inc.

Costs

Grey

$400

10/20/94

1006

Process Server Inc.

Costs

Grey

$60

10/20/94

1007

Dr. Bailey

Costs

Grey

$340

10/20/94

1008

Bill Grey

Settlement

Grey

$9,200

10/20/94

1009

Julia Dolan

Fees

Grey

$5,000

CLIENT 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

Federal/State Refund

 

 

$2,000

$2,000

10/21/94

Mrs. James Johnson

1010

$1,500

 

$500

CASH DISBURSEMENTS JOURNAL
TRUST ACCOUNT NO. 123-456
OCTOBER 1994

DATE

CHECK

PAYEE

PURPOSE

CLIENT

AMOUNT

10/20/94

1005

Court Reporter Inc.

Costs

Grey

$400

10/20/94

1006

Process Server Inc.

Costs

Grey

$60

10/20/94

1007

Dr. Bailey

Costs

Grey

$340

10/20/94

1008

Bill Grey

Settlement

Grey

$9,200

10/20/94

1009

Julia Dolan

Fees

Grey

$5,000

10/21/94

1010

Mrs. J. Johnson

Ct. Order

Johnson

$1,500

On October 31, 1994, Dolan is retained by Sam Spade and paid a $5,000 retainer which under the fee agreement is to be deposited in the trust account and withdrawn as earned.

CLIENT SUBSIDIARY LEDGER PAGE
TRUST ACCOUNT NO. 123-456

Name of Client: Sam Spade
Legal Matter/Adverse Party: Business litigation-Olson
File or Case Number: 94-1096

DATE

DESCRIPTION OF TRANSACTION

CHECK

FUNDS PAID

FUNDS RECEIVED

BALANCE

10/31/94

Retainer

 

 

$5,000

$5,000

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

10/13/94

Ace Insurance Co.

Bill Grey

62001

$15,000

10/31/94

Spade Retainer

Sam Spade

64662

$5,000

On October 31, 1994, Dolan bills Joan Smith $250 for court costs paid by Dolan on Smith's behalf during October and issues a trust account check for that amount made payable to herself.

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

10/01/94

Retainer-Smith

 

 

$1,000

$1,000

10/31/94

Costs-J. Dolan

1011

$250

 

$750

CASH DISBURSEMENTS JOURNAL
TRUST ACCOUNT NO. 123-456
OCTOBER 1994

DATE

CHECK

PAYEE

PURPOSE

CLIENT

AMOUNT

10/20/94

1005

Court Reporter Inc.

Costs

Grey

$400

10/20/94

1006

Process Server Inc.

Costs

Grey

$60

10/20/94

1007

Dr. Bailey

Costs

Grey

$340

10/20/94

1008

Bill Grey

Settlement

Grey

$9,200

10/20/94

1009

Julia Dolan

Costs

Grey

$5,000

10/21/94

1010

Mrs. J. Johnson

Ct. Order

Johnson

$1,500

10/31/94

1011

Julia Dolan

Costs

J. Smith

$250

2. Sample Trust Account Trial Balances

Before Dolan's IOLTA trust account can be reconciled, the checkbook register, the cash balance and the subsidiary ledgers must balance.

a. Checkbook Register Balance. On October 31, 1994, Dolan's checkbook register balance is $16,450.

CHECKBOOK REGISTER

CHECK NO.

DATE

PAYEE OR DEPOSIT SOURCE

CHECK AMOUNT

DEPOSIT AMOUNT

BALANCE

 

 

9/30/94

Balance

 

 

$10,200

 

 

10/01/94

Joan Smith

 

$1,000

$11,200

 

 

10/05/94

Johnson Tax Ref

 

$2,000

$13,200

 

 

10/13/94

Ace Ins. Co.

 

$15,000

$28,200

1005

10/20/94

Court Reporter

$400

 

$27,800

1006

10/20/94

Process Server

$60

 

27,740

1007

10/20/94

Dr. Bailey

$340

 

$27,400

1008

10/20/94

Bill Grey

$9,200

 

$18,200

1009

10/20/94

Julia Dolan

$5,000

 

$13,200

1010

10/21/94

Mrs. Johnson

$1,500

 

$11,700

 

 

10/31/94

Sam Spade

 

$5,000

$16,700

1011

10/31/94

Julia Dolan

$250

 

$16,450

b. Subsidiary Ledgers Trial Balance. Dolan's subsidiary ledgers trial balance for October is calculated by totaling all of the subsidiary ledgers that have an outstanding balance on October 31, 1994.

SUBSIDIARY LEDGER
TRIAL BALANCE
PERIOD OF 10/1/94 - 10/31/94
TRUST ACCOUNT NO. 123-456

CLIENT

BALANCE ON 10/31/94

Julia Dolan

$200

Ron Roper

$10,000

Joan Smith

$750

James Johnson

$500

Sam Spade

$5,000

Trial Balance Total

$16,450

c. Cash Balance. Dolan's cash balance for October is calculated by taking the cash balance from September and adding the total October receipts and subtracting the total October disbursements.

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

10/31/94

Spade Retainer

Sam Spade

64662

$5,000

11/01/94

 

OCTOBER TOTAL

 

$23,000

CASH DISBURSEMENTS JOURNAL
TRUST ACCOUNT NO. 123-456
OCTOBER 1994

DATE

CHECK

PAYEE

PURPOSE

CLIENT

AMOUNT

10/20/94

1005

Court Reporter

Costs

Grey

$400

10/20/94

1006

Process Server

Costs

Grey

$60

10/20/94

1007

Dr. Bailey

Costs

Grey

$340

10/20/94

1008

Bill Grey

Settlement

Grey

$9,200

10/20/94

1009

Julia Dolan

Costs

Grey

$5,000

10/21/94

1010

Mrs. Johnson

Ct. Order

Johnson

$1,500

10/31/94

1011

Julia Dolan

Costs

Smith

$250

11/01/94

 

OCTOBER TOTAL

 

$16,750

CASH BALANCE
PERIOD OF 10/01/94 - 10/31/94
TRUST ACCOUNT NO. 123-456

Cash Balance from September    $10,200
Plus October Receipts $23,000  
Minus October Disbursements   ($16,750)

October Cash Balance

$16,450  

d. October Trial Balances. The checkbook register balance, cash balance, and subsidiary ledgers trial balance must be identical.

Checkbook Register Balance $16,450
Cash Balance $16,450
Subsidiary Ledgers Trial Balance $16,450

3. Sample Monthly Trust Account Reconciliation

After the checkbook register, cash balance, and subsidiary ledgers have been balanced, the October bank statement is reconciled with the October trial balances figure (i.e. $16,450).

Julia Dolan
Attorney at Law
IOLTA Trust Account
125 Practice Avenue
New Justice, IL 00000-0000

 

ACCOUNT NUMBER: 123-456
CHECKING ACCOUNT SUMMARY FOR 10/01 THRU 10/31/94

OPENING BALANCE DEPOSITS WITHDRLS INTEREST SERVICE & CHECKS CLOSING CHARGE BALANCE
$10,241.66  $18,000.00 $62.50 $16,451.66 $0.00 $11,852.50

*******************************************************************************

CHECKING ACCOUNT TRANSACTIONS

DEPOSITS       DATE AMOUNT
50062       10/01/94 $1,000.00
50145       10/05/94 $2,000.00
62001       10/13/94 $15,000.00
Net Interest For October     10/31/94 $62.50
           
WITHDRAWALS       DATE AMOUNT
Net Interest paid to IOLTA for September   10/31/94 $41.66
           

CHECKS

   

BALANCES

ITEM DATE AMOUNT   DATE BALANCE
1005 10/25/94 $400.00   10/06/94 $13,241.66
1006 10/24/94 $60.00   10/13/94 $28,241.66
1008* 10/21/94 $9,200.00   10/26/94 $12,081.66
1009 10/23/94 $5,000.00   10/31/94 $11,852.50
1010 10/26/94 $1,500.00      
1011 10/31/94 $250.00      
* denotes gap in check sequence

The bank statement balance is reconciled with the trial balances figure by adding: (1) any outstanding deposits; and by subtracting: (2) net interest accrued, and any outstanding checks. (Accrued interest is subtracted because it will be paid directly to IOLTA and will thus never be added to the checkbook balance or the journal or ledger balances. (See supra part VI.D.2, Reconciling Account Records with Monthly Statements.) In this example, the bank statement and the checkbook register reflect that check number 1007 in the amount of $340 is outstanding and that the $5,000 Spade deposit has not yet been credited. There are no monthly service charges and the interest accrued figure is taken from the bank statement.

MONTHLY RECONCILIATION
PERIOD OF 10/1/94 - 10/31/94
TRUST ACCOUNT NO. 123-456

Checkbook Balance   $16,450.00
     
Cash Balance From Journals   $16,450.00
     
Subsidiary Ledger Trial Balance   $16,450.00
     
Bank Statement    

Balance on 10/31/94 

$11,852.50  
Plus outstanding deposits  $ 5,000.00  
Less net interest accrued  ($ 62.50)  

Less outstanding checks 

($ 340.00)  
     
Adjusted Bank Statement Balance

$16,450.00

 

All of the records discussed above must be kept for a period of seven years after termination of the representation. The foregoing sample is used to illustrate the typical daily procedures necessary to maintain proper trust account records. Lawyers may consult with a reputable accountant to help them set up an accounting system that they can understand and follow.

VII. Where to Find Help

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ARDC Ethics Inquiry Program - a telephone inquiry line that provides general information on where to find sources to help resolve hypothetical questions arising under the Rules. Call the ARDC at either the Chicago office at: 312/565-2600 or 800/826-8625 or the Springfield office at: 217/522-6838 or 800/252-8048. 

Lawyers Trust Fund of Illinois (IOLTA) - Ruth Ann Schmitt, Executive Director, Lawyers Trust Fund of Illinois, Two Prudential Plaza, 180 North Stetson Avenue,  Suite 820, Chicago, Illinois 60601; (312) 938-2906 or (800) 624-8962; Fax (312) 938-3091 or visit the Lawyers Trust Fund website at www.ltf.org.

ABA ETHICSearch - a research service for those needing information on the ABA Model Rules, Standards and ethics opinions.  Call 800/285-2221 or use their  online form with your ethics question. Most inquiries are handled on a same day basis. Expedited same day service and fax and mailing services can also be arranged.

Bar associations - ISBA Committee on Professional Responsibility or CBA Committee on Professional Responsibility - advisory committees that receive inquiries and render opinion either addressed to the inquiring lawyer or published in the Illinois Bar Journal or CBA Record. The ISBA ethics advisory opinions may be obtained from the ISBA website (for ISBA members only) at www.illinoisbar.org.  

 

APPENDIX

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1990 RULE 1.15 Safekeeping Property  [Will be replaced by 2010 Rule 1.15 (adopted July 1, 2009; eff. Jan. 1, 2010) below]

(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 or accounts 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 seven years after termination of the representation.

(b) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that

the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.

(c) When in the course of representation a lawyer is in possession of property in which both the lawyer and another person claim interests, the property shall be kept

separate by the lawyer until there is an accounting and severance of their interests.  If a dispute arises concerning their respective interests, the portion in dispute shall

be kept separate by the lawyer until the dispute is resolved.

(d) All nominal or short-term funds of clients or third persons held by a lawyer or law firm, including advances for costs and expenses, and funds belonging in part

to a client or third person and in part presently or potentially to the lawyer or law firm, shall be deposited in one or more pooled interest- or dividend-bearing trust

accounts, hereinafter “IOLTA accounts,” established with an eligible financial institution selected by a lawyer or law firm in the exercise of ordinary prudence, and

with the Lawyers Trust Fund of Illinois designated as income beneficiary. Each IOLTA account shall comply with the following provisions:

(1) Each lawyer or law firm in receipt of nominal or short-term client funds shall establish one or more IOLTA accounts with an eligible financial institution authorized by federal or state law to do business in the state of Illinois. An eligible financial institution is a bank or a savings bank insured by the Federal Deposit Insurance Corporation or an open-end investment company registered with the Security and Exchange Commission, which offers IOLTA accounts within the requirements of this rule as administered by the Lawyers Trust Fund of Illinois.

(2) Eligible institutions shall maintain IOLTA accounts that pay the highest interest rate or dividend available from the institution to its non-IOLTA account customers when IOLTA accounts meet or exceed the same minimum balance or other account eligibility guidelines, if any. In determining the highest interest rate or dividend generally available from the institution to its non-IOLTA accounts, eligible institutions may consider factors, in addition to the IOLTA account balance, customarily considered by the institution when setting interest rates or dividends for its customers, provided that such factors do not discriminate between IOLTA accounts and accounts of non-IOLTA customers, and that these factors do not include that the account is an IOLTA account.

(3) An IOLTA account that meets the highest comparable rate- or dividendstandard set forth in (d)(2) must use one of the identified account options as an IOLTA account, or pay the equivalent yield on an existing IOLTA account in lieu of using the highest-yield bank product:

(a) a checking account paying preferred interest rates, such as money market or indexed rates, or any other suitable interest-bearing deposit account offered by the eligible institution to its non-IOLTA customers.

(b) for accounts with balances of $100,000 or more, a business checking account with automated investment feature, such as an overnight sweep and investment in repurchase agreements fully collateralized by U.S. Government securities as defined in (f).

(c) for accounts with balances of $100,000 or more, an open-end money market fund with, or tied to, check-writing capacity solely invested in or fully collateralized by U.S. Government securities.

(4) As an alternative to the account options in (3), the financial institution may pay a “safe harbor” yield equal to 70% of the Federal Funds Target Rate or 1.0%, whichever is higher.

(5) A lawyer or law firm may maintain funds belonging to the lawyer or law firm in the IOLTA account to meet minimum balance requirements and to pay bank charges.

(6) Each lawyer or law firm shall direct the eligible financial institution to remit monthly earnings on the IOLTA account directly to the Lawyers Trust Fund of Illinois. For each individual IOLTA account, the eligible financial institution shall provide: a statement transmitted with each remittance showing the name of the lawyer or law firm directing that the remittance be sent; the account number; the remittance period; the rate of interest applied; the account balance on which the interest was calculated, the reasonable service fee(s) if any; the gross earnings for the remittance period; and the net amount of earnings remitted. Remittances shall be sent to the Lawyers Trust Fund electronically unless otherwise agreed.   Fees in excess of the earnings accrued on an individual IOLTA account for any

month shall not be taken from earnings accrued on other IOLTA accounts or from the principal of the account.

(7) Each lawyer or law firm shall deposit into such interest-bearing trust accounts all clients’ funds which are nominal in amount or are expected to be held for a short period of time.

(8) The decision as to whether funds are nominal in amount or are expected to be held for a short period of time rests exclusively in the sound judgment of the lawyer or law firm, and no charge of ethical impropriety or other breach of professional conduct shall attend a lawyer’s or law firm’s judgment on what is nominal or short term.

(e) Ordinarily, in determining the type of account into which to deposit particular funds for a client or third person, a lawyer or a law firm shall take into consideration the following factors:

(1) the amount of interest which the funds would earn during the period they are expected to be held and the likelihood of delay in the relevant transaction or proceeding;

(2) the cost of establishing and administering the account, including the cost of the lawyer’s services;

(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.

(f) Definitions

(1) “IOLTA account” means an interest- or dividend-bearing trust account benefiting the Lawyers Trust Fund of Illinois, established in an eligible institution for the deposit of nominal or short-term funds of clients or third persons as defined in (d) and from which funds may be withdrawn upon request as soon as permitted by law.

(2) “Open-end money market fund” is a fund of an open-end investment company that must hold itself out as a money market fund as defined by applicable federal statutes and regulations under the Investment Act of 1940, and, at the time of the investment, have total assets of at least $250 million.

(3) “U.S. Government securities” refers to U.S. Treasury obligations and obligations issued or guaranteed as to principal and interest or any AAA-rated United States agency or instrumentality thereof. A daily overnight financial repurchase agreement (“repo”) may be established only with an institution that is deemed to be “well capitalized” or “adequately capitalized” as defined by applicable federal statutes and regulations.

(4) “Safe harbor” is a yield that if paid by the financial institution on IOLTA accounts shall be deemed as a comparable return in compliance with this rule. Such yield shall be calculated as 70% of the Federal Funds Target Rate as reported in the Wall Street Journal on the first business day of the calendar month.

(5) “Allowable reasonable fees” for IOLTA accounts are per check charges, per deposit charges, a fee in lieu of a minimum balance, federal deposit insurance fees, automated investment (“sweep”) fees, and a reasonable maintenance fee, if those fees are charged on comparable bank accounts maintained by non-IOLTA depositors. All other fees are the responsibility of, and may be charged to, the lawyer or law firm maintaining the IOLTA account.

(g) In the closing of a real estate transaction, a lawyer’s disbursement of funds deposited but not collected shall not violate his or her duty pursuant to this Rule 1.15 if, prior to the closing, the lawyer has established a segregated Real Estate Funds Account (REFA) maintained solely for the receipt and disbursement of such funds, has deposited such funds into a REFA, and:

(1) is acting as a closing agent pursuant to an insured closing letter for a title insurance company licensed in the State of Illinois and uses for such funds a segregated REFA maintained solely for such title insurance business; or

(2) has met the “good-funds” requirements. The good-funds requirements shall be met if the bank in which the REFA was established has agreed in a writing directed to the lawyer to honor all disbursement orders drawn on that REFA for all transactions up to a specified dollar amount not less than the total amount being deposited in good funds. Good funds shall include only the following forms of deposits: (a) a certified check, (b) a check issued by the State of Illinois, the United States, or a political subdivision of the State of Illinois or the United States, (c) a cashier’s check, teller’s check, bank money order, or official bank check drawn on or issued by a financial institution insured by the Federal Deposit Insurance Corporation or a comparable agency of the federal or state government, (d) a check drawn on the trust account of any lawyer or real estate broker licensed under the laws of any state, (e) a personal check or checks in an aggregate amount not exceeding $5,000 per closing if the lawyer making the deposit has reasonable and prudent grounds to believe that the deposit will be irrevocably credited to the REFA, (f) a check drawn on the account of or issued by a lender approved by the United States Department of Housing and Urban Development as either a supervised or a nonsupervised mortgagee as defined in 24 C.F.R. §202.2, (g) a check from a title insurance company licensed in the State of Illinois, or from a title insurance agent of the title insurance company, provided that the title insurance company has guaranteed the funds of that title insurance agent. Without limiting the rights of the lawyer against any person, it shall be the responsibility of the disbursing lawyer to reimburse the trust account for such funds that are not collected and for any fees, charges and interest assessed by the paying bank on account of such funds being uncollected.

 

Adopted February 8, 1990, effective August 1, 1990; amended July 18, 1990, effective August 1, 1990; amended April 1, 1998, effective immediately; amended October 1, 1998, effective immediately; amended December 1, 1998, effective immediately; amended January 25, 2007, effective June 1, 2007; amended March 20, 2009, effective immediately.

2010 RULE 1.15: SAFEKEEPING PROPERTY (adopted July 1, 2009; eff. Jan. 1, 2010)

(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 seven years after termination of the representation. 

(b) A lawyer may deposit the lawyer’s own funds in a client trust account for the sole purpose of paying bank service charges on that account, but only in an amount necessary for that purpose. 

(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. An advance payment retainer may be used only when necessary to accomplish some purpose for the client that cannot be accomplished by using a security retainer. An agreement for an advance payment retainer shall be in a writing signed by the client that uses the term “advance payment retainer” to describe the retainer, and states the following: 

(1) the special purpose for the advance payment retainer and an explanation why it is advantageous to the client;

(2) that the retainer will not be held in a client trust account, that it will become the property of the lawyer upon payment, and that it will be deposited in the lawyer’s general account;

(3) the manner in which the retainer will be applied for services rendered and expenses incurred;

(4) that any portion of the retainer that is not earned or required for expenses will be refunded to the client;

(5) that the client has the option to employ a security retainer, provided, however, that if the lawyer is unwilling to represent the client without receiving an advance payment retainer, the agreement must so state and provide the lawyer’s reasons for that condition.

 (d) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this Rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.

(e) When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.

 (f) All nominal or short-term funds of clients or third persons held by a lawyer or law firm, including advances for costs and expenses, and funds belonging in part to a client or third person and in part presently or potentially to the lawyer or law firm, shall be deposited in one or more pooled interest- or dividend-bearing trust accounts known as Interest on Lawyers’ Trust Accounts (“IOLTA accounts”), established with an eligible financial institution selected by a lawyer or law firm in the exercise of ordinary prudence, and with the Lawyers Trust Fund of Illinois designated as income beneficiary. Each IOLTA account shall comply with the following provisions:

  (1) Each lawyer or law firm in receipt of nominal or short-term client funds shall establish one or more IOLTA accounts with an eligible financial institution authorized by federal or state law to do business in the state of Illinois. An eligible financial institution is 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, which offers IOLTA accounts within the requirements of this Rule as administered by the Lawyers Trust Fund of Illinois.

(2) Eligible institutions shall maintain IOLTA accounts that pay the highest interest rate or dividend available from the institution to its non-IOLTA account customers when IOLTA accounts meet or exceed the same minimum balance or other account eligibility guidelines, if any. In determining the highest interest rate or dividend generally available from the institution to its non-IOLTA accounts, eligible institutions may consider factors, in addition to the IOLTA account balance, customarily considered by the institution when setting interest rates or dividends for its customers, provided that such factors do not discriminate between IOLTA accounts and accounts of non-IOLTA customers, and that these factors do not include that the account is an IOLTA account.

 (3) An IOLTA account that meets the highest comparable rate or dividend standard set forth in paragraph (f)(2) must use one of the identified account options as an IOLTA account, or pay the equivalent yield on an existing IOLTA account in lieu of using the highest-yield bank product:

 (a) a checking account paying preferred interest rates, such as money market or indexed rates, or any other suitable interest-bearing deposit account offered by the eligible institution to its non-IOLTA customers.

 (b) for accounts with balances of $100,000 or more, a business checking account with automated investment feature, such as an overnight sweep and investment in repurchase agreements fully collateralized by U.S. Government securities as defined in paragraph (h).

 (c) for accounts with balances of $100,000 or more, a money market fund with, or tied to, check-writing capacity, that must be solely invested in U.S. Government securities or securities fully collateralized by U.S. Government securities, and that has total assets of at least $250 million.

 

(4) As an alternative to the account options in paragraph (f)(3), the financial institution may pay a “safe harbor” yield equal to 70% of the Federal Funds Target Rate or 1.0%, whichever is higher. 

(5) Each lawyer or law firm shall direct the eligible financial institution to remit monthly earnings on the IOLTA account directly to the Lawyers Trust Fund of Illinois. For each individual IOLTA account, the eligible financial institution shall provide: a statement transmitted with each remittance showing the name of the lawyer or law firm directing that the remittance be sent; the account number; the remittance period; the rate of interest applied; the account balance on which the interest was calculated; the reasonable service fee(s) if any; the gross earnings for the remittance period; and the net amount of earnings remitted. Remittances shall be sent to the Lawyers Trust Fund electronically unless otherwise agreed. Fees in excess of the earnings accrued on an individual IOLTA account for any month shall not be taken from earnings accrued on other IOLTA accounts or from the principal of the account.

(6) Each lawyer or law firm shall deposit into such interest-bearing trust accounts all clients’ funds which are nominal in amount or are expected to be held for a short period of time.

(7) The decision as to whether funds are nominal in amount or are expected to be held for a short period of time rests exclusively in the sound judgment of the lawyer or law firm, and no charge of ethical impropriety or other breach of professional conduct shall attend a lawyer’s or law firm’s judgment on what is nominal or short term.

 (g) Ordinarily, in determining the type of account into which to deposit particular funds for a client or third person, a lawyer or a law firm shall take into consideration the following factors:

 (1) the amount of interest which the funds would earn during the period they are expected to be held and the likelihood of delay in the relevant transaction or proceeding;

(2) the cost of establishing and administering the account, including the cost of the lawyer’s services;

(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.

 (h) Definitions

(1) “IOLTA account” means an interest- or dividend-bearing trust account benefitting the Lawyers Trust Fund of Illinois, established in an eligible institution for the deposit of nominal or short-term funds of clients or third persons as defined in paragraph (f) and from which funds may be withdrawn upon request as soon as permitted by law.

(2) “Money market fund” is an investment company registered under the Investment Company Act of 1940, as amended, that is qualified to hold itself out to investors as a money market fund or the equivalent of a money market fund under Rules and Regulations adopted by the Securities and Exchange Commission pursuant to said Act.

(3) “U.S. Government securities” refers to U.S. Treasury obligations and obligations issued by or guaranteed as to principal and interest by any AAA-rated United States agency or instrumentality thereof. A daily overnight financial repurchase agreement (“repo”) may be established only with an institution that is deemed to be “well capitalized” or “adequately capitalized” as defined by applicable federal statutes and regulations.

(4) “Safe harbor” is a yield that if paid by the financial institution on IOLTA accounts shall be deemed as a comparable return in compliance with this Rule. Such yield shall be calculated as 70% of the Federal Funds Target Rate as reported in the Wall Street Journal on the first business day of the calendar month.

(5) “Allowable reasonable fees” for IOLTA accounts are per-check charges, per deposit charges, a fee in lieu of a minimum balance, federal deposit insurance fees, automated investment (“sweep”) fees, and a reasonable maintenance fee, if those fees are charged on comparable bank accounts maintained by non-IOLTA depositors. All other fees are the responsibility of, and may be charged to, the lawyer or law firm maintaining the IOLTA account.

(i) In the closing of a real estate transaction, a lawyer’s disbursement of funds deposited but not collected shall not violate his or her duty pursuant to this Rule 1.15 if, prior to the closing, the lawyer has established a segregated Real Estate Funds Account (REFA) maintained solely for the receipt and disbursement of such funds, has deposited such funds into a REFA, and: 

(1) is acting as a closing agent pursuant to an insured closing letter for a title insurance company licensed in the State of Illinois and uses for such funds a segregated REFA maintained solely for such title insurance business; or 

(2) has met the “good-funds” requirements. The good-funds requirements shall be met if the bank in which the REFA was established has agreed in a writing directed to the lawyer to honor all disbursement orders drawn on that REFA for all transactions up to a specified dollar amount not less than the total amount being deposited in good funds. Good funds shall include only the following forms of deposits: (a) a certified check, (b) a check issued by the State of Illinois, the United States, or a political subdivision of the State of Illinois or the United States, (c) a cashier’s check, teller’s check, bank money order, or official bank check drawn on or issued by a financial institution insured by the Federal Deposit Insurance Corporation or a comparable agency of the federal or state government, (d) a check drawn on the trust account of any lawyer or real estate broker licensed under the laws of any state, (e) a personal check or checks in an aggregate amount not exceeding $5,000 per closing if the lawyer making the deposit has reasonable and prudent grounds to believe that the deposit will be irrevocably credited to the REFA, (f) a check drawn on the account of or issued by a lender approved by the United States Department of Housing and Urban Development as either a supervised or a nonsupervised mortgagee as defined in 24 C.F.R. §202.2, (g) a check from a title insurance company licensed in the State of Illinois, or from a title insurance agent of the title insurance company, provided that the title insurance company has guaranteed the funds of that title insurance agent. Without limiting the rights of the lawyer against any person, it shall be the responsibility of the disbursing lawyer to reimburse the trust account for such funds that are not collected and for any fees, charges and interest assessed by the paying bank on account of such funds being uncollected.

 Adopted July 1, 2009, effective January 1, 2010.

 Comment

[1] A lawyer should hold property of others with the care required of a professional fiduciary. Securities should be kept in a safe deposit box, except when some other form of safekeeping is warranted by special circumstances. All property that is the property of clients or third persons, including prospective clients, must be kept separate from the lawyer’s business and personal property and, if monies, in one or more trust accounts. Separate trust accounts may be warranted when administering estate monies or acting in similar fiduciary capacities. A lawyer should maintain on a current basis books and records in accordance with generally accepted accounting practice. 

[2] While normally it is impermissible to commingle the lawyer’s own funds with client funds, paragraph (b) provides that it is permissible when necessary to pay bank service charges on that account. Accurate records must be kept regarding which part of the funds are the lawyer’s. 

[3] Lawyers often receive funds from which the lawyer’s fee will be paid. The lawyer is not required to remit to the client funds that the lawyer reasonably believes represent fees owed. However, a lawyer may not hold funds to coerce a client into accepting the lawyer’s contention. The disputed portion of the funds must be kept in a trust account and the lawyer should suggest means for prompt resolution of the dispute, such as arbitration. The undisputed portion of the funds shall be promptly distributed. Specific guidance concerning client trust accounts is provided in the Client Trust Account Handbook published by the Illinois Attorney Registration and Disciplinary Commission as well as on the website of the Illinois Attorney Registration and Disciplinary Commission. 

[3A] Paragraph (c) relates to legal fees and expenses that have been paid in advance. The reasonableness, structure, and division of legal fees are governed by Rule 1.5 and other applicable law. 

[3B] Paragraph (c) must be read in conjunction with Dowling v. Chicago Options Associates, Inc., 226 Ill. 2d 277 (2007). In Dowling, the Court distinguished different types of retainers. It recognized advance payment retainers and approved their use in limited circumstances where the lawyer and client agree that a retainer should become the property of the lawyer upon payment. Prior to Dowling, the Court recognized only two types of retainers. The first, a general retainer (also described as a “true,” “engagement,” or “classic” retainer) is paid by a client to the lawyer in order to ensure the lawyer’s availability during a specific period of time or for a specific 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. The second, a “security” retainer, secures payment for future services and expense, and must be deposited in a client trust account pursuant to paragraph (a). Funds in a security retainer remain the property of the client until applied for services rendered or expenses incurred. Any unapplied funds are refunded to the client. Any written retainer agreement 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 any written agreement, which should also provide that the funds remain the property of the client until applied for services rendered or expenses incurred and that the funds will be deposited in a client trust account. If the parties’ intent is not evident, an agreement for a retainer will be construed as providing for a security retainer.

[3C] An advance payment retainer is 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; and the retainer may not be deposited into a client trust account because a lawyer may not commingle property of a client with the lawyer’s own property. However, any portion of an advance payment retainer that is not earned must be refunded to the client. An advance payment retainer should be used sparingly, only when necessary to accomplish a purpose for the client that cannot be accomplished by using a security retainer. An advance payment retainer agreement must be in a written agreement signed by the client that contains the elements listed in paragraph (c). An advance payment retainer is distinguished from a fixed fee (also described as a “flat” or “lump-sum” fee), where 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. Unlike an advance payment retainer, a fixed fee is generally not subject to the obligation to refund any portion to the client, although a fixed fee is subject, like all fees, to the requirement of Rule 1.5(a) that a lawyer may not charge or collect an unreasonable fee.

[3D] The guiding principle in the choice of the type of retainer is protection of the client’s interests.

[4] Paragraph (e) also recognizes that third parties may have lawful claims against specific funds or other property in a lawyer’s custody, such as a client’s creditor who has a lien on funds recovered in a personal injury action. A lawyer may have a duty under applicable law to protect such third‑party claims against wrongful interference by the client. In such cases, when the third-party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved. A lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party, but, when there are substantial grounds for dispute as to the person entitled to the funds, the lawyer may file an action to have a court resolve the dispute.

[5] The obligations of a lawyer under this Rule are independent of those arising from activity other than rendering legal services. For example, a lawyer who serves only as an escrow agent is governed by the applicable law relating to fiduciaries even though the lawyer does not render legal services in the transaction and is not governed by this Rule.

  [6] Paragraph (f) requires that certain client funds be deposited in a pooled, interest-bearing trust account and provides that the interest earned on any such account shall be submitted to the Lawyers Trust Fund of Illinois. The Lawyers Trust Fund of Illinois will disburse the funds so received to qualifying organizations and programs to be used for the purposes set forth in its by-laws. The purposes of the Lawyers Trust Fund of Illinois may not be changed without the approval of the Supreme Court of Illinois. The decision as to whether funds are nominal or short-term shall be in the sole discretion of the depositing lawyer or law firm. Client funds that are neither nominal or short-term may continue to be deposited in separate, interest-bearing trust accounts for the benefit of the client as set forth in Paragraph (a)

[7] Paragraph (i) applies only to the closing of real estate transactions and adopts the “good-funds” doctrine. That doctrine provides for the disbursement of funds deposited but not yet collected if the lawyer has already established an appropriate Real Estate Funds Account and otherwise fulfills all of the requirements contained in the Rule.

 Adopted July 1, 2009, effective January 1, 2010.

 

SUGGESTED SOURCES FOR RESEARCHING ETHICS ISSUES

1.  1.    1.  Annotated Model Rules of Professional Conduct, 6th Ed. (2007) - an ABA publication available from the ABA Center for Professional Responsibility (www.abanet.org).  Consists of the ABA Model Rules, as amended February 2002, and legal background notes analyzing case law, opinions, law review articles and legal treatises. 

22.       2. Restatement of the Law Governing Lawyers, American Law Institute (ALI) (2000) – two-volume set can be obtained from ALI at (800) CLE-NEWS or www.ali.org.

3.   ABA/BNA, The Lawyer's Manual on Professional Conduct (1984) - four-volume, looseleaf subscription service, consisting of a substantive discussion on the state of the law on professional responsibility, the full text of the ABA Model Codes, recent ABA ethics opinions, digests of ethics opinions issued by state and local bar associations, and recent developments in the field of professional responsibility including opinions, case law and reports of conferences and law reviews.  Updated bi-weekly.  Also available by subscription (1-800-372-1033 or www.bna.com).

4.  Hazard, G. & Hodes, W., The Law of Lawyering, 2d Ed. (1990) - looseleaf publication explaining the ABA Model Rules of Professional Conduct.

5.  West Publishing Company, Illinois Digests 2d, Attorney & Client.

6. AmJur 2d, Attorneys (Lawyers Cooperative Publishing).

7.  Ethics Opinions issued by the ABA Standing Committee on Ethics and Professional Responsibility, both formal opinions (beginning with 1924) and informal opinions (beginning with 1961), available in bound volumes from the ABA Center on Professional Responsibility. Most opinions can also be obtained off of WESTLAW database, "Ethics & Professional Responsibility" or LEXIS database, "Ethics."

8. Illinois State Bar Association Opinions on Professional Ethics, 1953 - present. Contains hypothetical questions concerning professional ethics and suggested, advisory answers. Ethics opinions issued between 1953 and 1984 are contained in two bound volumes: Ethics Op. Nos. 101-687, issued between 1953 and 1980, are contained in the initial volume of Professional Ethics Opinions; and Ethics Op. Nos. 644-874, issued between 1980 and 1984, are contained in volume 2. Opinions issued from 1984 to the present can be obtained from the ISBA website for ISBA members only at www.illinoisbar.org.

9. ABA Center for Professional Responsibility operates ETHICSearch, a research service for those needing information on the ABA Model Rules, Standards and ethics opinions. Call (312) 988-5323 or visit the ABA website at www.abanet.com.

10. ARDC Ethics Inquiry Program - provides general information on where to find sources to help resolve questions arising under the Rules. Call (312) 565-2600 or (800) 826-8625.

11. American Legal Ethics Library (Legal Information Institute) www.law.cornell.edu/ethics – contains ethics rules of many states and includes annotations to many of the rules, including the Illinois Rules of Professional Conduct

12. National Organization of Bar Counsel www.nobc.org – summaries of lawyer disciplinary cases throughout the country

 

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