Trust Accounting in Wisconsin: A Primer

This primer is a practical guide to help attorneys manage lawyers' trust accounts and to comply with recordkeeping requirements under SCR 20:1.15.

Published by the State Bar Consumer Protection Committee, this trust accounting primer is an update to Trust Accounting: A Handbook for Wisconsin Lawyers, which was last updated in 1993.

Readers should understand that this primer is designed as a practical nonauthoritative guide in making trust account decisions. Those decisions remain the ultimate responsibility of the individual lawyer acting under the Wisconsin Supreme Court Rules of Professional Conduct. The supreme court rules on safeguarding property are found at SCR 20:1.15.

Sample forms and answers to frequently asked questions about trust accounting and the Wisconsin Trust Account Foundation (WisTAF) are included.

Editor's Note: To view sample forms and statutory materials referenced in this article you must have and/or install Adobe Acrobat Reader 3.0 on your computer.

What are a lawyer's ethical
obligations regarding client funds?

A lawyer in possession of client funds and property is a fiduciary. The lawyer must safeguard and segregate those assets. This obligation also applies to nonclient money and property coming into a lawyer's possession in the practice of law. These assets must be preserved and cannot be commingled with the lawyer's personal and/or business assets. These funds must be deposited in a government-insured account located in Wisconsin.

A lawyer is obligated to:

• notify a client promptly when client funds or property are received;
  
  
• provide the client with appropriate accountings (upon request); and
  
  
• disburse promptly to the client or third party all funds and property to which each person is entitled.

Noncash property like jewelry or bonds should be clearly identified as client property and secured in the lawyer's safe or in a trust account safe deposit box. The court's ethical rules reflect a fiduciary's key duties of notification, segregation, delivery, and accounting.

Each lawyer is personally responsible for the proper deposit and maintenance of trust funds. While necessity often requires delegation of administrative duties within a law practice, the lawyer still must establish, be familiar with, and ensure the proper operation of adequate procedures for handling trust funds. Specifically, lawyers who delegate any part of their trust fund account responsibilities to staff must provide effective guidelines for properly handling and maintaining these accounts and supervise staff activities. It is better practice that all signatories on trust accounts be lawyers.

What records are required?

According to SCR 20:1.15(e), complete records of trust account funds and other trust property shall be kept by the lawyer and preserved for a least six years after terminating the representation. Complete records shall include:

• a cash receipts journal listing the sources and date of each receipt;
  
  
• a disbursement journal, listing the date and payee of each disbursement, with all disbursements being paid by check;
  
  
• a subsidiary ledger containing a separate page for each person or company for whom funds have been received in trust, showing the date and amount of each receipt, the date and amount of each disbursement, and any unexpended balance;
  
  
• a monthly schedule of the subsidiary ledger, indicating the balance of each client's account at the end of each month;
  
  
• a determination of the cash balance (checkbook balance) at the end of each month, taken from the cash receipts and cash disbursements journals and a reconciliation of the cash balance (checkbook balance with the balance indicated in the bank statement); and
  
  
• monthly statements including canceled checks, vouchers or share drafts, and duplicate deposit slips.

A record of all property other than cash that is held in trust for clients or third persons, as required by SCR 20:1.15(a), also shall be maintained. All trust account records shall be deemed to have public aspects as related to the lawyer's fitness to practice.

What is a "lawyer trust account"?

It is an insured checking or savings account located within Wisconsin. The account may be at a bank, trust company, credit union, or savings and loan association. A lawyer may have none, one, or several trust accounts, depending upon need. Typically, they will be one of three varieties.

1) A "pooled" interest-earning IOLTA (Interest on Lawyer Trust Account) account. This account holds client funds that are:

• nominal in amount or expected to be held for a short time;
  
  
• not deposited in an account or investment under SCR 20:1.15(c)(2); or
  
  
• not eligible for an account or investment under SCR 20:1.15(c)(2) because the client is a corporation or organization not permitted by law to maintain such an account, or the terms of the account are not consistent with a need to make funds available without delay.

The interest accruing on this account, net of any transaction costs, shall be paid to the Wisconsin Trust Account Foundation Inc. (WisTAF), which shall be deemed the beneficial owner thereof. A lawyer or law firm is liable for any bank fees or charges on an IOLTA account that exceed the interest earned on that account. It should be noted that many financial institutions waive service fees on IOLTA accounts. A lawyer may notify the client how these funds will be used.

2) A "pooled" interest-bearing account with subaccounting performed by the lawyer or financial institution that provides for computation of interest earned by each client's funds and payment thereof to each client. Client funds that are substantial in amount or expected to be held for a longer time may be deposited in this account.

3) An individual interest-bearing account that provides for the payment of the earned interest to the client. Client funds that are substantial in amount or expected to be held for a longer time may be deposited in an individual interest-bearing account.

What is the purpose of a lawyer trust account?

The purpose is to safeguard clients' funds from loss and to avoid the appearance of impropriety. The lawyer trust account is a depository for all funds coming into a lawyer's possession that belong to a client or third party. Funds belonging partly to a client and partly to a lawyer, presently or potentially, also must be deposited in the attorney trust account. The lawyer's portion may be withdrawn only after "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." SCR 20:1.15(d). The portion not in dispute should be distributed promptly.

Is commingling of trust, individual,
and business accounts prohibited?

Lawyer trust accounts must be maintained separately from the lawyer's personal and business accounts. The account must be designated, "Trust Account" or "Client's Account." WisTAF has an approved Lawyer Trust Account Agreement form that must be executed by the attorney when establishing an IOLTA account and be completed by the financial institution. These forms are free from WisTAF, 825 Williamson St., Suite A, Madison, WI 53703, (608) 257-6845; toll free 877-749-5045.

Who must maintain a lawyer trust account?

Every licensed Wisconsin attorney who is engaged in the private practice of law, whether full time or part time and who, in that capacity, holds funds in which a client or third party has an interest must maintain a trust account for the deposit of those funds. Lawyers who do not hold clients' or third-party funds do not need a trust account.

What funds are trust funds?

All funds received by a lawyer in connection with a representation in which a client or a third person has an interest are trust funds and should be deposited in a trust account. Among the funds treated as trust funds are advances for fees received from clients until they are actually earned by the lawyer (unless they are flat fees), funds of others that are being held for disbursement at a later time, personal injury awards, support payments, real estate conveyancing funds, and litigation settlements. It is the lawyer's responsibility to exercise good judgment in determining what funds belong in the trust account.

What about bank service charges
and check printing charges?

A lawyer may deposit a reasonable amount of personal funds into the trust account to pay bank service and check printing charges and other fees incurred in connection with the account. Also, arrangements sometimes can be made with financial institutions to bill the lawyer directly for the expenses of an account. In an IOLTA account, transaction costs and bank service charges or fees are paid by the IOLTA program up to an amount equaling but not exceeding the interest earned on the account. The net amount of charges exceeding the interest earned are the responsibility of the attorney. A list of acceptable service charges and those fees that are not chargeable to an IOLTA account is available from WisTAF.

What about interest on a lawyer trust account?

A lawyer as a fiduciary cannot benefit from the administration of a trust account. All interest or other income earned on a client trust account belongs to the client or person whose money generated the interest, or it goes to WisTAF through the IOLTA program.

The theory behind the IOLTA program is that noninterest-bearing accounts produce income that is kept by the financial institution. This income is diverted by the IOLTA program from the bank to WisTAF to fund legal aid services and other law-related programs.

What is IOLTA?

IOLTA is the acronym for the Interest on Lawyer Trust Account program, which was established by supreme court rule in 1986. Under the IOLTA program, a lawyer is permitted ­ indeed encouraged ­ to make the lawyer trust account productive for the profession. An IOLTA account is designed for short-term and nominal deposits of client funds that ordinarily would be pooled together in a noninterest-bearing checking account. WisTAF collects the interest on these accounts statewide, and this revenue is used by the WisTAF board to fund civil legal services for the poor and legal programs to improve the administration of justice. The IOLTA program is administered by the Wisconsin Trust Account Foundation Inc.

How should large trust deposits be handled?

As a practical matter, it is the lawyer's responsibility to exercise good judgment in determining how trust funds are to be deposited or invested. When the amount of trust funds of an individual client and the length of time those trust funds are to be kept indicate that the interest earned would substantially exceed the administrative costs and bank charges, the lawyer should invest the funds in an interest-bearing trust account for the client's benefit. The definition of "substantially exceed" depends upon the circumstances of each case ­ the larger the amount of funds, the shorter the period of time needed to justify establishing the account for the funds and vice versa.

A lawyer must consult the client before investing and follow the client's instructions as to the investment of the funds. The lawyer should be mindful of applicable income tax reporting requirements and advise the client or third party of the requirements. "In the case of an extreme violation of the lawyer's fiduciary duty to invest a client's funds amounting to gross neglect of a client's matter, moreover, the model code would provide a basis for professional discipline." ¹

In determining what funds should go into a pooled trust account, lawyers should exercise good faith judgments. Some factors to consider are the:

• directions of the client or third party;
  
  
• amount of the funds;
  
  
• period of time the funds are expected to be held;
  
  
• likelihood of delay in the transactions and proceedings;
  
  
• cost of establishing and maintaining an interest-bearing account;
  
  
• minimum balance requirements and service charges or fees imposed; and
  
  
• costs of preparing tax reports for interest accruing to a client or third party's benefit.

Lawyers are expected and encouraged to continue the customary practice of establishing separate, interest-bearing accounts for individual clients' funds where the sum is large enough or when the time of the deposit is of sufficient duration to justify the costs of opening, administering, and closing the account.

The IOLTA program can refund interest on any funds inadvertently held in an IOLTA account on request of a participating lawyer.

Where are advanced legal fees deposited?

Whether a retainer fee is deposited in the trust account or the lawyer's business account depends upon the lawyer's fee agreement with the client. If the advance fee becomes the lawyer's property when it is paid by the client (that is, a flat fee agreement), then the fee should be deposited in the firm's business account not in the lawyer trust account. If the advance fee is to remain client property until it is earned by the lawyer it should be deposited in the lawyer trust account, to be withdrawn by the lawyer after accounting, notifying and severing interest without dispute, all pursuant to SCR 20:1.15. For further guidance, review State Bar Ethics Opinion E-86-9.²

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