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

More

What accounting of lawyer trust accounts is required?

The accounting system that documents the trust funds can be as uncomplicated as the minimal approach described in this manual or as sophisticated as necessary within an integrated software program on a computerized accounting package. A lawyer need not be an accountant to keep proper trust account records. The lawyer should establish and maintain a system that ensures the lawyer can document:

• the amount of funds within the trust account at all times;
  
  
• the amounts within the trust account belonging to each client or third party;
  
  
• how each transaction was processed (the payor/payee).

A system that incorporates internal controls and properly documents the activity occurring in the trust account should be adequate for these recordkeeping requirements. The cash receipts journal and the cash disbursement journal can be nothing more than regular checkbook entries that identify the date and amount of funds deposited and the client on whose behalf the funds were received. While no specific accounting system is mandated, a lawyer should maintain all law firm financial records in accordance with generally accepted accounting practices.

Lawyer trust account checkbook. Each deposit transaction should show:

• the date;
• source of funds or name of person with an interest in the account, if different;
• a brief explanation;
• amount of deposit; and
• balance on hand in trust account.

Likewise, each disbursement transaction should show:

• the check number;
  
  
• date;
  
  
• payee;
  
  
• brief explanation of the transaction's purpose; and
  
  
• amount of the check and balance on hand in trust account.

This part of the accounting system by itself does not keep track of individual records as to each client or third party.

WisTAF Can Help Answer Your IOLTA, Trust Account Questions The Wisconsin Trust Account Foundation (WisTAF) administers the Interest on Lawyers Trust Account (IOLTA) program and its staff can answer questions generated by this article. In addition, WisTAF can provide attorneys: an approved Lawyer Trust Account Agreement form that must be executed by the attorney when establishing an IOLTA account and completed by the financial institution; a list of acceptable service charges and those fees that cannot be charged to an IOLTA account; a list of financial institutions that do not assess service charges to IOLTA accounts; and a list of financial institutions that provide above average interest rates on IOLTA accounts. To request these materials or other information, please contact WisTAF, 825 Williamson St., Suite A, Madison, WI 53703, (608) 257-6845; toll free 877-749-5045. Or visit WisTAF's Internet site.

Lawyer individual trust account ledger. Each individual client or third person's account could be maintained as a separate page in the lawyer's individual trust account ledger. This ledger sheet documents the chronological activity for each person's account. Entries on this sheet are posted from the activity originating in the checkbook register with the balances kept up to date so an accurate accounting of trust funds can be provided immediately upon request of the client or the third party involved simply by making a copy of the lawyer individual trust account ledger sheet and providing it to the client or third party.

At a minimum, each individual trust account ledger sheet should reflect:

• the date funds were received or dispersed;
  
  
• description of each transaction including whom the funds were received from or paid to;
  
  
• check number;
  
  
• amount of funds received or paid out; and
  
  
• balance of account at end of transaction.

How often must a reconciliation be made?

The trust account must be reconciled monthly with the bank statement. If needed, your banker or accountant can assist you in reconciling your account. A document similar to the Lawyer Trust Account Reconciliation Sheet (included) may be used to make the necessary reconciliations.

When should lawyers make an accounting to clients or third parties?

Periodically, the lawyer should advise each person whose funds are held of the status of those funds. An adequate description should be provided indicating what receipts and disbursements have occurred and any unexpended balance. If there is objection to any proposed disbursement, such as for earned fees, those funds must remain in the trust account pending resolution of the dispute.

What are some methods of safeguarding client funds?

The security of a trust account can be measured by the interest/attention the attorney devotes to operating the account. The following safeguards are suggested:

• Someone other than the bookkeeper should perform the monthly reconciliation and trial balances.
  
  
• An attorney should not hastily sign checks to be disbursed or deposited.
  
  
• Use prenumbered checks and periodically examine the sequential order of blank, void, and canceled checks, and question any unexplained break in numbers. For this reason, voided checks should be retained.
  
  
• Keep blank checks under someone's control during the day and secured at night, and ensure the checks are all accounted for when someone resigns or is terminated, to help reduce theft.
  
  
• When clients indicate they have paid in cash, ask if a receipt was provided. The receipt book can be examined periodically to determine if any copies of the receipts have been removed or voided, which should be questioned.
  
  
• Posting, depositing, and disbursing trust account funds should be done by different personnel in the office. If this is not possible due to limited staff, an attorney may want to audit the trust account periodically or have an independent party do so. Do not sign blank checks and do not make a check out to cash or bearer. Every client file should contain a copy of that client's trust account ledger. Check to see if the client's file contains documentation supporting disbursements.
  
  
• Ensure deposits are made in a timely manner, daily if possible. Control who opens bank statements and correspondence regarding the trust account and review periodically.
  
  
• Estate accounting should be reviewed monthly. Old or inactive estates become a prime target for embezzlement.
  
  
• Require supporting documentation of accounting reports/reconciliations (bank statements, canceled checks, deposit slips, correspondence, and so on). Check periodically to determine if only designated personnel in the office have had access to office mail.
  
  
• Prohibit ­ or at least restrict ­ removal of trust account records from the office. Question lifestyle changes of individuals with access to the trust account (increase of social activities/travel, new wardrobe, new car, and so on). Examine signature(s) on trust account checks to discover forgery attempts.
  
  
• Never transmit money without written communication. A voucher or other documentation for receipt and instruction should be prepared by the attorney instructing the person performing the bookkeeping function to deposit the funds into the trust fund account on behalf of the person or entity named in the voucher or receipt. Written communication avoids later arguments regarding deposit instructions and provides a needed audit trail.
  
  
• Each firm should decide the proper person(s) to sign trust checks. Generally, the person who prepares the checks should not have sole signatory authority. Good internal control dictates that access to the trust account checkbook be limited to authorized signatories, and that two signatures be required if practical on all trust account checks. Regardless, no individual should sign a check unless presented with written documentation that the disbursement is proper, along with notice that the original receipted funds have cleared the banking process and are available for disbursement. The lawyer's individual trust account ledger should reflect the availability of the trust funds. Disbursement procedures should be stated clearly in established rules for the firm.

Practical pointers

• Funds that cannot be traced to a client, after diligent inquiry, due to uncashed checks, unrounded cents, errors in management of the account, and so on, should be forwarded to the State of Wisconsin - Unclaimed Property Section (608) 267-7977.
  
  
• The attorney is ultimately responsible for properly managing the trust account.
  
  
• If you become aware of purposeful mismanagement of, or theft from, trust accounts, you should notify the managing attorney immediately. If that is impossible, then notify the Board of Attorneys Professional Responsibility.
  
  
• Your checkbook register can be used as the cash receipts and disbursement journals.
  
  
• Withdrawals from a lawyer trust account should be made to named payees, not to cash.
  
  
• The checks and deposit slips should be imprinted with the heading "Trust Account" or "Client's Account." This helps segregate those funds from the attorney's office and personal funds.
  
  
• A lawyer needs at least one business account as a depository for legal fees and to pay operating expenses. The checks on these accounts should designate the account, "Jones & Smith Business Account," or "Jones & Smith Professional Account," or "Jones & Smith Office Account," and so on, whereas the trust account should be designated as "Jones & Smith Client Trust Account." Also consider establishing trust account(s) at an institution other than where the lawyer's or law firm's operating account is located and selecting checks of a different color and/or size from those of the lawyer's operating account.
  
  
• Make sure that the institution has collected the money from the deposited checks before writing any check on those funds. It is important to know the financial institution's rules of when funds can be withdrawn. The time it takes for funds to become available after deposit can vary between a day and several weeks depending upon the form in which the money is deposited and the source of the funds. You should check with the financial institution to determine when it credits deposits to the account. Many banks have automated account information systems which will give the activity on an account.

Do not write a check to a client for settlement proceeds before the settlement check has cleared on the theory that there is other money in the trust account. This would put other clients' funds at risk.

• Under no circumstances should the lawyer ever disburse more funds than received in a matter, or use any trust funds for personal purposes; otherwise a wrongful taking of other client trust funds occurs, which could result in both civil and disciplinary liability. At the end of the representation involved there should not be any monies left on the individual trust account ledger.
  
  
• Avoid ATM deposits; the lawyer has a duty to account for 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. With an ATM withdrawal, there is nothing that shows whose money was withdrawn, who withdrew it, or to whom the money was paid.
  
  
• Real Estate Transactions:Real estate lawyers who act as the closing agents for real estate transactions often want or need to immediately issue checks from the trust account on funds that have not even been deposited, much less cleared the banking process. The issue is whether there is a practical way to protect other clients' funds held in the trust account while writing checks against the account before the deposit covering those checks has been made and credited. Ethics advisory opinions from a few other states would allow the practice if the lawyer accepts and makes disbursements of only certified or cashier's checks, where the risk of noncollectibility is minimal.³ However, certified and cashier's checks can be dishonored, and if they are, the lawyer remains responsible, civilly and ethically, for any losses incurred by any other party whose funds were used to pay checks written in reliance upon the dishonored deposits.⁴
  
  
• The individual trust account ledger sheets can be organized alphabetically in two three-ring binders. The first binder would be labeled as the "Open Account" ledger, where all the separate individual trust account ledger sheets should be filed and maintained. The second binder would be labeled as the "Closed Account" ledger, where all individual trust account ledger sheets on closed matters should be kept.
  
  
• Good internal control dictates that access to the trust account checkbook be limited to only the authorized signatories.
  
  
• The individual signing the check should review the individual trust account ledger sheet before authorizing disbursement of trust funds.
  
  
• There are computer software accounting packages that easily meet the minimum accounting standards outlined here.
  
  
• In addition to records previously mentioned, every lawyer must maintain for six years after terminating representation or possession of funds, the original or copies of all client retainer and fee agreements; statements to clients showing disbursements of funds; receipts; bills rendered to clients; records showing payments to other lawyers or nonemployees for services rendered; and retainer, settlement, and closing statements. SCR 20:1.15(e). In the event of a law firm dissolution, appropriate arrangements must be made for maintaining the firm's records, either by a former partner or the successor law firm.
  
  
• The IOLTA program does not pay for the cost of printing checks, deposit slips, wire transfer fees, special accounting services, and other selected charges. A list of these fees that a financial institution cannot charge to an IOLTA account is available from WisTAF.

Before unilaterally withdrawing client funds as legal fees it is advised to get the client's written consent. Three items must be met: a) the right to look to that particular client for payment; b) an agreement as to amount due; and c) an agreement that the lawyer should be paid at that time. Review Disciplinary Proceedings Against Marine for further information.⁵

• Disputed fees are to be left in the trust account until the dispute is resolved. If the attorney has erroneously withdrawn funds from the trust account and then learns of the dispute, the attorney should immediately redeposit those funds into the trust account.

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Endnotes

¹ ABA Formal Opinion 346, "Placing Client's Funds at Interest," July 23, 1982 (the IOLTA opinion).

²59 Wis. B. Bull. 32 (Sept. 1986).

³See N.C. Ethics Ops. RPC 232 (April 11, 1996) and RPC 191 (Oct. 20, 1995); Va. State Bar Legal Ethics Op. 183 (April 1, 1996); N.J. Ethics Op. 454, 11, 4 N.J.L.J. I 10 (Aug. 2, 1984); see also Fla. Bar Rule 5-1.1(g) (Disbursement against uncollected funds) and N.C. Gen. Stat. ch. 25-4-211 ("Good Settlement Funds Act").

⁴See N.C. Ethics Op. RPC 191, at 3.

⁵ 82 Wis. 2d 602, at 610 (1978).

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