Safeguarding Client Property

Terms:

Trust
A legal vehicle for achieving goals in the maintenance of property, involving the split of equitable and legal title.

Equitable title
Beneficial ownership of a trust. The holder of equitable title is generally entitled to proceeds and, at the expiration of the trust, to the principal held.

Legal title
Title “in name” in a trust.

Settlor
The person who creates the trust.

Trustee
Holds “legal title” in a trust; Responsible for maintaining and guarding the trust assets. Owes strict legal and ethical duties to beneficiaries and the settlor.

Beneficiaries
Holders of equitable title. They are generally entitled to proceeds and principal of a trust. Trust assets are considered held for the benefit of the beneficiaries.

Principal
Generally the sum that is held in trust.

In Chapter One, you were saddled with a number of questions and problems regarding the safeguarding of client property. Here we’ll look at the rules in greater detail. The fact that we’re exploring this topic in both chapters underscores the seriousness of it. Courts give lawyers absolutely no leeway when it comes to handling client trust funds.

It’s important to know a little bit about what a trust is, in order to sort out the responsibilities a trustee assumes.

Trusts are the general term for property in which a settlor, the person who sets up the trust, splits the legal title of property from the equitable title. Legal title relates to the individual or organization that holds ownership “in name” only, often known as the trustee. The beneficiary, on the other hand, holds the equitable title. The beneficiary is the individual or organization that is entitled to the principal, or sum that is held in trust, plus any proceeds.

Often a trust is created on behalf of a beneficiary because the settlor needs help safeguarding funds. For example, a parent might want to set aside a fund for a child in the event of the parent’s death. A will might provide that the death of the parent will cause a certain portion of the estate to “pour over” into a trust for the benefit of the child, who might be too young to handle the funds. The trustee promises to handle the funds for a specified period. The trustee is obligated to properly account for the funds and make them profitable, among other affirmative duties. Most importantly, the trustee may not toy with the funds. He cannot use them for his personal gain. He must never misappropriate funds from the trust, under severe penalty of law.

Client trusts are established to facilitate transactions. Lawyers often act as middlemen for these transactions. In a client trust, the lawyer is usually the trustee, and the client or a third party is the beneficiary. The client or third party consents to the lawyer holding legal title to the funds until they are properly disbursed to the client. The lawyer’s obligation as a trustee is sacred. A lawyer’s failure to respect the division between legal and equitable title – say by misappropriating some of the trust principal for his own usage – will trigger, in many jurisdictions, immediate disbarment.

The Model Rules make a distinction between property of clients and third parties, and lawyer fees. If a client advances his lawyer money for court costs, the lawyer must deposit these funds in his client trust account. See Model Rule 1.15(a). However, courts are split when it comes to advance fees, as distinguished from costs and expenses. Some courts say the lawyer does not have to deposit advanced fees in a client trust account.

Generally, trust accounts are non-interest bearing. It would be difficult for an attorney to calculate and distribute interest income among all the clients, especially since their funds typically reside in the account for varied periods of time. Where a client’s funds must be held for a long time and the amount is large, however, it would be appropriate to deposit the funds into an interest-bearing account. In this fashion a lawyer will protect the client’s investment interest.

The fiduciary duties a trustee owes a beneficiary are among the most crucial and strict in all of the law. The following are requirements the Model Rules prescribe for lawyers when acting as trustees for client funds:

(1) Separation of Funds

Property of clients or third parties must be held in an account separate from the lawyer’s personal property. There must be no commingling of client funds with the lawyer’s funds. Generally, funds must be kept in a separate account in the state where the lawyer’s office is located, or elsewhere with the client’s consent.

(2) Keeping Records

The lawyer must keep records of all withdrawals and deposits into the trust fund. The records must be preserved for a prescribed period following the termination of the representation. In California, for example, the prescribed period is five years following the final distribution of the property. Also, in certain jurisdictions, trust fund checkbooks must be balanced on a regular basis. State ethics boards are often empowered to conduct audits of client trust funds. If a discrepancy in the records is found, a lawyer will be sanctioned.

(3) Informing the Client

A lawyer has an obligation to promptly inform the appropriate client or third party upon receiving funds. Also, no disbursements may be made from a client’s trust account without the client’s consent. See Model Rule 1.15(a).


(4) Remittance of Funds and Property

Generally a lawyer must promptly deliver any funds that the client or third party is entitled to receive. Upon request, a full accounting regarding the property must also be made available.

(5) Obligations in a Dispute

If there is a dispute between the lawyer and another individual regarding the trust fund property, the property must be kept separate by the lawyer until an accounting is conducted and the respective interests in the property are sorted out. If there is a dispute between the lawyer and the client, the disputed portion must also remain separated by the lawyer until the dispute is resolved. The key is, there should be no commingling of funds at any time if there is a chance the funds are not the property of the lawyer.

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