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Attorney who ignore the responsibilities of the day-to-day processes involved with trust accounts because of a lack of knowledge or training are putting themselves in danger. Sound harsh? It may be, but the reality is that it's happening more and more throughout New Jersey.

Maintaining a trust account is a profound responsibility. Clients willingly entrusts money or property to their attorneys and do not receive collateral or a security filing in the money or property. As a result, lawyers are completely accountable for their clients' money or property and are required to maintain the proper paperwork.

An attorney becomes familiar with the rules governing trust accounts while studying the laws of agency in law school and has some knowledge of agency principles when obtaining a license to practice. Acting as an agent, lawyers know that they must uphold certain fiduciary duties.

Lawyers may be familiar with the underlying law relating to the trust account (agency laws), but unfamiliar with or not trained in the record-keeping requirements, which is where a legal license can be jeopardized. If the trust account violation is found to be unintentional and negligent, the results can include disciplinary action and civil liability.

The safekeeping property rules are covered under the Rules of Professional Conduct 1.15. According to RPC 1.15, the responsibility and duties include:

• Client funds must be kept separate from the lawyer's own property.
• Funds shall be maintained in a financial institution in New Jersey.
• Complete records of account funds must be maintained by the lawyer.
• Records must be kept for a period of seven years after the event that they record.
• Upon receipt of funds or property in which a client has an interest, the lawyer must promptly notify the client.
• A lawyer shall promptly deliver to the client or third person any funds or property that the client or third person is entitled to receive, except under specific exemption in this rule or otherwise permitted by law or by agreement with the client or third person
• If there is a dual claim of interest between the lawyer and another person, the funds or property must be kept separate by the lawyer until the dispute is resolved
• A lawyer must comply with court rule provisions that outline the record keeping requirements. R. 1:21-6.

Establishing a Trust Account
Trust accounts must be maintained in a financial institution in New Jersey. The financial institution must be approved by the state Supreme Court and the account must have the designation "Attorney Trust Account."

Deposit slips and checks must also have the designation. An annual registration form, which includes the name of the institution and identification numbers of each account, must be filed with the Office of Attorney Ethics and the New Jersey Lawyers' Fund for Client Protection.

One or more of the trust accounts must be an Interest on Lawyers' Trust Account (IOLTA). Attorneys should familiarize themselves with the IOLTA rules. There are certain situations in which an IOLTA account should be utilized. If the time spent obtaining and filing Internal Revenue Service information outweighs the benefit of interest earned in a separate account, the attorney is justified to use the IOLTA account.

However, if a significant amount of interest can be earned on the client's behalf, then the attorney should open a separate interest-bearing trust account on behalf of the client. In every instance, either IOLTA or the client receives the interest. The attorney is never entitled to the interest earned on funds held in trust accounts.

Categorizing Deposits
Even before addressing the record-keeping requirement, the attorney must decide which funds qualify to be deposited into the trust account. Deposits fall into three categories: mandatory, permissive and prohibited.

Mandatory deposits include funds held on behalf of clients, funds that come into the attorney's possession out of legal representation, and general retainers for legal services and advances for costs in which there is an explicit understanding with the client that they will be separately maintained.

Permissive deposits are funds that may be deposited into the trust account and are identified as general retainers for legal services, advances for costs in which there is no explicit understanding with the client and also funds of the attorney that are reasonably sufficient to pay bank charges.

Prohibited deposits are funds that may not be deposited into the trust account. These include funds received by attorneys for which they are acting in a fiduciary capacity, such as executor or guardian and must be deposited into a separate fiduciary account. Prohibited funds also include a lawyer's personal funds, business and investment monies and payroll taxes on employee wages.

Detailed Record Keeping
Essentially, detailed records must be kept on a per-client basis. Any deposit made or check written on a client's behalf must be sparely recorded on a ledger sheet for that client. Deposit slips should be at least a two-part slip and must include the client name or file number. Checks need to be pre numbered and accounted for, including voided or unused checks.

The client ledger sheet should have a running balance, which must be maintained at all times. Attorneys can never use funds from one client to satisfy another client's obligation. By maintaining a running balance on each client ledger sheet, the lawyer will always know the balance in the account for that client.

If an attorney has only one trust account in which trust funds are combined, the separate client ledger sheets can save a lawyer's license. When trust funds are combined into one trust account and no separate client ledger is maintained, it is easy to write checks on behalf of one client while using the funds of another. This will certainly lead to disciplinary action.

In addition to separate client ledger sheets, there must be a receipts journal and a disbursement journal. These must be designed to record all deposits and disbursements made on behalf of each client and must be totaled monthly. The information recorded in the journals is information already recorded in the separate client ledger sheets but in a different format. The purpose for this is to obtain monthly totals for receipts and disbursements which will be used in the reconciliation process.

Three-Way Reconciliation
Bank reconciliations should be done on a monthly basis but are required to be reconciled quarterly. A three-way reconciliation process is recommended. A book balance that starts with the beginning-of-the-month book balance plus total monthly cash receipts from the cash receipts journal less total monthly cash disbursement journal would provide an end-of-month total.

Using the bank statement balance, the second reconciliation would take the ending bank balance, plus deposits in transit less outstanding checks, to provide a reconciled bank balance.

The third reconciliation should be the total month end balances from all the client ledger cards. All three reconciliations should total the same amount. Dollar round is not permissible. The totals must be to the penny. If there are discrepancies, they must be immediately investigated and resolved.

Attorneys who rely on their book-keeper, administrator or certified public accountant must review the reconciliation process. The lawyer should verify that all three balances are the same and should review the detailed client ledgers to make sure the receipts and disbursements appear to be properly record.

Reconciliations should be signed and dated, indicating the attorney's approval of the detailed record-keeping on a client-to-client basis with all reconciliations being performed. Signing and dating the reconciliations demonstrates the attorney has performed the due diligence necessary for preserving the trust accounts.

"Snitch" Rules
Trust accounts can never have negative balances. The balance must be positive, which indicates funds are held, or zero, indicating the account is closed. A negative balance would indicate that funds were inappropriately used.

Attorneys who maintain negative balances should be cognizant of the "snitch" rules. In order to be placed on the qualified list, a financial institution agrees to report to the Office of Attorney Ethics if a properly payable attorney trust instrument is presented against insufficient funds, even if the financial institution agrees to honor the instrument. Once notified, the Office of Attorney Ethics will request a written documented response from the attorney within 10 days of the receipt of the letter.

Bank's Clearing Policy
Timing of deposits clearing the bank and checks written from those funds must be carefully scrutinized. Lawyers must be aware of their bank's clearing time for intrastate and interstate checks.

If a deposit has not cleared the bank, the attorney cannot write a check from those funds until it has. Writing a check to pay a client's obligation cannot be made until the client's funds are available. If the client's funds are not available, checks issued against them would be the funds of another client, which is not permissible. (There is an exception to this regarding real estate transactions.)

Unclaimed Trust Funds
If a lawyer receives a settlement for an individual, but the individual has become unreachable, the attorney must perform a reasonable search to locate the missing individual.

A reasonable search is defined as a search to ascertain the facts over a period of one year. If the funds remain unclaimed after the end of one year, the attorney must make an application to the clerk of the Superior Court to accept the funds. The application must include a check for the funds and an affidavit demonstrating the means used to perform a reasonable search.

Earned Legal Fees
Legal fees that are received into the trust account must be transferred to the attorney's operating account. Lawyers may never write a check payable to their creditor or vendor from the trust account. Earned legal fees must be withdrawn from the trust account in a timely manner, as keeping fees in the trust account could be construed as commingling funds and can result in disciplinary action.

Prior to transferring earned fees to their operating account, attorneys must furnish their client with proper notification of the services rendered and the amount of legal fees related to those services. In a contingency case, the attorney is required to present the client with a written closing statement and may withdraw funds after a reasonable period of time following notification.

IF a client notifies the attorney of a dispute of the fee, the portion of funds in dispute must remain in the trust account until the dispute is resolved.

Eyes of the IRS
If a lawyer is under audit by the IRS, a review of trust account records may be requested. The IRS will be looking for unreported income. Many attorneys think that by keeping their portion of earned fees in a trust account, they do not have to record it as income until it is transferred into their operation account.

The IRS is aware of this technique and will review the trust accounts to determine if there are proper procedures in place to remove earned fees from the trust account which are timely recorded as income. If the IRS concludes that earned fees remained in the trust account for an unreasonable period of time, it may assess tax, penalties and interest on those fees.

Delegating Responsibility
Some attorneys decide that maintaining trust accounts is too much to handle and delegate the responsibility to their bookkeeper, administrator or CPA. An important point to consider is that no matter who maintains the trust account, the attorney is always responsible for the trust account activity.

For example, a New Jersey practitioner had his license suspended after being investigated by the state Office of Attorney Ethics for a trust overdraft. The trust violation occurred when his secretary improperly transferred funds from his trust account to his business account to pay office-related bills.

Although the secretary admitted that she had done so without his knowledge and the attorney was the one who noticed it and rectified the situation, the OAE found there was no rationale for him to place total reliance on a secretary.

Reliance on Others
If a firm partner has the designation of overseeing trust accounts, it does not alleviate the other attorneys in the office from the responsibility. A partner in a large firm can be held financially liable and be professionally disciplined for the intentional and negligent handling of the trust account by others in the firm.

IF the firm hires an outside company to oversee the trust account and the company does not properly maintain the account, it is the attorney, not the company, who is disciplined.

"But the Client Wasn't Hurt"
Due to a lack of training or knowledge, an attorney can make unintentional mistakes when maintaining a trust account. Even if their clients ultimately receive what they are entitled to, the lawyer may still face disciplinary action.

Unintentional mistakes that do not harm the client, such as delay in remitting funds to a client or failure to deposit funds on a timely basis, can still subject a practitioner to disciplinary action.

Intentional Misuse
Unfortunately, there are intentional "mistakes," and some are more sever than others. Use of a client's fund for just a few hours is an intentional act that could lead to disciplinary action even though the client was not "hurt."

In recent months, a few New Jersey attorneys have gone beyond the use of funds for a "few hours." The lawyers have been accused of stealing trust funds and using them for personal gain. The misuse of trust funds have led to disbarment and even jail in some circumstances.

Taking it one step further, if the funds were not declared as income on their personal tax return, the IRS could prosecute them for fraud and tax evasion. In situations of intentional misuse, whether the client was hurt or not, the attorney is still subject to disciplinary action.

Safeguarding Trust Funds
In addition to adhering to agency laws and understanding the record-keeping necessary for trust funds, practitioners also need to concern themselves with the safekeeping of money or property entrusted to them. Controls must be institutionalized in order to minimize exposure to theft of the funds or property.

The following are controls attorneys may want to consider instituting to minimize theft of funds internally. These controls should be applied not only to the trust accounts, but to other accounts maintained by the firm as well.

• Authorization to sign checks should be given to an attorney. Never use a facsimile signature stamp.
• Limit access to account records. Multiple access makes it difficult to pinpoint the responsible person if there is a problem.
• Segregation of duties is an important element of control. Separating duties is easier in a large firm than a small firm. A small firm still needs to design controls that will allow for certain functions to be handled by different people in the office.
• Bank statements should be opened by an attorney, preferably the attorney signing the monthly reconciliations. The attorney should review the statements to see if something unusual appears to have occurred during the month.

  For example, a negative daily balance indicates an overdraft. This should be immediately investigated. In addition, canceled checks should be reviewed to see if there is an unusual payee, the signature on the check is appropriate or the check was not endorsed by someone in your office. Credit and debit memos should also be explained if there are not routine.

• Upon reviewing monthly reconciliations, inquiry should be made for checks that have been outstanding for a period of time. Deposits in transit in the prior month should be recorded on the bank statement within a couple of days of the next month.
• Lawyers signing checks should review the client ledger sheet to verify that funds are available to cover the check.
• It's a good idea to perform background checks on new hires. For present employees, observation may be the key. Close attention should be paid as to whether or not employees are working when it is not needed or when no one else is around or if employees appear to be living beyond what their salaries allow.
• Establish an employee hotline. Many thefts are uncovered as a result of a tip from another employee. If an employee is aware of funds being misappropriated but is not comfortable talking to management, having a hot line will allow that employee to call anonymously.
• FOr practitioners in a multiple-attorney firm, check with your malpractice insurance carrier to obtain innocent partner coverage.
• Have an independent outside party review the trust account activity and reconciliations.

A trust account can be a lawyer's downfall. Poor management due to lack of knowledge and training is the cause of most trust account problems. These problems can be avoided by following very basic and simple rules.

Be familiar with the rules for New Jersey. Maintain detailed records on a client basic. Reconcile the account monthly. And most importantly, keep in mind that the responsibility of maintaining a trust account cannot be delegate, ignored or neglected. It's your personal assets and your license to practice that's at risk.