Everything You Need To Know About Trust Accounting

Transcription

1 The Chicago Bar Association Presents: Everything You Need To Know About Trust Accounting Wednesday, December 2, :10 p.m. The Chicago Bar Association 321 S. Plymouth Court Level of Instruction: Basic to Intermediate Presented by: CBA Law Practice Management and Technology Division and YLS Professional Responsibility Committee Also Available: Archived Webcast, DVD Rental, Written Materials Managing client funds is a basic component of maintaining a law practice. However, statistics show that year after year, mishandling client's money is among the most frequent sources of investigation and disciplinary action by the ARDC. For lawyers who want to stay out of trouble, the first line of defense is to understand the provisions of Illinois' safekeeping of property rule (Rule 1.15) and the record-keeping required by the rule. Our expert panel will provide a detailed explanation of the key principles in the rule, recent revisions to the rule (including the new provision regarding unidentified funds), and the requirements regarding IOLTA and unidentified funds. The program will also look at how to use basic accounting techniques to manage a client trust account and comply with the record-keeping requirements of Rule SPEAKERS: Mary Andreoni, Illinois ARDC Daniel A. Cotter, Butler Rubin David Holterman, Lawyers Trust Fund

2 TABLE OF CONTENTS Everything You Need to Know About Trust Accounting December 2, 2015 Mary F. Andreoni... CBA3 David Holterman... CBA49 CBA1

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4 TRUST ACCOUNTING: WHAT EVERY LAWYER SHOULD KNOW Mary F. Andreoni, ARDC Ethics Education Counsel December 2, 2015 CBA3

5 CBA4

6 Basic Requirements of Holding Client Funds in Trust CBA5 3

7 When is a Lawyer Required to Hold Funds in Trust under Rule 1.15? Rule 1.15 Safekeeping Property (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 CBA6 4

8 General Duties Under Rule 1.15 Duty to Segregate in an IOLTA or Non-IOLTA Client Trust Account - ILRPC 1.15(a) Duty to Promptly Notify ILRPC 1.15(d) Duty to Maintain Complete Records ILRPC 1.15(a) Duty to Account ILRPC 1.15(d) Duty of Prompt Payment ILRPC 1.15(d) Duty to Preserve Disputed Funds ILRPC 1.15(e) CBA7 5

9 What is a Client Trust Account? An interest- or dividend-bearing fiduciary account maintained at an eligible financial institution for the deposit of funds held by a lawyer or law firm on behalf of a client. CBA8 6

10 What MUST Be Deposited in the Client Trust Account? Funds belonging to a client or third person held in connection with a legal representation. Unearned legal fees and costs including security retainers. Funds to which two or more person (one of whom may be the lawyer or law firm) have competing claims to the funds and ownership claims that are unresolved. CBA9 7

11 What MUST NOT be Held in the Client Trust Account? Lawyer's own personal or business funds except for those funds allowed under Rule 1.15(b). Earned fees including funds received as a fixed fee, a general retainer or an advance payment retainer under Rule 1.15(c). CBA10 8

12 What MAY Be Deposited in the Client Trust Account? 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(b). CBA11 9

13 Every Client Trust Account Must Be: interest-bearing or dividend-bearing; held at an eligible financial institution; and opened with interest accruing for the benefit of either: the client (Non-IOLTA account) or the IOLTA program (in Illinois, the Lawyers Trust Fund) (IOLTA) Non-Interest Bearing Trust Accounts are Prohibited Rule 1.15(f) CBA12 10

14 IOLTA Account Rule 1.15(f) Pooled/Several Clients & Matters Pooled (several clients/matters) Interest- or dividend-bearing Nominal amounts or amounts expected to be held for a short period time and Interest goes to the Lawyers Trust Fund of Illinois e.g., settlement funds, advances for unearned fees and un-incurred costs CBA13 11

15 Non-IOLTA - Rule 1.15(a) One Client/Matter Account Individual client or client matter Interest- or dividend-bearing Substantial amounts or amounts expected to be held for a long period of time and Interest goes to client e.g., required by contract (real estate escrow) or court order (estate or divorce) CBA14 12

16 IOLTA or Non-IOLTA? Always Ask: Are funds nominal or are expected to be held for a short period of time? Always Consider: What is the amount of net interest that trust funds are capable of earning for a client/third person? CBA15 13

17 Discretion Rules! A decision about where to place funds rests on lawyer or law firm s REASONABLE JUDGMENT. No charge of ethical impropriety or other breach of professional conduct shall attend to a lawyer s or law firm s exercise of reasonable judgment under this rule or decision to place client funds in an IOLTA account or a non-iolta client trust account on the basis of that determination. -Rule 1.15(g) CBA16 14

18 Client Trust Account Requirements 1. Form of Account IOLTA - the account must be payable on demand, e.g. checking or NOW savings account Non-IOLTA can include passbook, CD or other longer term accounts CBA17 15

19 Requirements Cont d 2. Eligible Financial Institution Defined in R. 1.15(i)(3) List of Eligible Financial Institutions IOLTA (Lawyers Trust Fund of Illinois) Non-IOLTA (ARDC) CBA18 16

20 3. Location of Account Requirements Cont d State where lawyer s office is located or elsewhere with the informed consent of the client or third person 4. Tax Information or Taxpayer Identification Number (TIN) IOLTA TIN of the Lawyers Trust Fund for IOLTA (contact the Lawyers Trust Fund for TIN) Non-IOLTA TIN of client or third person CBA19 17

21 Requirements Cont d. 5. Account Name Clearly identifies the fiduciary nature of the account in the account name and checks - see Comment [1] to Rule 1.15 E.g., for IOLTA Law Firm of John Doe Client Trust Account DO NOT identify the Lawyers Trust Fund as designee, trustee or owner in the account name or on printed checks E.g., for Non-IOLTA Law Firm of John Doe Estate of Mrs. Smith CBA20 18

22 Required Accounting Journals CBA21 19

23 Five Required Client Trust Account Recordkeeping Journals Checkbook Register Receipts Journal Disbursements Journal Client Ledger Pages Reconciliation Report Rule 1.15(a)(1)-(8) Samples of the above recordkeeping journals can be found on the ARDC website ( CBA22 20

24 #1 Checkbook Register Rule 1.15(a)(4) Lists sequentially all trust account deposits and checks and reflects a current and accurate daily balance on the trust account. CHECK DATE PAYEE OR DEPOSIT SOURCE AMOUNT OF CHECK AMOUNT OF DEPOSIT BALANCE 2/01/10 Joan Smith $1,000 $8, /01/10 Mrs. Johnson $1,000 $7,000 CBA23

25 #2 Receipts Journal Rule 1.15(a)(1) Lists all receipts chronologically for all deposits in the trust account and identifies the date and source of each receipt DATE SOURCE CLIENT CASE OR FILE# DEPOSIT AMOUNT 2/01/10 Smith Retainer Check #2398 Joan Smith $1,000 2/05/10 Fed Refund James Johnson $2,000 CBA24

26 #3 Disbursements Journal Rule 1.15(a)(1) Lists all disbursements chronologically and identifies the recipient, purpose and date of each disbursement. DATE CHECK # 3/1/ Mrs. Johnson PAYEE PURPOSE CLIENT CASE or FILE # AMOUNT Ct. Order James Johnson $1,000 CBA25

27 #4 Client Ledger Rule 1.15(a)(2) A separate page for each client/matter showing chronologically all receipts, disbursements and balances for each client/matter. CBA26

28 Client Ledger Page Name of Client: John Doe Legal Matter/Adverse Party: Bob Smith File/Case Number: Date Description of Transaction Payor/Payee Ref Funds Paid Funds Received Balance 10/15/08 Adv. Fee dep. $3, /23/08 Attorney s fees $3, /17/08 Med. records RCS # $3, /18/08 Filing fee County Ct. Clerk #635 $ $2, CBA27

29 #5 Reconciliation Report CBA28 26

30 Accounting Principles Separate Clients = Separate Accounts In a pooled, IOLTA account, the client ledger enables the lawyer to know the individual balance for each client matter. Can t Spend What You Don t Have Know the financial institution s rules regarding when funds become available and are credited to the account. Know the Balance The balance is either 0 (when no trust funds are being held) or equal to the sum of all funds being held for clients or third persons. CBA29 27

31 How to Do a Reconciliation Report Rule 1.15(a)(7) Requires that reconciliations must be made for all client trust account (IOLTA and non-iolta) on at least a quarterly basis. Before a client trust account can be reconciled with the monthly bank statement, the balances of: Receipts Journal minus Disbursement Journal; Sum total of all Client Ledger pages; and Checkbook Register must equal one another. CBA30 28

32 Some Recordkeeping Specifics Complete records of client trust account funds and other property held in trust must be retained for 7 years after the termination of representation (See also, Ill.Sup.Ct. Rule 769). Electronic records and other media records are okay but must be printable and readily accessible to the lawyer. A lawyer must make arrangements for the maintenance of the records in the event of the closing, sale, dissolution, or merger of a law practice. CBA31 29

33 Resources ARDC website under Publications List of Eligible Financial Institutions ARDC CLE 1-hour webcast on client trust accounts Client Trust Account Handbook Sample Recordkeeping Account Journals Trust Account Software Resources Questions about IOLTA & Enrollment Forms Lawyers Trust Fund (IOLTA) CBA32 30

34 Overdrafts: When the Disciplinary Agency Comes Calling CBA33

35 Automatic Overdraft Notification: Rule 1.15(h) The ARDC is notified when a client trust account contains insufficient funds ( NSF ). Applies regardless of whether a check is ultimately honored. Provides an early warning that a lawyer s trust account systems are deficient or that the lawyer is engaging in conduct that could injure clients or others. CBA34 32

36 Regulatory Impact of Overdraft Notification CBA35 33

37 Top Ten Reasons for ARDC OD Investigation Closures 1. Trust account check issued against uncollected funds (post-dated check syndrome); 2. Deposited item is returned; 3. There is a failure to make a timely make deposits; 4. Bank fees (e.g., dormant account and check printing charges); 5. Online computer banking errors (Lawyer mistypes information); 6. Telephone banking errors (e.g., teller/backroom personnel credit items into a different account); 7. Using the trust account for personal, not client trust, purposes; 8. Lawyer math errors; 9. Using the wrong check book; and 10. Bank error. CBA36 34

38 Best Practices: Client Trust Accounts Select Trust Account Checks that are Distinguishable from Business Account Checks Let Deposits Clear Before Writing Checks Reconcile Monthly Establish an Accounting System that You Understand and Can Follow Even if You Delegate Bookkeeping Tasks Know Your Financial Institution s Charges and Fees for Maintaining the Trust Account CBA37 35

39 Unidentified Funds: New ILRPC 1.15(i) (amended April 7, 2015, eff. July 1, 2015) New Rule 1.15(i) applies to funds in the IOLTA account which cannot be identified as belonging to a client or third party or to the lawyer or law firm Usually because of: Mathematical error Faulty bookkeeping or Lawyer s failure to with earned legal fees but lacks sufficient records If after 12 months, lawyer reasonably believe further efforts are fruitless, lawyer must remit funds to the Lawyers Trust Fund. Lawyers Trust Funds has a remittance form on its website Claim can be made with the Lawyers Trust Fund if owner is later discovered or funds were remitted in error. CBA38 36

40 A word about fees. CBA39

41 Fee Retainers Rule 1.15(c) codifies requirements of Dowling Funds for fees and expenses not yet earned/incurred (a/k/a ( security payment retainer) MUST be deposited in the client trust account EXCEPT for: General Retainer Fixed/lump Fee Agreement Advance Payment Retainer CBA40

42 Types of Retainers Recognized in Illinois See Comments [3B]-[3D] to Rule 1.15 Security Retainer = payment to secure fees owed for future services. Deposit in trust account General or Classic Retainer = payment to secure lawyer s availability. Deposit in the business account Advance Payment Retainer (Dowling) = present payment in exchange for the commitment to provide future services. Deposit in business account Fixed/Flat Fee Agreements = a/k/a lump sum or flat fee, the lawyer agrees to provide a specific service for a fixed amount. Deposit in business account CBA41

43 Trust Account Questions in an Electronic Age CBA42

44 Trust Account Scams The Way it Works Avoiding the Scam Wait for a check, even a cashier s or certified check, to clear before using the money; Provisional credit is NOT sufficient Be suspicious of client who want the lawyer to act quickly and insist on sending fund by wire transfer Know with whom you are dealing before accepting the representation. Verify client's ID and facts by sources independent of what client give you. Duties to maintain computer security: ILRPC 1.1, Comment [8] and 1.6(e), Comments [18]-19]. CBA43 41

45 Handling Credit Card Payments Issues: Commingling Credit card service fees Chargebacks Confidentiality ISBA Op (May 2014) CBA44

46 ARDC Resources CBA45

47 Rules of Professional Conduct & Disciplinary Law ARDC website at: Guidance on the Rules & IL Lawyer s Professional Duties Call the ARDC Ethics Inquiry Hotline: (Chicago); (Springfield) FREE online CLE seminars at ARDC web site: Lawyers Assistance Program: LAP-1233 Talk it out with other lawyers See RPC 1.6(b)(4) CBA46 44

48 Questions CBA47 45

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50 Everything You Need to Know about Client Trust Accounts Chicago Bar Association December 2, 2015 David Holtermann, General Counsel Lawyers Trust Fund of Illinois CBA49

51 Objectives IOLTA explained IOLTA vs Non-IOLTA account When to use an IOLTA account Establishing an IOLTA account Unidentified funds Support for the legal aid system IOLTA & unidentified funds resources CBA50 2

52 Safekeeping Requirement Two types allowed under Rule 1.15(a): IOLTA account Separate, interest-bearing non-iolta client trust account Must be interest-bearing Lawyer may not receive interest CBA51 3

53 IOLTA Accounts Defined in Rule 1.15(i)(2): Pooled interest- or dividend-bearing Lawyers Trust Fund designated as income beneficiary (LTF earns interest; principal belongs to clients) For deposit of nominal or short-term funds of clients or third persons Funds may be withdrawn upon request as soon as permitted by law CBA52 4

54 Non-IOLTA Client Trust Account Rule 1.15(f): Separate interest- or dividend-bearing client trust account Client earns interest For deposit of funds of clients or third persons that are not nominal in amount or expected to be held for a short period of time I.e. substantial amount held for substantial period, such as a commercial real estate escrow CBA53 5

55 IOLTA or Non-IOLTA? See Rule 1.15(f): IOLTA: nominal in amount or are expected to be held for a short period of time Advances for costs and expenses Funds belonging in part to a client or third person and in part presently or potentially to the lawyer or law firm Non-IOLTA: Not nominal in amount or expected to be held for a short period of time CBA54 6

56 Rule 1.15(g): IOLTA or Non-IOLTA? Lawyer or law firm makes determination Exercise reasonable judgment Are funds nominal in amount or expected to be held for a short period of time? Factors Amount of interest funds would earn Cost of separate account Capabilities of financial institution CBA55 7

57 IOLTA or Non-IOLTA? Key question: Will client funds generate net interest for benefit of client? Net interest = gross interest costs Gross interest = amount x duration x interest rate Costs: account fees, check fees, lawyer and staff time, expenses related to tax reporting CBA56 8

58 Establishing an IOLTA Account Eligible institution under Rule 1.15(f) & (h) Establish as an interest-bearing demand deposit account Identified as a client trust account Use LTF tax identification number (TIN) Notice forms ( Page 1 (Notice to Financial Institution) bank Page 2 (Notice of Enrollment) LTF CBA57 9

59 IOLTA Questions? Lawyers Trust Fund ( IOLTA Basics Instructions List of eligible financial institutions Notice to Financial Institution/Notice of Enrollment Help: David Holtermann, LTF General Counsel: , Terri Smith, LTF Director of Banking: , CBA58 10

60 Unidentified Funds Requirement A legacy issue? Rule 1.15(i), effective 7/1/15 amounts accumulated that cannot be documented as belonging to a client, a third person, or the lawyer or law firm Lawyer required to try to identify and return funds After 12 months, remit funds to LTF if further efforts not likely to succeed CBA59 11

61 Remitting Unidentified Funds Protections: Reasonable judgement of lawyer ( no charge of ethical impropriety ) Refund provision Unidentified funds vs. unclaimed funds Use reporting form to remit funds (available on CBA60 12

62 What Does IOLTA Support? IOLTA created by Supreme Court in 1983 LTF grants support civil legal aid Access Fairness Protect people with nowhere else to turn $9.3 million to 34 organizations : 47% downstate and collar counties 45% Cook County 8% statewide CBA61 13

63 What Does IOLTA Support? IOLTA-supported organizations = 170,000 cases in 2014 Domestic violence Elder abuse Consumer fraud Access to education Competitive grants process = accountability Grants approved by board appointed by Supreme Court and bar associations CBA62 14

64 The Lawyer s Role Understand duties under Rules of Professional Conduct Rule 1.15 Be a conscientious participant in IOLTA Properly established account Use when appropriate Pay attention to where you bank Unidentified funds? CBA63 15

65 Rules Trust Account Resources Rule of Professional Conduct 1.15; Supreme Court Rule 756 (client trust account reporting) ARDC ( ARDC Client Trust Account Handbook On-demand CLE webcast: The Ethical Requirements of Handling Trust Funds Under Rule 1.15 and IOLTA Basics Ethics Inquiry Program: Chicago ( ) or Springfield ( ) CBA64 16

66 IOLTA Resources Lawyers Trust Fund ( IOLTA Basics List of eligible financial institutions IOLTA account instructions & forms Unidentified funds info and report Help: David Holtermann, LTF General Counsel: , Terri Smith, LTF Director of Banking: , CBA65 17

67 David Holtermann CBA66 18

68 Y O U N G L A W Y E R S J O U R N A L A guide to THE AMENDED RULE of PROFESSIONAL CONDUCT 1.15 Understanding the New Client Trust Account Requirements By Mary Andreoni and David Holtermann Lawyers licensed to practice in Illinois need to be familiar with the amendments to Rule of Professional Conduct 1.15 that took effect September 1, These amendments, announced by the Illinois Supreme Court in July, make three key changes regarding how lawyers handle client funds and client trust accounts: Changes to Rule 1.15 (a) and (f) clarify that there are only two options for the deposit of client funds an IOLTA client trust account or a client trust account established to hold the funds of the client with the client receiving the interest. No client funds may be held in an account that does not earn interest. Additions to Rule 1.15(a) include new trust account recordkeeping requirements for lawyers. Rule 1.15(h) creates a trust account overdraft notification system, under which banks that hold client trust accounts must agree to notify the ARDC in the event the account is overdrawn. A quick look at the purpose of Rule 1.15 titled Safekeeping of Property puts these amendments in context. The rule specifies the responsibilities and obligations of lawyers who hold the property of clients in trust. Underlying these is the general principle that a lawyer holding the funds or property of a client or third person has a fiduciary duty to safeguard them and to segregate them from the lawyer s personal and business assets. Based on this principle, Rule 1.15 and its predecessors long have required lawyers to hold client funds in trust accounts for safekeeping. That principle continues through the recent amendments to the rule. The 42 SEPTEMBER 2011 key changes reinforce it by clarifying the two allowable types of client trust accounts lawyers may use for the deposit of client funds. The expanded recordkeeping requirements provide an additional safeguard for client funds. As an early warning system for mismanagement of an account that could lead to a loss of funds, the overdraft notification requirement provides a further safeguard. The remainder of this article highlights these key changes and provides guidance about what they mean and what practitioners may need to do in response. Key Change #1: Only Two Types of Client Trust Accounts The amendments to paragraphs (a) and (f) of Rule 1.15 clarify that there are only two options for depositing client funds: either an IOLTA account or a non-iolta client trust account. An IOLTA account is a pooled interestbearing client trust account, held at an eligible financial institution, for the deposit of nominal or short-term funds of clients or third persons. Interest on IOLTA accounts is payable to the Lawyers Trust Fund of Illinois (LTF), which makes grants to support CBA67

69 Y O U N G L A W Y E R S J O U R N A L legal aid programs throughout Illinois. A non-iolta client trust account is a separate, interest-bearing account established for the benefit of a particular client or client matter where the net income earned on the funds is paid to the client. Client funds may not be held in an account that does not earn interest. Paragraph (g) lists the factors a lawyer should consider in determining whether client funds are nominal or short term. Generally speaking, nominal or short-term client funds are those that cannot generate net interest for the client (i.e., in excess of the costs of establishing, maintaining and administering a separate account for the benefit of the client) and should be deposited in an IOLTA account. Funds that are not nominal or short-term should be placed in a separate, interest bearing trust account with interest paid to the client. Under paragraph (g), lawyers are required to exercise reasonable judgment in making the determination about whether client funds are nominal or short term. That exercise of reasonable judgment and the connected decision on whether to place client funds into one of the two allowed types of accounts may not be the basis of any disciplinary charge. Most lawyers who handle client funds already use a pooled IOLTA account and the amended rules require no additional action, unless the lawyer wants to verify that the trust account is properly set up and that interest is, in fact, remitted to LTF. (Bank errors in the coding of IOLTA accounts are not uncommon.) If a lawyer or firm needs to establish an IOLTA account, simple stepby-step instructions and forms are available from LTF on its web site at You can also contact LTF staff for more assistance. Key Change #2: Recordkeeping Requirement The addition of subparagraphs (1) through (8) to Rule 1.15(a) provides lawyers with detailed guidelines for keeping records of client trust account funds and transactions. Before the amended rule, lawyers were required to keep complete records of trust accounts and to promptly render a full accounting of trust funds or property upon request. But the rule did not provide New member BENEFITS Alliant Credit UNION Alliant is proud to offer credit union membership to members of The Chicago Bar Association and your family members. Alliant is one of the nation s largest credit unions, serving more than 280,000 members worldwide. Alliant members benefit from below-market loan rates, above-market rates on savings and checking accounts, and 24/7 account access on the phone, online and at ATMs. To join Alliant, visit Business Online PAYROLL Business Online Payroll offers CBA members access to an award-winning, online payroll alternative to costly traditional payroll services that saves you time and money. See details at asp?pc=chba. lawyers with practical guidance for complying with their obligations or in establishing GREAT MINDS DON T THINK ALIKE. We work with more than 6000 businesses throughout Chicago and it s our experience that no two operate the same way. That s why each entrepreneur is unique. And because there is no template for success, we do everything we can to make sure our clients have all the tools they need to succeed. Please contact Brian Hannon Vice President, Commercial Banking at for more information. Member FDIC EQUAL HOUSING Locally Owned and Operated LENDER 2010 American Chartered Bank americanchartered.com CBA68 CBA RECORD 43

70 Y O U N G L A W Y E R S J O U R N A L The RULE CHANGED? WHAT DO I NEED TO DO? Read the amended Rule 1.15 (available through or Check the form of your client trust account. Is it an interest-bearing account? If it is a pooled client trust account, is it an IOLTA trust account with the Lawyers Trust Fund receiving the net interest? If not, it will need to be changed to an interest-bearing IOLTA trust account. Does your bank know that this account is subject to the overdraft notification provisions? Review your client trust account recordkeeping procedures. Does your present system of tracking funds and maintaining trust accounts records comply with the new recordkeeping requirements? Implement regular reconciliation of the client trust account. To minimize the risk of an NSF trust account check, the client trust account should be reconciled once a month, if monthly statements are issued, or at least on a quarterly basis, to spot any accounting or bank errors. accounting systems. The amended rule fills this gap. It continues to require lawyers to maintain records for seven years, but additionally spells out the elements of the records to be made, collected, and maintained by lawyers. The rule also requires account reconciliation at least once a quarter. These required procedures encourage careful accounting that helps safeguard client funds. In addition, they benefit lawyers by requiring records that can be used to refute concerns that funds were handled improperly. In response to these changes, lawyers should carefully read Rule 1.15(a)(1-8) and review their trust account recordkeeping and reconciliation procedures. The ARDC has several resources that illustrate the requirements. These include basic accounting journals and forms that can be used as guides, as well as a form reconciliation report. These are available on the ARDC web site at Most comprehensively, the ARDC s Client Trust Account Handbook provides a detailed look at recordkeeping and reconciliation procedures in addition to a broad overview of the requirements of Rule It is also available online at toc_mail.html. make sure your bank is an eligible institution for the deposit of client funds. (Check the frequently updated list posted on and Coverage That s Right For You More than 150,000 attorneys trust CNA, the largest writer of Lawyers Professional Liability Insurance in the nation, for their coverage needs. Exclusively offered through Pearl in Illinois, our program provides you with one of the broadest, most reliable plans on the market today. One or more of the CNA companies provide the products and/or services described. The information is intended to present a general overview for illustrative purposes only. CNA is a registered trade mark of CNA Financial Corporation. Copyright 2011 CNA. All rights reserved. Pearl is the exclusive agent for CNA LPL in IL. 44 SEPTEMBER Key Change # 3: Automatic Overdraft Notification The final key change is the addition of an automatic overdraft notification provision under Rule 1.15(h). Banks that wish to be eligible financial institutions to hold client trust funds must agree to report to the ARDC anytime a properly payable instrument is presented against a client trust account containing insufficient funds, whether or not the instrument is honored. The rule requires lawyers to maintain trust accounts only in banks that have agreed to make such reports to the ARDC. This overdraft notification provision, which is also the rule in 42 other jurisdictions, provides another safeguard for client funds. It will not lead to any ARDC inquiry unless the lawyer s trust account has insufficient funds to honor a check or other debit. CBA69

71 Y O U N G L A W Y E R S J O U R N A L Questions about the rule amendments can be directed to the ARDC or the LTF. Both organizations have extensive information about the rule amendments online at and www. ltf.org. Other resources on these sites include FAQs and a webcast eligible for one hour of MCLE credit. You can reach both organizations by phone. The ARDC s Chicago office is at 312/ Contact LTF at 312/ A bounced check on a client trust account is an early warning of lawyer conduct that could injure clients. Early notice can help contain problems before many clients are affected and losses incurred. Experience in other states shows that most regulatory action taken under overdraft notification rules involves educational intervention. Prosecutions are not routine. Because an agreement to provide overdraft notification to the ARDC is a prerequisite for holding client funds (whether in an IOLTA or non-iolta client trust account), lawyers need to verify that their bank has submitted such an agreement. Both the ARDC and LTF maintain a list of banks that have submitted agreements and are therefore eligible for the deposit of client funds. The list is cross-posted at www. iardc.org and After verifying the eligibility of their bank, lawyers should make sure the bank is aware of any trust accounts subject to the overdraft notification provision. Conclusion There is no reason to be daunted by the amendments to Rule After reviewing the amendments and consulting resources such as this article and the materials available from the ARDC and LTF, complying with the new provisions should be neither complicated nor difficult. Mary Andreoni is ethics education counsel at the Attorney Registration & Disciplinary Commission. David Holtermann is general counsel of the Lawyers Trust Fund. YLS IntERNATIONAl & FOREIGN Law CommITTEE The Young Lawyers Section is pleased to announce the creation of a new committee, International & Foreign Law. The Committee will examine both private and public international law, including U.S. and foreign legal aspects of international business transactions, litigation and arbitration, taxation of foreign income, foreign investment laws, treaties, the United Nations and other international organizations. The group also will explore the nuances and importance of international criminal law. The inaugural year will be chaired by Kyle Olson, Baker & McKenzie; John Tufano Jr., attorney at law; and Maya Ganguly, attorney at law. The committee will meet regularly on the third Monday of the month. To join, visit (under Committees) or call 312/ CBA70 CBA RECORD 45

72 LAWYERS TRUST FUND OF ILLINOIS INSTRUCTIONS FOR REMITTING UNIDENTIFIED FUNDS Effective July 1, 2015, amendments to Illinois Rule of Professional Conduct 1.15 require lawyers to change how they handle unidentified funds in IOLTA accounts. The amended rule states in part: A lawyer who learns of unidentified funds in an IOLTA account must make periodic efforts to identify and return the funds to the rightful owner. If after 12 months of the discovery of the unidentified funds the lawyer determines that ascertaining the ownership or securing the return of the funds will not succeed, the lawyer must remit the funds to the Lawyers Trust Fund of Illinois. No charge of ethical impropriety or other breach of professional conduct shall attend to a lawyer s exercise of reasonable judgment under this paragraph (i). (The complete rule, along with additional information is available at 30TUwww.ltf.orgU30T.) Remitting Unidentified Funds If you believe you are holding unidentified funds in an IOLTA account, please follow these instructions: Step 1: Are the funds unidentified? Rule 1.15 defines unidentified funds as amounts accumulated in an IOLTA account that cannot be documented as belonging to a client, a third person, or the lawyer or law firm. If the accumulated funds belong to a known owner (a client or third person) who cannot be located or who will not cash a check for payment of the funds, the funds are unclaimed. Under the Uniform Disposition of Unclaimed Property Act ( 765 ILCS secs. 1025/1 et seq.), funds that remain unclaimed for five years may be remitted Illinois State Treasurer through the I-CASH program. (More information is available at 30TUicash.illinois.gov.U30T) Do not remit unclaimed funds to the Lawyers Trust Fund. If you determine that the accumulated funds cannot be identified as belonging to a client or third person, or documented as belonging to the lawyer or law firm, proceed to Step 2. Step 2: Have you met the 12-month requirement? After the discovery of unidentified funds, Rule 1.15(i) requires lawyers to make periodic efforts over 12 months to identify the owner of the funds and return them. If ownership of the unidentified funds is ascertained during the 12-month period, the lawyer should return the funds to the owner. If the owner cannot be located or does not accept payment of the funds, the lawyer should treat them as unclaimed funds. These funds should not be remitted to the Lawyers Trust Fund. After 12 months of periodic efforts to identify and return the funds, if the lawyer determines that further efforts will not succeed, the funds must be remitted to the Lawyers Trust Fund. Unidentified funds discovered before the effective date of the new rule (July 1, 2015) may be remitted to LTF as long as there have been periodic efforts made over at least 12 months to identify the owner and return the funds. However, no lawyer is required to begin efforts to identify and return previously discovered funds until the July 1, 2015 effective date. Step 3: Remit unidentified funds using this report. To remit funds, complete page 2 of this form with required information and signed verification. Send the completed form and a check for the amount of the unidentified funds payable to the Lawyers Trust Fund of Illinois to: Lawyers Trust Fund of Illinois Collections Center Dr. Chicago, IL The Lawyers Trust Fund will send an electronic acknowledgement of the remittance and report to the address supplied in Section A on page 2 of this form. Do you need assistance? Contact us: 30TDirector of Banking Terri-Smith Ashford30T: , Uterri@ltf.org Uor LTF General Counsel 30TDavid Holtermann30T: , Udavid@ltf.orgU CBA71

73 A. LAWYERS TRUST FUND OF ILLINOIS Collections Center Drive Chicago, IL (312) UNIDENTIFIED FUNDS REMITTANCE REPORT This form is for the remittance of unidentified funds from IOLTA accounts pursuant to Illinois Rule of Professional Conduct 1.15 PERSON MAKING REPORT 1. Name: 2. Law Firm Name: (if applicable) Address: Address: 3. Phone: 4. ARDC Number: (if applicable) 5. B. IOLTA ACCOUNT OWNER INFORMATION: (Complete only if different from reporting lawyer) 1. Name: 2. Law Firm Name: (if applicable) Address: Address: 3. Phone: 4. ARDC Number: (if applicable) C. IOLTA ACCOUNT & UNIDENTIFIED FUNDS INFORMATION: 1. Bank Name/Address: 2. Account Information: (for record keeping only) Routing Number 3. Amount of Unidentified Funds Remitted: 4. Provide additional details (optional ). Account Number (Enclose check for above amount payable to: Lawyers Trust Fund of Illinois) REMINDER: Remit only funds that are unidentified and after satisfying the 12-Month requirement. D. VERIFICATION: I verify that the information reported on this form is true and correct, and that I am remitting the unidentified funds referenced above pursuant to Rule of Professional Conduct Signature (if unsigned, report will be returned) Date Print Name FOR OFFICE USE ONLY BATCH NUMBER BANK NAME ROUTING NO. LTF ACCT. NO. DATE POSTED CBA72

74 The Lawyers Trust Fund of Illinois Thanks to the support and participation of thousands of Illinois lawyers, the Lawyers Trust Fund (LTF) is the largest state-based funder of legal aid in Illinois. LTF was established by the Illinois State and Chicago Bar Associations in Subsequently the Illinois Supreme Court designated LTF to administer the Interest on Lawyers Trust Account (IOLTA) program and support the provision of legal aid in Illinois. During the current fiscal year LTF will distribute $9.3 million in grants to 34 nonprofit legal aid organizations with offices throughout Illinois. The legal assistance provided by these organizations is a legal safety net for people who cannot afford to hire a lawyer, but face serious problems related to issues such as domestic violence, elder abuse, child custody, foreclosure, access to medical care, and other critical needs. In 2014 the legal aid organizations funded by LTF provided legal help to more than 170,000 individuals. LTF s legal aid grants are supported by IOLTA program revenue as well as an annual fee assessed on active Illinois lawyers at the direction of the Supreme Court. In 2016, grants also will be supported by revenue from unidentified funds remitted pursuant to rule changes that took effect on July 1, LTF is governed by a nine-member board appointed by the Illinois Supreme Court, the Illinois State Bar Association, and The Chicago Bar Association. Supreme Court Justice Thomas L. Kilbride serves as the Supreme Court s liaison to LTF s board. Improving the Legal Aid System LTF s approach to grant-making prioritizes building strong and effective organizations and fostering innovation. Grants are awarded through an annual, competitive process that ensures the legal aid system is operating effectively. Under the leadership of its board, LTF has long taken responsibility for launching and funding efforts to expand the capacity and reach of Illinois legal aid providers. Key initiatives include: Conducting statewide legal needs studies. (1989 and 2005) Computerizing legal aid offices across Illinois. ( ) Creating and funding CARPLS, Illinois first legal aid hotline. (1993) Providing leadership and financial support to obtain the first state appropriation for legal aid, now administered by the Illinois Equal Justice Foundation. (1999) Spearheading the development of Illinois Legal Aid Online to provide web-based legal information for consumers and lawyers. (2000) Funding and support to establish self-help legal centers for pro se litigants in nearly 100 downstate counties. ( ) Upgrading case management systems for legal aid providers. ( ) Supporting the use of automated document assembly and other tools to increase the efficiency of legal aid offices. (2012) Start-up funding for the Supreme Court Commission on Access to Justice. (2013) Bringing business process analysis into legal aid programs to increase efficiency in operations. ( ) CBA73

75 IOLTA Accounts Resources Rule of Professional Conduct 1.15 This rule is the starting point for understanding lawyers duties in holding client funds and includes requirements related to IOLTA accounts, non-iolta client trust accounts, and unidentified funds.( LTF website LTF s site includes an overview of IOLTA basics, instructions and forms for establishing IOLTA accounts, and a list of eligible financial institutions. ( Contact David Holtermann, LTF Associate Director & General Counsel: , david@ltf.org Terri Smith, LTF Director of Banking & Operations: , tlsmith@ltf.org Unidentified Funds Summary of unidentified funds requirements LTF webpage that summarizes the new unidentified fund requirements ( Remittance report and instructions Lawyers remitting unidentified funds must complete and submit this form ( ISBA Advisory Ethics Opinion Addresses the disposition of unclaimed and unidentified client funds in light of 2015 amendments to Rule 1.15 ( Contact David Holtermann, LTF Associate Director & General Counsel: , david@ltf.org Terri Smith, LTF Director of Banking & Operations: , tlsmith@ltf.org Trust Account & Recordkeeping Requirements ARDC Client Trust Account Handbook This PDF handbook from the Attorney Registration & Disciplinary Commission provides detailed information on how to properly manage client trust accounts. ( The Ethical Requirements of Handling Trust Funds under Rule 1.15 and IOLTA Basics An on-demand CLE webcast from the ARDC and LTF, free of charge on the ARDC s website. ( Ethics Inquiry Program The ARDC s Ethics Inquiry Program may be able to answer trust account-related questions. The program can be contacted in Chicago ( ) or Springfield ( ). CBA74