(Questions 1-5)

A trust account is a bank account maintained incident to a lawyer's law practice in which the lawyer holds funds received in a fiduciary capacity, including those held on behalf of or belonging to a client. Revised Rule 1.15-1(b)(2).

Any lawyer who receives funds in a fiduciary capacity in the context of his or her law practice must have access to or maintain a trust account. The lawyer must have access to or establish a trust account before receiving such funds. Revised Rule 1.15-1(a) and (c).

Yes. Trust accounts can only be maintained at federally or North Carolina chartered banks, savings and loan associations, or credit unions. Unless the client specifically provides written direction to the contrary, the bank at which a trust account is maintained must be in North Carolina. Revised Rule 1.15-1(b)(1) and (c).

Generally speaking, a lawyer needs only one trust account to handle monies received in trust which are either nominal in amount or held for a short period of time. Within this common account, the funds of many clients may be commingled so long as adequate records are kept to identify the funds of each client. Revised Rule 1.15-1(c).

No. Each lawyer in a firm may ethically use a common account so long as adequate records are maintained. However, multiple accounts are permissible. A lawyer may personally maintain several trust accounts if he or she desires. Revised Rule 1.15-1(c).

(Questions 6-9)

Since a lawyer has an ethical obligation to pay or deliver client funds promptly as instructed by the client, trust accounts are generally demand accounts with check writing privileges. Because trust funds are typically nominal in amount or held for only a short period of time, there is no general requirement that the trust account be interest-bearing. Revised Rule 1.15-2(h).

Yes. If, because of the size of the deposit or the length of time the deposited funds are to be held, a prudent person acting in a fiduciary capacity would be expected to invest the funds, a lawyer receiving money under such circumstances would have a corresponding obligation to deposit the funds in an interest-bearing account. The trust or fiduciary account in which such funds are deposited should be separate from the lawyer's general trust account. Any interest generated would be the property of the client. Revised Rule 1.15-1(f).

Lawyers who serve as trustees, guardians, attorneys in fact, or personal representatives should usually maintain separate, specially denominated fiduciary accounts. Generally speaking, such fiduciary accounts should be interest-bearing since the deposited funds would generally be held in trust for significant periods of time. Revised Rule 1.15-1(b)(3).

Yes. Lawyers wishing to participate in the State Bar's IOLTA program, which is explained in more detail elsewhere in the Lawyer's Handbook, may maintain general trust funds in interest-bearing checking accounts. The interest earned on such accounts is remitted by the depository bank directly to the IOLTA Board of Trustees, which subsequently distributes the funds in the form of grants to persons or entities for various public purposes in accordance with the rules of the IOLTA program. Revised Rules 1.15-1(f) and 1.15-3.

(Question 10)

A trust account must be clearly labeled and designated as a "trust account," and all checks drawn on the account must be so identified. For instance, an appropriate title for the account might be "The Trust Account of John Smith" or "Smith, Jones & Williams Trust Account." A properly labeled trust account check is appended as Exhibit A. Each account in which funds are held by a lawyer pursuant to the lawyer's service as a trustee, guardian, personal representative, attorney in fact, or escrow agent must be appropriately labeled as a fiduciary account unless such funds are held in a trust account. Revised Rule 1.15-1(c).

(Questions 11-14)

The general rule is that every receipt of money from a client or for a client which will be used or delivered on the client's behalf should be placed in the trust account. This includes funds received by the attorney as an escrow agent. Revised Rule 1.15-1(d) and Comment.

The trust account rules are not applicable in cases where the lawyer handles money for a business, religious, civic, or charitable organization as an officer, employee, or other official of that organization. The lawyer's only professional obligation regarding such funds is to deal honestly. Revised Rule 1.15-1 Comment.

The trust account rules are not generally applicable to lawyers serving as trustees, personal representatives, or attorneys in fact. However, lawyers serving in such fiduciary roles must segregate property held in trust from their personal property, maintain the minimum financial records required for trust accounts and instruct any financial institution in which property of a trust is held to notify the North Carolina State Bar of any negotiable instruments drawn on the account which are presented for payment against insufficient funds. Revised Rules 1.15-1(a) and 1.15-2(b), (c), (e), and (j).

Generally speaking, any negotiable instrument may be deposited in a trust account whether or not it represents collected funds. Unless specifically permitted by law, the Revised Rules of Professional Conduct or definitive interpretations thereof, no withdrawal should be made with respect to any deposited item until the funds represented by that item are collected. Revised Rules 1.15-1(a)(6) and 1.15-2(e).

(Questions 15-16)

No funds belonging to the lawyer may be deposited in the trust account except such funds as are necessary to open or maintain the account, pay service charges, and funds belonging in part to a client and in part presently or potentially to the lawyer, such as where a deposited item represents both the client's recovery and the lawyer's fee. In such a case, the portion of the funds belonging to the lawyer must be withdrawn from the trust account as soon as the lawyer becomes entitled to the funds unless the right of the lawyer to receive that portion is disputed by the client, in which event the disputed portion must remain in the trust account until the dispute is resolved. Revised Rule 1.15-1(e).

Strictly speaking, no. A retainer in its truest sense is money paid to the lawyer to reserve the exclusive use of the lawyer's services for a particular time or in regard to a particular matter. Since a retainer is deemed earned when paid, it immediately becomes the property of the lawyer and as such must not be deposited in the trust account. True retainers must be distinguished from fees paid in advance which are intended to be held by the lawyer as security deposits against work which is yet to be performed. Since a lawyer has an ethical obligation to refund the unearned portion of any fee paid in advance upon discharge or withdrawal, such funds are not considered property of the lawyer and must be held in the trust account until they are earned. Revised Rules 1.15-1(a) and Comment and 1.16(d).

(Questions 17-21)

Any attorney maintaining a trust account must keep the following records:

1. A record of receipts. This can be a journal, file of receipts, file of deposit slips, or a collection of checkbook stubs. The record of receipts must list the source, client, and date of the receipt of all trust funds. Examples of properly composed deposit slips are appended as Exhibits B and C.

2. All canceled instruments drawn on the account or printed digital images thereof.

3. All bank statements or documents received from the bank regarding the account.

4. A ledger containing a record for each person or entity from whom or for whom trust money has been received which shall accurately maintain the current balance of funds held for that person or entity. Examples of properly composed ledger cards are appended as Exhibits D and E.

An attorney maintaining a fiduciary account must, in addition, maintain all records required by law, but need not maintain a ledger. Revised Rules 1.15-2(c) and (d).

It can be very simple. For a trust account, all that is really required is a checkbook, a ledger card for each client, and a file for correspondence from the bank. When properly maintained, all the information required for deposits and disbursements can be recorded on the checkbook stub. The only other record which must be generated by the lawyer is a ledger card for each client describing each transaction involving the client's funds and carrying a running balance. Revised Rule 1.15-2(d).

A lawyer must retain trust account records for a period of six years following the completion of the transactions which generated the records. Revised Rule 1.15-2(a).

Yes, if the records are retrievable in hard copy or in digital form for the required six-year period. Revised Rule 1.15-2(b).

A lawyer must reconcile the trust account balances of funds belonging to all clients at least quarterly with the statements provided by the bank. At a minimum, this is intended to ensure that the running balances kept for each client equal the total funds on deposit, exclusive of funds belonging to the lawyer which have been properly deposited in the account. Revised Rule 1.15-2(g). A lawyer maintaining a trust account must produce any or all of the required trust account records upon lawful demand by the North Carolina State Bar. Revised Rule 1.15-2(j). Copies of proper trust account reconciliation forms are attached as Exhibits F and G.

(Questions 22-27)

As the client's agent and fiduciary, the lawyer has an obligation to pay or deliver the funds in accordance with the client's most recent instructions. Unless the lawyer is authorized by the client to pay a particular charge or claim, the lawyer may not disburse trust funds for those purposes. Revised Rule 1.15-2(h) .

All receipts of trust money must be deposited into the trust account intact. If an instrument represents funds belonging in part to the client and in part to the lawyer, the portion belonging to the lawyer must be withdrawn when the lawyer becomes entitled to the funds unless the right of the lawyer to receive the portion of the funds is disputed by the client. In that case the disputed portion must remain in the trust account until the dispute is resolved. Revised Rules 1.15-1(e)(2) and 1.15-2(e).

Generally, the lawyer must follow the client's most recent directions. Unless the health care provider in question has perfected a statutory lien against the funds in the hands of the lawyer, the lawyer must handle the settlement proceeds as directed by the client. RPC 75.

Prior to the adoption of RPC 191 in October 1995 (revised January 24, 1997), a lawyer was permitted to issue trust account checks against funds which, although uncollected, were provisionally credited to the lawyer's trust account by the financial institution in which the trust account was maintained. RPC 191 still allows lawyers to disburse provisionally credited but uncollected funds from the trust account, but only in consequence of trust account deposits in the form of cash, wired funds, or certain types of negotiable instruments specified in the Good Funds Settlement Act, G.S. 45A. It is further provided that disbursements against such provisionally credited funds should be made only where the lawyer reasonably believes that the underlying deposited instrument is virtually certain to be honored when presented for collection, and the lawyer has sufficient assets or credit to fund any outstanding trust account checks issued in regard to a provisionally credited item which may be dishonored.

RPC 191 provides that the lawyer, upon learning that a deposited instrument has been dishonored, must act immediately to protect the property of the lawyer's other clients by personally paying the amount of the failed deposit or by securing or arranging for payment from sources available to the lawyer other than the trust funds of other clients. An attorney should take care not to disburse against uncollected funds in situations where the attorney's assets or credit would be insufficient to fund the trust account checks in the event that a provisionally credited item is dishonored.

Yes. RPC 191 specifically provides that it applies to transactions other than real estate conveyances.

(Questions 28-29)

Theoretically, of course, this should never happen. As a practical matter, however, mistakes do happen and bank errors or administrative snafus within the lawyer's own office can result in an instrument's being returned for insufficient funds. If a trust account check is dishonored, the lawyer should immediately ascertain the nature of the problem and promptly correct it, even if this requires a deposit of the lawyer's own funds. Under no circumstances should the lawyer allow the trust funds of another client to be used impermissibly. Finally, the lawyer should immediately document the problem and any corrective action taken in a memorandum for his or her own files.

Every lawyer must instruct his or her bank to notify the State Bar when any check drawn on the trust account is presented for payment against insufficient funds. That being the case, a lawyer who overdraws his or her trust account may soon expect to be contacted by a representative of the State Bar who will informally request an explanation of the problem. Once it is verified that an innocent mistake caused the shortage or apparent shortage in the trust account, the inquiry will be concluded and no further action will be taken. If, however, no adequate explanation is immediately forthcoming, a grievance file will be established and a formal investigation initiated. Revised Rule 1.15-2(i)

(Questions 30-31)

An accounting must be provided to the client upon the completion of the disbursement of the client's funds and at such other times as may be reasonably requested by the client. If trust funds are retained for more than one year, the lawyer must provide annual accountings. All accountings must be in writing. Revised Rule 1.15-2(g).

No. It is often possible to satisfy the accounting requirement by providing copies of documents generated during the representation, such as a settlement statement describing disbursements incident to the resolution of a tort claim or a HUD-1 statement describing the disbursement of the proceeds of sale in a real property transaction. In addition, the accounting requirement can generally be satisfied by providing the client with a copy of a properly maintained ledger card which describes all receipts and disbursements of the client's funds. A sample accounting form is attached as Exhibit H. A sample cover letter is attached as Exhibit I.

(Question 32)