Fail-Safe Tips for IOLTA and Private Trust Accounts

There are a few more areas in the area of "administration" we need to talk about in order to bring the "administration" section to a close.

Those five things are "customers" or "clients," "administration," "getting the work done," "billing," and "getting the bill collected." At the end of this section on "administration" you can again assess how well you are doing with regard to the scale that will grade you from being somewhere at the low end and in the "Stone Ages," to being on the high and "On the Cutting Edge."

This week's topic is IOLTA and private trust accounts. You are probably asking yourself, how can this person have any tips with regard to these type of trust accounts — aren't they covered by Missouri Court Rules? The answer is that there are several things you can do in setting up these trust accounts that will allow you to get more money from your clients up front and also will improve your cash flow. Isn't that enough?

The Missouri Court Rules provide for the safe keeping of property of clients in Rule 4 - 1.15. I am not going to reiterate all these Rules here because every lawyer should know them.

I have participated as a speaker in many seminars with speakers from the Office of the Chief Disciplinary Counsel of the Missouri Bar. Invariably, a question will come up regarding trust accounts, and the stock answer that is always given by every OCDC speaker is every dime of client money must go into a trust account. This statement is simply not totally accurate. Retainers from clients are a case in point as to how these amounts of monies may be handled differently than other client money received. If a matter is settled and you are going to take your fee out of part of the settlement, that money must always go through a trust account, but if a client is giving you a retainer, and you are going to immediately begin work on the file, and it is more likely than not that you are going to use all or nearly all of that retainer within the next billing period, then it is perfectly permissible to place in your Engagement Letter a phrase that has the client specifically authorize you to place that money in your general account and to begin immediately working on the client's matter. The key to this concept is that you must get the client's written permission to put their retainer in your general account. My best advice to you is if you do not get this written permission, you simply may not put that amount of money in your general account until such time as you have had an opportunity to bill against it. a

If you get a substantial amount of money as a retainer, you may have to set up a special trust account for that client. Often times, the client will want interest on that money to apply for the benefit of their own account. I have often used the special trust accounts as ways of getting my client to put substantial amounts of money up front against their legal bill, and have passed on the interest to the client because the interest on such accounts belong to the clients.

I am sure that all of you who are reading this are familiar with trust accounts that are set up under the auspices of the IOLTA plan. These trust accounts that are set up under the interest on lawyer's trust account plans are your normal trust accounts where nominal amounts of money are put for short periods of time. The interest on these accounts goes to the IOLTA trust fund which is distributed on a yearly basis to worthy projects.

My normal trust account is an IOLTA account. Often times I will have as many as three, four or five additional general trust accounts. Wherever possible, I always get permission from my client to put any and all amounts received as retainers in my general account. Obviously, you cannot do this if the amount of the retainer is very substantial and will be used over a long period of time.

Getting your client's written permission to put retainer money in your general account helps mightily in your cash flow. Getting your clients to put up substantial amounts of money in the special trust accounts where they get the interest also helps in your cash flow because you can bill against those accounts when the amount of money becomes due.

One other idea I have used with regard to trust accounts that has proved very beneficial is what is called a "two-tiered retainer" trust account. This type of a trust account is set up as a special trust account with the client getting the interest on the amount of money that is put in the special trust account. In your Engagement Letter you tell your client you need a retainer in the amount of "X," for illustration purposes, let's have "X" equal $20,000.00. You ask the client for a $20,000.00 retainer, you put this amount of money in your contract, and when the client pays this amount of money, you put this amount of money in your contract indicating that of the $20,000.00 retainer, $10,000.00 of it may be put in your general account and you will begin working on their matter immediately. The other $10,000.00 of the retainer is put in a special trust account which pays interest to the client. In your Engagement Letter you specify that you are going to bill against this special trust account on a monthly basis. You are also going to send a copy of the monthly bill to the client. The first bill will reflect the initial $10,000.00 retainer put into your general account, when this initial $10,000.00 retainer is used up, you have the right to draw against the additional $10,000.00 that is in the special trust account.

The client has agreed in the Engagement Letter to replenish this amount of money for your bill into the special trust account so that at all times the client has maintained a special trust account balance of $20,000.00. This is a great way to maintain your cash flow and to get some security that you will always have an amount of money to look to to get paid. Additionally, you put in the Engagement Letter that if your client does not replenish the special trust account back up to its original $10,000.00 amount, the client has acknowledged in the Engagement Letter that they have given you permission to withdraw from any further representation of them. You then promptly withdraw from their case, pay yourself with whatever money is left in the special trust account, and immediately turn over to the client whatever the balance is left in the special trust account after you have paid yourself your last bill out of their special trust account.

I have seen many lawyers use these accounts that call for the client to continually have a certain amount of money on deposit, and this seems to have worked for them very well.

The real thrust of this tip, is to utilize the rules of court in such a way that whenever your cash flow and your income can be ethically enhanced, that you do what you can to make that happen. Remember, "happiness is a positive cash flow!"

Next week we are going to talk about the utilization of a legal research database in your office so that you do not have to constantly be reinventing the wheel year after year and case after case with regard to the legal research you have already done on behalf of various clients. I think you will find the idea of having a legal research database as to be a very helpful tip in the area of "administration" of your law firm. Remember, every single one of these tips have to deal with being organized.

Remember my favorite James Michener quote, "when the space is ordered you are free to live creatively."

Talk to you next week!

Jim Wirken is a civil trial attorney and the Chairman of the Board of The Wirken Law Group in Kansas City.