November 1, 2001 Regular News Commonly asked trust accounting questions Commonly asked trust accounting questions the Bar’s Ethics Department Q. I have recently opened an IOTA trust account and have been informed by the bank that there will be fees for checks and other fees associated with maintaining the account. The bank has declined to provide these services for free and has asked for a transfer from my operating account to cover these expenses. I am concerned about commingling my own funds with the clients’ funds, but I cannot think of any other way to pay for these expenses. Is it permissible to do what the Bank has asked? A:Yes. While there is no specific rule which discusses this scenario, Florida Bar auditors are of the opinion that an attorney may use up to $100 of his or her own funds to open a trust account. The deposit should be treated like an individual client account with a ledger, etc. Once the balance gets low, the attorney can deposit additional sums to maintain $100 in the trust account to avoid using client funds to pay the bank fees. Q. I have recently decided to start charging clients a nonrefundable flat rate for some of the legal services I provide. Some of the services will require a payment for costs. In order to keep things simple I wish to include the amount for costs in the flat rate that I charge. I have spoken to some colleagues and have gotten mixed answers regarding whether the funds need to be placed into my trust account. Do I have to place the funds in my trust account when the fee is nonrefundable? A: The answer will depend upon whether the amount includes any costs as well as fees. Florida Ethics Opinion 93-2, in pertinent part, provides: Question 2. Does any applicable rule require that prepaid costs and prepaid fees for services to be performed be deposited and kept in the trust account until earned? Regarding prepaid costs, Rule 4-1.15(a) states that money entrusted to an attorney for a specific purpose, including advances for costs and expenses, is held in trust and must be applied only to that purpose. See also Rule 5- 1.1(a). Accordingly, in view of the specific requirement of these rules, advances for costs and expenses must be deposited in the attorney’s trust account and withdrawn and applied against such expenses as they are incurred and paid. As to prepaid fees, the key issue can be stated thusly: Is the money earned at the time it is received by the attorney? For example, a fee paid for the right to employ an attorney to perform future services (the “true retainer” situation) is earned by the attorney upon receipt and should not go in the trust account. A prepaid fee which the attorney and client have expressly agreed is nonrefundable is likewise earned upon receipt and so should not be held in trust but should be deposited into the attorney’s general account. Nevertheless, the lawyer may later be obligated to refund part, or possibly all of it, if the legal services are not performed, in which case the fee may be found to be excessive, but the money is the lawyer’s upon receipt of it. On the other hand, the prepaid fee may be given to the attorney with the understanding that it is a deposit securing a fee that is yet to be earned. Such money does not belong to the lawyer, and should be held in trust until it has been earned by performance of the agreed-upon services. The Committee believes that there should exist a presumption that prepaid fees are an advance deposit against fees for work that is yet to be performed. Certainly, this is the assumption that the typical client would make. The attorney should bear the burden of rebutting this presumption. Question 6. If an attorney receives a “flat fee” that is a payment for services to be rendered as well as the costs associated with the performance, does all or part of this payment go in the trust account? The entire payment should be first deposited in the trust account. Then that portion, if any, of the payment that is considered an earned fee upon receipt should promptly be withdrawn from the trust account. Any portion that does not constitute earned fees must remain in the trust account. The fact that costs are to be paid out of this “flat fee” complicates matters somewhat. As required by Rules 4-1.15(a) and 5-1.1(a), any advance of costs is to be held in trust until used to pay those costs. Therefore, the attorney must make a good faith estimate of the amount of costs to be incurred and must hold that amount in the trust account. Failure to hold the estimated costs in the trust account would result in the attorney paying the costs out of his or her own funds, which would violate Rule 4-1.8(e) (lawyer may not provide financial assistance to client, except to advance costs and expenses). Not holding the estimated costs in the trust account would also result in a commingling violation under Rule 4-1.15(a) when those funds, which should have been left in trust, are removed and commingled with the attorney’s own funds. To summarize, if money paid to the firm at the outset of the representation constitutes a fee that is understood to be earned when paid, then the money must be placed in the operating account. If money for costs is part of a prepaid lump sum that includes a fee that is deemed earned when paid, then the entire amount must be placed in trust and the earned fee portion promptly withdrawn. If money for costs is part of a prepaid lump sum that includes an advance deposit against fees to be drawn as the services are performed, then the entire amount must be kept in trust until the fees are earned or the costs incurred. If you have questions about the topics discussed in this article or any other ethics issues, please call the Florida Bar Ethics Hotline at (800) 235-8619 or (850) 561-5780. Ethics Opinions issued by the Professional Ethics Committee are available online through The Florida Bar’s website at www.FLABAR.org.