Law

New York bars and disciplinary boards have strict rules regarding the use of attorneys’ trust and escrow accounts. Misuse of client funds is one of the top reasons for suspension and disbarment, and while most lawyers are very diligent about their escrow accounts, a surprising number of attorneys do not know how to properly use them. Here are a few basics about lawyers’ escrow. In addition to following the rules of the disciplinary board, lawyers should also be familiar with their own state bar’s rules regarding escrow accounts.

Ethics issues

The role of a lawyer as an escrow agent can present ethical issues. Regardless of whether the escrow agent is a client or a third party, the lawyer must disclose the effects of this dual role to all parties and provide full representation in the escrow transaction. The client’s consent must be informed and voluntary; even if the client gives informed consent, the lawyer could still have a financial interest in delaying the escrow’s termination.

The use of escrow accounts has ethical implications, as the lawyer may receive excessive fees from the escrow account. While escrow account expenses are nominal, the interest accrued on client funds can exceed the costs of administering the account. Accordingly, New York City 79-48 (1980), N.Y. City 181 (1931), and Nassau County 85-9 prohibit attorney-escrow agents from collecting any income on client funds.

IOLTAs as escrow accounts

Lawyers can establish IOLTAs as part of their responsibilities to indigent people. Lawyers can use the interest generated from these accounts for charitable purposes. In many cases, this interest is used to fund civil legal services for indigent people. However, not all IOLTAs are charitable. While some use them to support the charitable purposes of their clients, most lawyers use them for their profit.

When attorneys use IOLTAs as their lawyers’ escrow accounts, they must follow certain rules regarding their record keeping. One of these is keeping separate ledgers for their clients. Keeping separate ledgers for each client is also crucial. Otherwise, an attorney may be in hot water with regulators and could end up messing up their taxes. Therefore, attorneys must keep meticulous records of all transactions that go in and out of these trust accounts.

Pass-through share insurance for IOLTAs

Insurance for attorneys who handle clients’ funds may be a useful tool in their financial management strategy. Lawyers often hold client funds in separate individual accounts, or in “Client Trust Accounts,” with any interest earned being remitted to the client. However, lawyers who handle small sums of money must participate in the Interest on Lawyers’ Trust Accounts (IOLTA) program. These accounts must be maintained at financial institutions that have been approved by the attorney’s firm.

IOLTA, or Interest on Lawyer Trust Account, is an interest-bearing account designed for lawyers. Many lawyers handle client money, including settlement checks, court fees, and medical payments. In addition to putting client funds into an interest-bearing account, lawyers typically place significant amounts of client money into these accounts. Lawyers are responsible for adhering to state bar association rules governing the use of these funds and are required to maintain IOLTAs by July 1, 2022.

Disciplinary rules for lawyers’ escrow

Disciplinary rules for lawyers entrusting client funds are a hot topic these days. The long-winded rule governing attorney trust accounts (DR 9-102(G)) is woefully inadequate in its current form. However, this may soon change. In the meantime, attorneys should follow the rules to protect clients’ funds. To prevent such abuses, lawyers should keep records of all client funds, including those relating to the handling of escrow funds.

A violation of these rules does not create a cause of action against a lawyer, nor does it create a presumption of breach of legal duty. In addition, a violation of these rules does not necessarily justify a nondisciplinary remedy. The purpose of the Rules is to guide lawyers and provide the structure for regulating conduct through disciplinary agencies. However, the purpose of the rules is to prevent lawyers from engaging in unethical conduct. Disciplinary rules for lawyers’ escrow funds are not intended to be the basis for civil liability and can be used to subvert the purposes of these rules.

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