January 11, 2013

How to handle aged trust accounts

January 11, 2013

Each year, a number of lawyers are referred to the Professional Conduct Department for investigation and possible disciplinary action after a compliance audit discloses improper handling of aged trust accounts.

In some cases, the lawyers are trying to “tidy up” small trust balances remaining  on client ledgers, but they do so without complying with the trust accounting rules set out in Part 3, Division 7 of the Law Society Rules.

Examples of such trust funds may include left-over retainer money, payments to court that are subsequently reimbursed, late reimbursements for estate taxes or late payments from the purchase or sale of a house.

Lawyers often wish to deal with these aged trust accounts before filing their annual Trust Report with the Law Society. In the Trust Report, they must certify whether they have any trust balances that have been inactive for more than two years and meet criteria of unclaimed trust funds under Rule 3-82.

Applicable standard

All trust funds, regardless of the amount or the length of time held in trust, must be dealt with properly in accordance with the Part 3, Division 7 trust accounting rules. Rule 3-56(1) sets out circumstances in which a lawyer may withdraw funds from trust. A withdrawal for any other reason is improper. Further, a lawyer may only transfer funds from trust to general if:

• the lawyer is properly entitled to those funds as payment for fees, disbursements or taxes, and
• the lawyer has prepared a bill and delivered it to the client in accordance with the requirements of Rule 3-57 and section 69 of the Legal Profession Act.

A lawyer’s conduct in withdrawing  funds from trust to general without meeting these requirements, particularly when the lawyer has no entitlement to the money but issues a bill to “zero out” the trust balance, may lead to disciplinary action for failure to comply with the Law Society Rules. Moreover, this conduct may be considered misappropriation, depending on the circumstances.

What you should do

Avoid the problem by early identification of files where a balance is held in trust after completion of the work and early attempts to contact the owner of the funds. Don’t let it get to the point where a great deal of time has passed since your last contact with the person(s) for whom you hold the money.

Carefully review monthly trust reconciliations for any trust cheque that has not cleared within two or three months of issuance and for any trust balances remaining on closed or inactive files for longer than two or three months.

Unclaimed trust money

If a lawyer does hold unclaimed trust funds, she or he must make reasonable efforts to locate the owner of the funds to pay them to the owner. The lawyer should also document the efforts to locate the owner.

When lawyers are unable to locate the owner of the trust funds, they may apply to the Executive Director to pay the money to the Law Society (section 34 of the Legal Profession Act). Rule 3-82 provides that such an application must be made in writing and contain the full name and last known address of the owner, the amount of trust funds held, efforts made to locate the party, any unfulfilled undertakings given by the lawyer in relation to the funds, and details of the transaction.

Lawyers are reminded of the need for strict compliance with the Legal Profession Act, the Law Society Rules and the Code of Professional Conduct for BC. Read them carefully, and if you have any doubts, contact a Practice Advisor.