This Concise Guide is intended for use as a quick overview of trust accounts. It is a shorter version of A Lawyer’s Guide to Client Trust Accounts, updated in 2024, which should be referenced for all source material.

Introduction

Texas Disciplinary Rule of Professional Conduct 1.15, “Safekeeping Property,” governs trust accounts.

It requires lawyers to keep funds or other property belonging in whole or in part to a client or a third party in a trust or escrow account, separate from the lawyer’s own property, thereby safeguarding client or third-party funds that do not belong to the lawyer from the lawyer’s creditors or personal financial problems. The obligation to keep the funds separate is absolute and not waivable. A lawyer acts as a fiduciary when holding funds belonging to a client or third party.

When to Use a Trust Account

A lawyer must deposit any client or third-party funds related to representation into a trust or escrow account. This includes advance fee deposits, retainers for future work, settlement funds pending distribution, advances on costs, overpayments subject to refund, funds in dispute, and any monies not yet earned.

Funds that belong wholly to the lawyer, such as fees for work already completed or reimbursements for incurred expenses previously paid by the firm, must be placed in the lawyer’s operational or personal bank account, not in a trust account. Operational accounts typically pay law firm expenses, including the lawyer’s salary or income.

Rule 1.15 applies regardless of what the fee is called or the type of fee agreement between the lawyer and client, including flat fees, contingent fees, and advance payments of expenses. A lawyer cannot transform a prepayment of fees into a nonrefundable retainer simply by stating it is nonrefundable in the fee agreement. Doing so is a common cause of fee disputes and disciplinary action. If a flat fee is used, the agreement should list benchmarks for when the fee is earned. Without clear benchmarks, the entire fee should not be treated as earned until the matter is complete.

Lawyers must be vigilant in distinguishing between earned and unearned fees. Commingling personal funds with client funds is strictly prohibited. The only exception is that lawyers must deposit sufficient operating funds to cover bank fees and other charges that may be deducted from the account.

Types of Trust Accounts

A trust account is an interest-bearing account. There are two main types of trust accounts: Interest on Lawyers’ Trust Accounts (IOLTA) and individual client trust accounts.

• A lawyer should use an IOLTA account when the beneficiary’s funds are nominal or only expected to be held for a short time. These types of funds cannot reasonably earn interest for an individual client. An IOLTA account pools these client funds into one account, and the interest earned is paid to the Texas Access to Justice Foundation (TAJF) for the provision of legal services to the indigent in civil matters. TAJF approves the financial institutions that are eligible to hold IOLTA accounts, which are listed here.
  
  
• A lawyer should use an individual client trust account when the client's funds are large enough or will be held long enough to generate interest that benefits the client. Any accrued interest belongs to the client and must be reported by the financial institution to the Internal Revenue Service accordingly. When opening a client trust account, the lawyer must use the client’s social security number or employer identification number for IRS reporting.

Managing Trust Accounts

Signatories

Only the lawyer or people under the lawyer’s direct supervision may sign on a trust account. The client cannot be a signer even if the account is in the client’s name. It is advisable to have a second authorized signer in case the lawyer is unable to sign.

Fees

It is the lawyer’s responsibility to pay the associated costs of maintaining the trust account. The lawyer must deposit a reasonable amount of personal funds to cover these costs, as allowed under an exception to the comingling prohibition under Rule 1.15.

Deposits and Disbursements

Identify each client’s deposits and disbursements to create a record, regardless of whether you bank online or make a phone or wire transfer. Disbursements should be made per the fee agreement between the lawyer and client. Although a written fee agreement is not always required, it is highly recommended to avoid disputes about the lawyer’s fees, expenses, or payments to third parties. Disbursements should be made promptly once the deposited funds have cleared the bank and should identify the person or entity being paid on behalf of the client. A lawyer should never write a check for cash from a trust account.

When a lawyer receives funds belonging to a client or third party, the lawyer must promptly notify that person and deliver any funds that person is entitled to receive. Third parties often claim a legal interest in funds, such as an assignment or lien. Who is entitled to receive funds is a question of law, not governed by the disciplinary rules. Lawyers should also be familiar with their duties under fiduciary law and other laws that may relate to funds held.

Disputed Funds

When a dispute arises over who is entitled to the funds, the undisputed portion should be disbursed promptly, and the disputed amount must remain in trust. The lawyer should not act as the arbiter in the dispute, whether the dispute exists between a client and a third party or the client and the lawyer. If the dispute cannot be resolved, the lawyer should submit the ownership issue to a court for resolution. To avoid improper withdrawal or payment of disputed funds, a lawyer should notify the client before transferring funds and allow time for the client to object before payment is made.

Reconcile Regularly

Reconcile the trust account bank statement with your trust accounting software or check register monthly. If the statement and the ledgers do not balance, resolve any errors immediately. Routine reconciliation saves aggravation down the road and discourages employees from embezzling trust funds.

Client Communication

Lawyers must notify the client promptly when in receipt of funds belonging to the client or a third party to whom the client owes money. Lawyers must also refund any unearned fees upon termination of the case or withdrawal/termination of the lawyer, even if the client fired the lawyer without cause.

Accountings

When a lawyer receives funds that belong to another, Rule 1.15 requires that the lawyer provide a full accounting of the funds if requested.

Trust Account Records

Rule 1.15 requires lawyers to keep a client’s trust account records for five years after termination of the client’s representation. It is helpful to send a closing letter to the client when representation ends to establish a date to begin tolling time.

Closing a Trust Account

Before closing a trust account, return any unearned fees to clients and pay amounts due to third parties. If the trust account is an IOLTA account, provide written notification to the Texas Access to Justice Foundation of the account closure within thirty days after the account is closed.

If the trust account includes unclaimed funds, the lawyer should make all reasonable efforts to locate the person owed funds as directed under chapters 72–74 of the Texas Property Code. If the person can still not be located, the lawyer should keep the funds in the trust account for at least three years. Afterward, the lawyer can treat the funds as abandoned and follow the abandoned property provisions in the Texas Property Code on how to handle these funds.

Under usual circumstances, it is easy to close a trust account. Problems arise when a lawyer unexpectedly dies or is unable to practice law. When a lawyer dies, all signatories simultaneously lose authority to sign on bank and trust accounts, causing difficulty for clients and others who are owed funds. Only joint account owners may continue to sign on the account.

To avoid these problems, an attorney should designate a custodian attorney who can close the office on a temporary or permanent basis through the State Bar of Texas Advance Designation of Custodian portal. Custodians do not take on the attorney’s clients or practice. They simply step in to notify clients of the situation, review and return files to clients, make determinations about file retention and destruction, handle the final client accounting, and return any unearned retainer fees.

Discipline and Enforcement

Improper handling of trust funds can result in serious consequences. The State Bar’s Office of Chief Disciplinary Counsel investigates grievances and may impose sanctions ranging from reprimands to disbarment. The district attorney may also pursue criminal charges stemming from the misuse of trust account funds. If convicted, the lawyer is subject to compulsory discipline. Courts have consistently upheld disciplinary actions for violations of Rule 1.15.

Typically, it is a client or third party with an interest in a client’s settlement funds who files a grievance against a lawyer. If the grievance is upgraded to a complaint, the CDC has sixty days to investigate. If the lawyer decides belatedly to return unearned fees or pay the third party, it will not affect the investigation nor necessarily mitigate any disciplinary sanctions the lawyer may face. Even technical or unintentional errors can lead to sanctions.

For more detailed information on lawyer trust accounts, visit A Lawyer’s Guide to Client Trust Accounts.