In light of the U.S. House of Representative’s decision today that it would not pass the historic $700 billion rescue of the financial industry I thought it was time to help spread the word on how the increasing number of bank failures – or threatened bank failures – may impact your client’s funds held in trust accounts. Luckily for me, Jim Calloway has provided an excellent explanation of what protection is afforded fiduciary accounts held in a bank insured by FDIC in his recent blog post, “In a possible era of bank failure, what about the safety of a lawyer’s trust account?”. In short, an account designated as a fiduciary account with proper record-keeping that show the money belongs to a particular client will be protected up to $100,000.00. However, Jim discusses an important caveat, if the client has their own account in the same bank; it is arguable that any portion of the combined accounts over $100,000.00 would not be insured. You may need to ensure that you are not using the same bank as clients for whom you hold larger deposits. Also, if you are holding more than $100,000 for one client, you will want to carefully consider how you can reduce the risk of loss to that client. I recommend that you go to Jim Calloway’s blog post and read the post in full.
One very important facet of protecting your client’s money in case of a bank failure is complying with the Massachusetts Rules of Professional Conduct, Rule 1.15, accounting rules. If you have followed Rule 1.15 by keeping a check register, electronic or paper, you have kept individual client records, and reconciled the account as required, then you should be able to protect your client’s funds. I would suggest that if your bank accounts are not in order that it is time to set up individual client records, get the account reconciled, and make sure that you can document whose money is in the fiduciary account.
