Maintaining Fiduciary Account in Accordance with Rule 1.15
Opinion rules that a lawyer representing an estate must maintain the checking account for the estate in accordance with Rule 1.15 consistent with the extent to which the lawyer has control over the account.
On June 9, 2016, the North Carolina Supreme Court approved amendments to Rule 1.15, Safekeeping Property, and its subparts (frequently referred to as the “trust accounting rules”). The following opinion concerns a lawyer’s obligations with respect to a fiduciary account, such as an estate account. Inquiries are answered based upon the rule as amended.
A’s will names Lawyer as executor. After A dies, Lawyer opens a client file for the estate in his law office and begins serving as the personal representative for the estate. Lawyer intends to seek compensation for his services. Lawyer opens a checking account for the estate, makes himself the signatory on the account, and manages the checking account throughout the administration of the estate. What are Lawyer’s management obligations for the account under Rule 1.15?
The checking account must be established as a lawyer’s fiduciary account and managed in accordance with the provisions of Rule 1.15 and its subparts.
As the personal representative for the estate, Lawyer will serve in the role of a fiduciary and provide professional fiduciary services. The phrase “professional fiduciary services” is defined and explained in Rule 1.15-1(l) and cmt.  as service by a lawyer in any one of the various fiduciary roles undertaken by a lawyer that is not, of itself, the practice of law, but is frequently undertaken in conjunction with the practice of law. This includes service as a trustee, guardian, personal representative of an estate, attorney-in-fact, and escrow agent, as well as service in other fiduciary roles “customary to the practice of law.” Rule 1.15, cmt. .
The funds Lawyer receives for the benefit of the estate are fiduciary funds and must be deposited in a fiduciary account. Fiduciary funds, another term defined in Rule 1.15-1, denotes funds belonging to someone other than the lawyer that are received by or placed under the control of the lawyer in connection with the performance of professional fiduciary services. Rule 1.15-1(g). A “fiduciary account,” also defined in Rule 1.15, is “an account, designated as such, maintained by a lawyer solely for the deposit of fiduciary funds or other entrusted property of a particular person or entity.” Rule 1.15-1(f).
Any property belonging to the estate received by or placed under the control of the lawyer in connection with the lawyer’s furnishing of legal services or professional fiduciary services must be handled and maintained in accordance with all of the applicable provisions of Rule 1.15, including but not limited to:
• Rule 1.15-2: General Rules
• Rule 1.15-3(a): Check Format
• Rule 1.15-3(b) or (c)(as appropriate): Minimum Records
• Rule 1.15-3(f): Accountings for Fiduciary Property
• Rule 1.15-3(g): Minimum Record Keeping Period
• Rule 1.15-3(i): Reviews
See Rule 1.15, cmts. , and -.
These duties include promptly depositing all fiduciary funds received by or placed under the control of the lawyer in a fiduciary account. Rule 1.15-2(c). They also include (1) review of the monthly bank statements and canceled checks for the account each month (the “monthly review”); (2) for each quarter, review of the statement of costs and receipts, client ledger, and cancelled checks of a random sample of representative transactions completed during the quarter (the “quarterly review”); (3) resolution within ten days of any discrepancies found during the monthly or quarterly reviews; and (4) preparation of a signed and dated report on each monthly and quarterly review. Rule 1.15-3(i). This list is not exhaustive and Lawyer is obligated to review Rules 1.15-2 and 1.15-3 to ensure compliance.
Lawyer represents Estate of B and the personal representative of Estate of B in her official capacity. Lawyer opens a checking account for the estate and designates the personal representative as the signatory on the account. The personal representative will receive the bank statements. Lawyer, however, intends to retain possession of the checkbook, preparing checks for the personal representative’s signature as needed and depositing estate funds into the account when obtained. What are Lawyer’s obligations for the account under Rule 1.15?
The requirements of Rule 1.15-2 and 1.15-3 apply only to the extent that the lawyer has control over the estate account. In the instant inquiry, Lawyer has possession of the checkbook, but does not have signatory authority. Therefore, Lawyer is not obligated to follow the requirements of Rule 1.15 and its subparts that apply to the maintenance and disbursement of funds by one having signatory authority over the account, or with the review and reconciliation requirements of Rule 1.15-3. Lawyer, however, is obligated to follow the requirements of Rule 1.15 as applicable to items over which Lawyer has possession or control, such as properly safeguarding checks received for the estate, properly safeguarding the checkbook for the estate account, and not using any debit card received for the estate account to withdraw funds from the estate account.
For example, if Lawyer receives a check or other entrusted property for the benefit of the estate, Lawyer must comply with the provisions of Rule 1.15 governing the handling of entrusted funds, including Rule 1.15-2(a), which sets forth the duty to identify, hold, and maintain entrusted property separate from the property of the lawyer and to deposit, disburse, and distribute only in accordance with Rule 1.15. This would include labeling a check or funds as property of the estate, and placing the check or funds in a suitable place of safekeeping until deposited in the estate account. Notice must be promptly given to the personal representative if the personal representative is responsible for depositing funds to the account.
Lawyer represents the estate and the personal representative in her official capacity. RPC 137. Therefore, Lawyer has a duty to provide competent and diligent representation. Rule 1.1 and Rule 1.3. Competent and diligent representation requires Lawyer to advise the personal representative of her fiduciary responsibilities relative to the safekeeping of the funds of the estate and her duty to administer the estate in compliance with the law. See generally 2002 FEO 3 (lawyer for estate may seek removal of personal representative if the personal representative’s breach of fiduciary duties constitutes grounds for removal under the law). To ensure that the estate account is properly managed, checks are not written against insufficient funds, and estate funds are protected from theft, competent and diligent representation dictates that Lawyer periodically meet with the personal representative to review the estate account documents, including the bank statements and canceled checks. If Lawyer prepares checks for the personal representative’s signature, Lawyer must conduct a periodic review of the balance for the estate account sufficient to guard against the preparation of a check for the personal representative’s signature that would exceed the balance of the account.
Lawyer represents Estate of C and the personal representative of the Estate of C in her official capacity. Lawyer opens the checking account for the estate. Lawyer and the personal representative are designated as signatories on the estate account. Lawyer has the checkbook for the account and receives the bank statements. Although Lawyer is the person primarily responsible for depositing funds into the estate account and writing checks, the personal representative may also deposit funds into the estate account and write checks. What are Lawyer’s duties with regard to the estate account?
As stated in Opinion #2, the requirements of Rule 1.15-2 and Rule 1.15-3 apply only to the extent the lawyer has control over the estate account. Because Lawyer has signatory authority, has possession of the checkbook, and receives the bank statements, Lawyer has control of the estate account and is, therefore, obligated to follow the requirements of Rule 1.15-2 and Rule 1.15-3. Lawyer must open the estate account as a lawyer’s fiduciary account and review the estate account in accordance with Rule 1.15-3(i): Reviews. Furthermore, Lawyer must advise the personal representative of her fiduciary responsibilities relative to the safekeeping of the funds of the estate and her duty to administer the estate in compliance with the law. See Opinion #2.
Lawyer represents Estate of D and the personal representative of Estate of D in her official capacity. The personal representative opens the checking account for the estate and manages the account, including the preparation of checks at Lawyer’s direction. What are Lawyer’s obligations for the account under Rule 1.15?
Lawyer is not obligated to follow Rule 1.15. See Opinion #2.
Lawyer represents Estate of E and the personal representative of Estate of E in her official capacity. The personal representative opens a checking account for the estate and manages the account, including receipt of the bank statements and the preparation of checks. The personal representative is the only signatory on the estate checking account. The personal representative, however, asks Lawyer’s paralegal to take possession of the checkbook. Each month, the personal representative goes to Lawyer’s law firm, writes checks, and gives the bills and the checks to paralegal. Paralegal then mails out the checks. What are Lawyer’s obligations to the estate account under these circumstances?
See Opinion #2. Additionally, under Rule 5.3(b), Lawyer must make reasonable efforts to ensure that the paralegal’s conduct is compatible with the professional obligations of Lawyer. This includes making reasonable efforts to ensure that the paralegal understands and complies with the professional obligation of Lawyer to safeguard the checkbook under Rule 1.15-2(d) as well as with the professional obligation of Lawyer under Rule 8.4(b) and (c) not to misappropriate fiduciary funds by means of forged checks or other methods.
Did the June 2016 amendments to Rule 1.15 change or add to the obligations of a lawyer with respect to a fiduciary account, or otherwise change the answers to Inquiries #1 and #2 above?
Yes. The 2016 amendments found in Rule 1.15-3(i) now require monthly and quarterly reviews for fiduciary accounts as well as general trust accounts.
In the representations described in Inquiries #1 and #2 above, may Lawyer delegate the management of the fiduciary account to a nonlawyer assistant?
Day-to-day management of the account may be delegated to a nonlawyer assistant. However, the responsibility for conducting the monthly and quarterly reviews required by Rule 1.15-3(i) may not be delegated. The rule specifies that “the lawyer” shall review the records. To fulfill the intended purpose of this provision, the lawyer, rather than an assistant, must conduct these reviews. Lawyer must periodically review underlying bank records, independently of any records prepared or provided by the assistant, to ensure that the nonlawyer’s conduct is compatible with the professional obligations of the lawyer. As explained in comment  to Rule 1.15:
The mandatory monthly and quarterly reviews and oversight measures in Rule 1.15-3(i) facilitate early detection of internal theft and early detection and correction of errors. They are minimum fraud prevention measures necessary for the protection of funds on deposit in a firm trust or fiduciary account from theft by any person with access to the account. Internal theft from trust accounts by insiders at a law firm can only be timely detected if the records of the firm’s trust accounts are routinely reviewed. For this reason, Rule 1.15-3(i)(1) requires monthly reviews of the bank statements and cancelled checks for all general, dedicated, and fiduciary accounts.
Although Lawyer may delegate day-to-day management of the account to a nonlawyer assistant, Lawyer remains professionally responsible for compliance with the requirements of Rule 1.15 and its subparts. Therefore, the assistant must be appropriately instructed, trained, and supervised concerning the requirements of the rule. Rule 5.3.
If Lawyer delegates the day-to-day management of a fiduciary account to a nonlawyer assistant, may that assistant be a signatory on the account?
The trust accounting rules do not prohibit this. However, the practice increases the risk of internal fraud. See, e.g., Rule 1.15-2(s) (prohibiting an assistant responsible for reconciling a trust account from being a signatory on the account). A lawyer should not permit an assistant to be a signatory on a fiduciary account unless the lawyer or law firm has established fraud prevention procedures that will protect the fiduciary funds from internal theft. See Rule 1.15, cmt. .