It has been a wild month so far in the financial markets and it doesn’t appear that the roller coaster has come to a complete stop yet. So as possible bank failures loom, some of us are hearing from lawyers concerned about the safety of their client’s funds in their trust accounts and their own ethical and legal responsibilities.
According to James M. McCauley, Ethics Counsel of the Virginia State Bar and some other experts I’ve contacted, your client’s money will be insured in a bank trust account up to the FDIC $100,000 limit as long as your account is clearly designated as a fiduciary account and the record-keeping shows what money belongs to what client. But be warned about the hidden danger of a client having deposits in the same bank. If a client has $75,000 in your trust account and $75,000 in a CD or personal account at the same bank, then the FDIC may well take the position that not all funds are insured. So it makes sense in the initial engagement to let the client know where your trust account is located and determine if the client banks there. If you haven’t been doing that, you may want to review your position today and contact at least the clients who have the largest deposits. Note that even a smaller trust account amount could be at risk as many consumers have learned to spread their jumbo CD’s across various banks so that they are all insured. If you have a need to have more than $100,000 of a client’s funds held in trust, maybe you should adopt the same strategy and have more than one trust account at more than one institution. I recognize that this is sometime not practical if a large real estate closing looms. But that just means those lawyers have to actively monitor their bank’s health.
James M. McCauley has written a nice article on this topic, Bank Failures: If your bank goes under, are your clients’ trust account deposits fully insured? Take a few minutes to read it now and perhaps pass it along to firm management. We really appreciate Minnesota Lawyers Mutual Insurance Company making this article available to everyone and not just their insureds. MLM even has a blog, which tipped me to this article in the first place.