When a North Carolina lawyer serves as executor or otherwise handles an estate account, when do the Rule 1.15 trust-accounting rules apply and what reviews are required?

Plain-English summary

The opinion applies North Carolina's amended trust-accounting rules (the June 2016 amendments to Rule 1.15) to a lawyer's handling of a fiduciary account such as an estate account. Its organizing principle is control: the requirements of Rule 1.15-2 and Rule 1.15-3 apply only to the extent the lawyer has control over the account.

Where the lawyer is the personal representative and the signatory who manages the account (Inquiry #1), the account must be established as a designated fiduciary account and managed under all applicable provisions of Rule 1.15, because the lawyer is providing "professional fiduciary services" as defined in Rule 1.15-1 and handling "fiduciary funds." Those duties include promptly depositing fiduciary funds (Rule 1.15-2(c)), the monthly review of bank statements and canceled checks, the quarterly review of a representative sample of transactions, resolution of discrepancies within ten days, and a signed, dated report of each review (Rule 1.15-3(i)). Where the lawyer holds only the checkbook but has no signatory authority and does not receive the statements (Inquiry #2), the lawyer is not bound by the maintenance, disbursement, and reconciliation duties tied to signatory control, but must still safeguard checks, the checkbook, and any debit card, and must competently advise the personal representative of her fiduciary duties. Where the lawyer has signatory authority, the checkbook, and the statements (Inquiry #3), the lawyer controls the account and the full Rule 1.15-2 and 1.15-3 obligations apply.

The opinion then addresses the 2016 amendments and delegation. Inquiry #6 confirms the amendments to Rule 1.15-3(i) now require monthly and quarterly reviews for fiduciary accounts as well as general trust accounts. Inquiries #7 and #8 hold that day-to-day management of a fiduciary account may be delegated to a nonlawyer assistant, but the monthly and quarterly reviews may not be delegated because the rule specifies that "the lawyer" must review the records; the lawyer remains responsible under Rule 5.3 for supervising the assistant, and an assistant may be a signatory only if fraud-prevention procedures are in place.

In practice

Under the North Carolina rules as they stood at the time of the opinion, the duties tied to an estate account turn on how much of the account the lawyer controls. The opinion holds that a lawyer who is the signatory managing the account must designate it as a fiduciary account and carry out the monthly review, quarterly review, ten-day discrepancy resolution, and signed review reports of Rule 1.15-3(i). A lawyer who only possesses the checkbook, without signatory authority and without receiving statements, is, per the opinion, not subject to the reconciliation and review requirements, but remains obligated to safeguard the items in the lawyer's possession and, under Rules 1.1 and 1.3, to advise the personal representative of her fiduciary responsibilities.

The opinion holds that day-to-day management may be delegated to a nonlawyer assistant but the Rule 1.15-3(i) reviews may not, because the rule assigns them to the lawyer; the lawyer must independently review underlying bank records to satisfy the supervision duty of Rule 5.3. Per the opinion, the trust-accounting rules do not flatly prohibit a nonlawyer assistant from being a signatory, but the committee states a lawyer should not permit it absent established fraud-prevention procedures, citing Rule 1.15-2(s) and comment [25].

Common questions

Q: If a North Carolina lawyer is the executor and runs the estate's checking account, does Rule 1.15 apply?

A: Yes. Opinion #1 holds that when the lawyer serves as personal representative and signatory, the account must be set up as a designated fiduciary account and managed under all applicable provisions of Rule 1.15, including the reviews in Rule 1.15-3(i).

Q: What if the lawyer only holds the checkbook but is not a signatory and does not get the bank statements?

A: Opinion #2 holds the lawyer is not bound by the Rule 1.15 duties that depend on signatory control or the reconciliation requirements, but must safeguard the checks, the checkbook, and any debit card, and must competently advise the personal representative of her fiduciary duties.

Q: Did the 2016 amendments add review duties for fiduciary accounts?

A: Yes. Opinion #6 states the 2016 amendments to Rule 1.15-3(i) now require monthly and quarterly reviews for fiduciary accounts as well as general trust accounts.

Q: Can a lawyer delegate management of a fiduciary account to a paralegal?

A: Day-to-day management may be delegated, but Opinion #7 holds the monthly and quarterly reviews may not, because the rule specifies that "the lawyer" must review the records; the lawyer must independently review the underlying bank records and supervise the assistant under Rule 5.3.

Q: May a nonlawyer assistant be a signatory on the fiduciary account?

A: Opinion #8 states the trust-accounting rules do not prohibit it, but the practice increases the risk of internal fraud, and the lawyer should not allow it unless fraud-prevention procedures are in place (citing Rule 1.15-2(s) and comment [25]).

Background and rules framework

The opinion interprets North Carolina's safekeeping-property rule, Rule 1.15 (Model Rule 1.15) and its subparts, as amended by the North Carolina Supreme Court effective June 9, 2016. Rule 1.15-1 defines "professional fiduciary services," "fiduciary funds," and "fiduciary account." Rule 1.15-2 sets the general handling and safekeeping duties, including prompt deposit of fiduciary funds (1.15-2(c)) and the duty to identify, hold, and maintain entrusted property separately (1.15-2(a)). Rule 1.15-3 sets recordkeeping and the monthly and quarterly review requirements in Rule 1.15-3(i).

The competence and diligence duties of Rules 1.1 and 1.3 (Model Rules 1.1 and 1.3) support the lawyer's obligation to advise the personal representative. Rule 5.3 (Model Rule 5.3) governs supervision of nonlawyer assistants, and Rule 8.4(b) and (c) (Model Rule 8.4) bar misappropriation of fiduciary funds. The opinion also cites RPC 137 (lawyer represents the estate and the personal representative in her official capacity) and 2002 FEO 3.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.15 / NC Rule 1.15-1, 1.15-2, 1.15-3 (safekeeping property; fiduciary accounts; reviews)
• Model Rule 1.1 / NC Rule 1.1 and Model Rule 1.3 / NC Rule 1.3 (competence and diligence)
• Model Rule 5.3 / NC Rule 5.3 (supervision of nonlawyer assistants)
• Model Rule 8.4 / NC Rule 8.4(b), 8.4(c) (misappropriation; dishonesty)

Other opinions cited:

• RPC 137: a lawyer represents the estate and the personal representative in her official capacity.
• 2002 FEO 3: a lawyer for an estate may seek removal of a personal representative whose breach of fiduciary duties is grounds for removal.

See also

• ABA Formal Op. 02-426: Lawyer Serving as Fiduciary for Estate or Trust
• Alaska Op. 2025-2: Safeguarding Trust Funds From Fraud
• ABA Formal Op. 506: Responsibilities Regarding Nonlawyer Assistants

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2017-formal-ethics-opinion-2/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Background:

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.

Inquiry #1:

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?

Opinion #1:

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. [6] 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. [6].

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. [2], and [6]-[9].

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.

Inquiry #2:

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?

Opinion #2:

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.

Inquiry #3:

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?

Opinion #3:

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.

Inquiry #4:

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?

Opinion #4:

Lawyer is not obligated to follow Rule 1.15. See Opinion #2.

Inquiry #5:

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?

Opinion #5:

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.

Inquiry #6:

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?

Opinion #6:

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.

Inquiry #7:

In the representations described in Inquiries #1 and #2 above, may Lawyer delegate the management of the fiduciary account to a nonlawyer assistant?

Opinion #7:

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 [23] 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.

Inquiry #8:

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?

Opinion #8:

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. [25].