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Protecting Clients’ Funds – Keystone Elder Law – Mechanicsburg, PA

How can you tell when an attorney is not telling the truth? The answer, according to the punchline of a joke, is “when his lips are moving. “  That joke is not only so old that it’s not funny, it has a sexist punchline.  The sexism might be the silliest part of the joke, since the Wall Street Journal reported that at least a third of the nation’s attorneys are now female.   Phone calls to the state and local Bar Associations for local percentages revealed that they no longer keep records of attorneys broken down by sex.

That reminds me of a true story.  Thirty-five years ago, a federal auditor asked the Lancaster Redevelopment Authority to “report the number of employees broken down by sex.”   My boss wrote back that we had no employees who were broken down by sex, but some seemed to be broken down from alcohol or gambling.   Humor masks the pain of truth.

Because of the educational and financial investment that is required to become an attorney, lawyers can take ourselves too seriously.  The ability to laugh at a lame joke made at the expense of the legal community can be good therapy for an attorney to stay humble.   However, occasionally circumstances surface publicly about a lawyer’s improper management of a client’s funds, and this saddens and concerns the legal community.

When a lawyer mismanages trust funds of any person, and especially an older person as was reported recently about an attorney located in a county east of the Susquehanna River, there is nothing funny about it.   Because fraudulent behavior by an attorney is rare, it is dramatically newsworthy.   Attorney misconduct is dealt with severely by the Disciplinary Board of the Supreme Court of Pennsylvania, which regulates the practice of law in Pennsylvania.  

How can you tell when an attorney is managing funds honestly?   I offer no punch line for that.  But I will touch on the legal community’s self-policing policies, as well as offer additional precautions which a client could consider to make sure that their funds, and especially “trust funds,” are safe-guarded.

If a lawyer is holding a small amount of money for a client or clients for a short term, such as with client retainers or a real estate settlement escrow, the lawyer is not permitted to use or earn interest on the money.   Instead, such funds must be deposited by the lawyer into a special bank account, from which the interest is automatically sent monthly by the bank to a special larger fund that is managed by the Pennsylvania Interest On Lawyers Trust Account (IOLTA) Board, which consists of nine members who are appointed by the Supreme Court.  This fund is used for various public benefits, such as but not limited to providing civil legal assistance to poor and disadvantaged persons.

Otherwise, a lawyer who is holding funds for a specific client over a longer period of time may invest those funds and earn income solely for the benefit of the client.  In this context, it is permissible for an ethical lawyer to serve as the fiduciary investment agent for a client, or the trust created by the client, as many lawyers have in done in the course of their practice.  Professional Rules of Conduct include procedures that, when properly followed as required, provide necessary protection for funds managed by an attorney for a client.

Lawyers are human, as the punchlines of jokes remind us.  Mistakes and poor decisions can occur.  While the Pennsylvania Disciplinary Board discourages unethical behavior by imposing harsh punishment upon offending lawyers, clients who wish to avoid becoming victims of an attorney’s improperly managed trust fund may take extra precautions.

At the risk of offending a lawyer who may have an opinion which differs from mine, it could be unwise and unnecessary for a lawyer to act as the trustee of a trust, or the agent with power of attorney for a living person, or the executor of an estate.  Most of our clients have a family member who can assume those roles, especially with the benefit of professional advice from us and other third-party professionals who have no conflicting interest.  For those clients who have no available family, or might have a lack of confidence or trust in their family members, we can arrange a relationship with third party such as a bank or CPA to act as a trustee, power of attorney agent, or executor.   Again, it is possible for another ethical attorney to believe that my opinion is too strict and unnecessarily cautious. 

Usually, a trust that we create can be managed by a family member as trustee, although we often recommend that such a trustee consult with a professional financial manager before making investment decisions.   We routinely caution our clients and encourage them to involve multiple persons and professionals in the oversight of their funds.   Although we avoid allowing ourselves as lawyers to be appointed as the primary trustee of a trust that we create for a client, occasionally we will serve as a distribution trustee to review and approve the actions of the primary trustee, who acts like a general manager of the trust funds.  However, we are pleased when our client agrees to ask an independent CPA to serve as a distribution trustee instead of asking us to fill that role.  

In addition to being unwilling to invest funds on behalf of our clients, we advise our clients against investing money with any fund manager who does not show credible evidence of how the client’s funds have been invested with a third-party.  For example, a Certified Financial Planner could provide evidence of stocks, bonds and other assets which have been acquired.   When a financial or legal advisor is also a co-investor or co-owner of an asset, such as in a real estate partnership or private investment fund, it can be a conflict of interests.   When a client has both a financial planner to manage assets, and also an independent CPA to prepare tax returns, there are more safeguards than if a client’s funds are entirely supervised by one individual.

Older persons usually should become more risk averse, and therefore should be cautious in response to investment advisors who promise return-on-investment rates that seem uncommonly high.   Because of our experience with the challenges of paying for long term care, which is a possible future need of many clients, we generally advise caution about purchasing an annuity if an investor is over age 65 and has a net worth of less than one million dollars.  Often, the best investment results can be obtained by negotiating a percentage-based fee for investments to be managed by a qualified financial planner.

If an investment salesperson’s projection for performance seems too good to be true, it probably is.  And that’s no joke.  A prudent investor should listen to a recording of their favorite comedian if they want to laugh all the way to the bank.

by Dave Nesbit, Attorney