Trusts And Law Practices: Can They Be Beneficiaries?

Trusts are a legal entity with distinct rights, similar to a person or corporation. They are used to hold assets and ensure they are distributed according to the trustor's wishes. Trusts can be established to provide legal protection for the trustor's assets, avoid probate, protect assets from creditors, and dictate the terms of inheritance for beneficiaries. Trusts are widely used internationally, especially in countries with English law influence, and are recognised in most civil law jurisdictions under the Hague Convention. In the context of law practices, there are two types of trust accounts: pooled and separate. Pooled accounts, such as IOLTA (Interest on Lawyers' Trust Accounts), hold funds for multiple clients, while separate accounts are typically used for larger sums or at the client's request. Lawyers often serve as trustees for their clients, managing and using the assets for the client's benefit. Trusts can be a complex but essential part of a law practice, and lawyers must be aware of the legal and ethical considerations when dealing with these accounts.

Trusts and estate planning

Trusts are a widely used legal entity, especially in countries influenced by English law. Trusts can be established to provide legal protection for a trustor's assets, ensuring they are distributed according to their wishes. They can also help an estate avoid taxes and probate.

In the context of estate planning, a trust is a legal relationship where the owner of property or any transferable right gives it to another party, the trustee, to manage and use solely for the benefit of a designated person, the beneficiary. The trustee is the legal owner of the assets held in trust on behalf of the trust and its beneficiaries, who are the equitable owners. The trustee has a fiduciary duty to manage the trust with loyalty, prudence, and impartiality.

Trusts can be used to secure assets for specific purposes, such as a beneficiary's education or business venture. They are also useful for protecting assets from creditors or family members who might sell or spend them. Trusts can be established to ensure that a dependent with a physical disability or mental health condition receives care.

In the case of a law practice, it is possible to transfer ownership rights to a trust if the trustee and beneficiaries are all licensed. However, it is important to consult with an estate planning attorney to understand the consequences and explore alternative strategies.

Trust accounting is an important aspect of trust management, and it involves tracking and monitoring client funds held in trust. Law firms routinely use trust accounts to hold client funds, and these accounts are subject to specific regulations. For example, funds in trust accounts must not be commingled with the firm's funds, and detailed records of transactions must be maintained. Trust accounting can be complex, and mistakes may result in serious repercussions.

Trust accounting

Rules and Best Practices for Trust Accounting:

• Clear Communication: Attorneys should clearly communicate with clients about how funds will be handled, what will be deposited into the client trust account, and the timing of withdrawals. This early alignment on billing processes can prevent misunderstandings and disputes.
• Separate Accounts: One of the core principles of trust accounting is to maintain separate accounts for client funds and the law firm's operating funds. This ensures that client funds are not used for personal or firm expenses and helps avoid issues related to improper fund management.
• Accurate Record-Keeping: Trust accounting requires meticulous record-keeping, including regularly reconciling the trust ledger, trust account bank statement, and client ledgers to ensure all balances match. This helps maintain ethical standards and avoid legal issues.
• Compliance with Regulations: Law firms must comply with local Bar rules and state-specific laws related to trust accounting. Understanding and adhering to these regulations are crucial to avoid fines or, in severe cases, loss of the attorney's license to practice law.
• Use of Technology: Implementing specialised legal software for trust accounting, such as Clio or MyCase, can greatly simplify the process. These tools help track transactions, reconcile records, and streamline case management and billing processes.
• Client Updates: Lawyers are responsible for keeping clients informed about the status of their trust account, including balances and any transfers affecting their funds. This transparency helps maintain trust and compliance with legal regulations.

Common Mistakes to Avoid:

• Commingling of Funds: Attorneys should be careful not to commingle client funds with their personal or firm expenses. This is a significant breach of trust and can lead to ethical and legal issues.
• Incorrect Reporting: Deposits made into a client trust account should not be reported as the attorney's income. Confusing client funds with personal income is a common mistake that can result in serious consequences.
• Neglecting Local Rules: Understanding and adhering to local Bar rules and state-specific laws related to trust accounting are essential. Neglecting these rules can lead to disciplinary actions and legal troubles.

Types of trust accounts

Trust accounts are an important part of a law firm's operations, and lawyers are required to keep clients informed about the status of their trust accounts. Trust accounts are used by lawyers to hold money on behalf of clients, and they can be categorised as either pooled or separate accounts. Pooled accounts hold funds for multiple clients, while separate accounts are usually for larger sums or when specifically requested by the client.

There are several types of trust accounts, including:

• Living trusts: These are written documents that allow an individual's assets to be provided for their use and benefit during their lifetime. A trustee is named to handle the affairs of the trust and transfer the assets to the beneficiaries upon the trustor's death. Living trusts can be further categorised as either revocable or irrevocable.
• Testamentary trusts: Also known as will trusts, these specify how an individual's assets are designated after their death and are established only after the trustor dies. They are generally irrevocable once established.
• Revocable trusts: These can be changed or terminated by the trustor during their lifetime.
• Blind trusts: This type of trust allows trustees to handle assets without the knowledge of the beneficiaries, which can be useful for avoiding conflicts of interest.
• Totten trusts: Also known as payable-on-death accounts, Totten trusts are set up during the lifetime of the trustor, who also acts as the trustee. These are generally used for bank accounts and help assets avoid probate upon the trustor's death.
• Funded trusts: In this type of trust, the trustor places assets into the trust during their lifetime.
• Unfunded trusts: Unfunded trusts consist only of the trust agreement with no funding. They can become funded upon the trustor's death or remain unfunded.
• Employee trusts: Shares in a company may be held indefinitely by the trustee of an employee trust as part of an employee share or share option plan.

Legal and ethical considerations

Trust accounting is an important and tedious part of practicing law. Trust accounts are used by law firms to hold client funds. These funds are held in trust until they are used for a specific client's case and cannot be accessed any earlier. While each jurisdiction has its own requirements, the main rules they share are:

• Funds in trust must not be commingled with the firm's funds.
• Firms must maintain detailed records of the money that comes in and out.
• Firms may only use a client's money for their legal matters.
• Lawyers are required to keep clients informed on the status of their trust account, including its balance and any transfers affecting their funds.

There are two types of trust accounts: pooled and separate. Pooled accounts hold funds for more than one client, and separate accounts are for larger sums of money or when requested by the client. Trust accounts are also used for security retainers and court filing fees that are not included in a flat fee.

Trusts are a way to provide for a beneficiary who is underage. Once the beneficiary is deemed capable of managing their assets, they will receive possession of the assets held in trust. Trusts can be established to provide legal protection for the trustor's assets and ensure they are distributed according to their wishes. They can also help an estate avoid taxes and probate.

In the context of professional corporations, a law practice can be held in trust if the trustee and beneficiaries are all licensed. However, it is important to consult with an estate planning attorney before taking any action, as there may be other strategies that make more sense depending on the circumstances.

International use of trusts

Trusts are widely used internationally, especially in countries within the English law sphere of influence. While most civil law jurisdictions do not contain the concept of a trust within their legal systems, they do recognise the concept under the Hague Convention on the Law Applicable to Trusts and on their Recognition.

The main benefit of an international trust is the enhanced privacy and protection it offers for your assets. A foreign trust can also be used to hold assets in a foreign country, for example, you may wish to use it to hold real estate rather than owning it personally or through a company structure.

There are many other benefits to having a foreign trust, including tax benefits. Foreign trusts generally provide greater flexibility, privacy, and a higher level of protection for trust assets. For example, if you have a trust in a jurisdiction such as the Cook Islands, Cayman Islands, Saint Kitts and Nevis, or Belize, creditors and litigators will have to go to that jurisdiction and commence new legal proceedings, which will be expensive and act as a deterrent.

However, it is important to be aware of the tax implications of having a foreign trust. If you are based in the US, for example, you will need to report it to the Internal Revenue Service. There are also specific reporting requirements for US citizens, such as filing FinCEN Form 114 (Report of Foreign Bank and Financial Accounts).

Frequently asked questions