Client trust accounts are required when a lawyer handles money for a client. The lawyer must keep money that belongs to a client separate from money that belongs to the lawyer. Fees paid to the lawyer belong to the lawyer and can be placed in the law firm's account. All funds belonging to the client must be placed in a separate account designated for that purpose.

The proper use of a client trust account is an ethical obligation of the lawyer. Misuse of client funds is a very serious matter and can lead to disbarment. The ethical rules require clear records of each client trust account transaction. Client trust account funds may only be distributed to the client or to a person designated by the client.

It is important that the paralegal be able to recognize the kinds of funds that must be deposited in a client trust account. Paralegals sometimes receive funds from clients and must be able to give appropriate instructions to the law firm bookkeeper. More often, a paralegal will be called on to explain how specific funds will be handled.

There are four types of funds that must be placed in a client trust account:

• Funds belonging to the client, such as an insurance payment.

• Funds belonging to third parties, such as escrow funds related to a real estate transaction.

• Retainers paid by the client. Retainers are payments against which future legal services will be charged. These payments belong to the client until the legal services are performed.

• Settlement proceeds. When a client settles a legal dispute, the settlement check is usually made payable to the client and the lawyer. Because the proceeds belong partly to the client, the entire settlement check must be deposited in a client trust account.