Your client calls to say their former partner's solicitor has released $180,000 that was being held on trust for both parties without your client's consent, and the money is gone. Your client wants to know who is responsible. In most cases, the answer is the solicitor who released the funds.
Trust Money: Handle With Care
Transferring trust funds without proper authority from the rightful beneficiary, even by mistake, can result in liability for breach of fiduciary duties and breach of trust, as well as contravention of the Legal Profession Uniform Law 2014 (Vic) and Legal Profession Uniform General Rules 2015 (NSW) and liability to pay pecuniary penalties. If the wrongful recipient is unable or not prepared to repay the funds, the firm may be sued for breach of trust and liable to restore the trust.
These claims do not arise because practitioners are careless. They arise because the terms of the trust are not clearly articulated and documented at the outset or are not revisited before funds are released often due to pressure from clients and other parties. The LPLC has seen repeated claims where a diligent practitioner followed their client's instructions to release trust money, only to discover the client was not the only person entitled to it.
Three moments where trust money goes wrong
Trust money claims cluster around three workflow moments. A practitioner who builds the right checks into each moment will avoid the most common errors.
1. Opening the file: establish the terms of the trust
Before receiving any funds into trust, practitioners must determine and document:
- who the money is held for (the client may not be the only beneficiary)
- the purpose for which the money is held
- the conditions that must be satisfied before the money can be released
- whether any third party's consent or a court order is required before disbursement.
| What this looks like in practice: A practitioner acted on a property purchase where a third party provided the deposit. When the purchase fell through the practitioner released the deposit to the client on the client's instructions without considering the third party's entitlement. The third party was in fact lawfully entitled to the funds. The practitioner faced a breach of trust claim. The error occurred because the terms of the trust, specifically who was beneficially entitled to the deposit, were not clearly understood and recorded at the outset. |
2. Receiving funds: confirm and record the trust terms
At the point funds arrive in the trust account, practitioners should confirm the terms are accurately reflected in the firm's records.
- Record the identity of every beneficiary in the trust account ledger and on the matter file.
- Obtain written confirmation from the client and all relevant beneficiaries as to the terms on which the money is held and the basis for release.
| What this looks like in practice: A practitioner was acting for a company that was to be nominated as purchaser of property for development. The client arranged a loan to do the development. The loan funds were transferred to the practitioner as stakeholder without his agreement or knowledge. He did receive a copy of the loan agreement setting out his stakeholder role and thought he had complied with the obligations to advise the lender of the client’s nomination as purchaser before releasing the money. The lender later alleged it had not received the correct information. The practitioner could not produce written evidence that the condition had been met. The practitioner allowed use of his trust account as a stakeholder without being involved in the whole transaction and fully conversant with the terms of the stake. |
3. Disbursing funds: revisit the terms before every payment
Before releasing any trust money, practitioners must revisit the original trust terms, not rely solely on the client's instructions.
- Check whether all conditions for release have been met and obtain written confirmation from all relevant parties.
- Where trust money is held pursuant to a court order, do not release the funds without a further specific order from the court authorising release, or direct clarification from the court that existing orders permit it.
- Where a client has been made bankrupt, do not disburse funds without the bankruptcy trustee's written consent. Under the Bankruptcy Act 1966 (Cth) (Bankruptcy Act), property that vests in the trustee in bankruptcy cannot be released on the client's instructions alone.
| What this looks like in practice: A firm held sale proceeds on behalf of both a husband and wife under interim court orders. The husband and wife subsequently made claims against each other for the net proceeds of sale by way of property settlement. When the husband's property settlement application was dismissed on procedural grounds, the firm released the full amount to the wife, believing she was entitled to it. The firm did not seek a court order for release and did not notify the husband's solicitors. The husband brought a successful claim for breach of trust. The firm had to restore the full amount, plus interest and damages, at its own expense. |
Do not forget interest on trust funds
Practitioners who hold substantial amounts in trust for more than a short period should raise the question of investment with the client at the time of receiving the funds. This happens most commonly in family law matters, for a vendor selling land and when acting for the executor of a deceased estate.
- Inform the client in writing, at the time funds are received, that money held in the firm's general trust account does not accrue interest.
- Ask the client to provide written instructions about whether the funds should be invested in an interest-bearing controlled money account.
- Note in the letter that the client should consider the tax consequences of investing the funds.
- Diarise a weekly check of the trust account ledger to identify files where significant funds remain uninvested without instructions.
| What this looks like in practice: a practitioner acting in a deceased estate and received substantial amount from the deceased superannuation fund. The practitioner discussed investing the funds with the executor in a meeting, but no decision was made. The question was not revisited even after receiving a substantial life insurance amount. Twelve months after the estate was distributed the practitioner received a claim for the lost interest on the funds held. |
Trust money checklist
Practitioners should download and use the checklist below at each of the three workflow moments identified in this article.
At file opening:
- Identify every person or entity beneficially entitled to the trust money.
- Document the purpose for which the money is to be held.
- Record the conditions for release in writing, agreed by all relevant parties.
- Note whether any third-party consent or court order is required before disbursement.
When receiving funds into trust:
- Confirm the trust account ledger records every beneficiary's identity.
- Obtain written confirmation of the trust terms from the client and all relevant beneficiaries.
- Where acting as stakeholder, confirm the stakeholder terms are documented in writing.
- Inform the client in writing that trust funds do not accrue interest and seek written instructions on investment.
Before disbursing funds:
- Re-read the documented trust terms on the file.
- Verify that all conditions for release have been satisfied.
- Obtain written consent or authority from every beneficiary entitled to the funds.
- Where funds are held under a court order, obtain a specific court order authorising release before paying out.
- Where the client is or may be bankrupt, obtain the bankruptcy trustee's written consent before disbursing.
- Retain documentary evidence of every step on the file.
Key legislation
Payments of trust money can only be made in the circumstances prescribed by the Legal Profession Uniform Law Application Act 2014 (Vic) (Uniform Law) and the Legal Profession Uniform General Rules 2015 (NSW) (Uniform Rules), including:
- under the direction of the person beneficially entitled to the money (s 138(1) of the Uniform Law), and where money is held on behalf of joint beneficiaries, every beneficiary must consent
- as an authorised payment for the practitioner's legal costs (rule 42 of the Uniform Rules; s 144(2)(b) of the Uniform Law)
- under an order of a court or as authorised by law (s 138(2) of the Uniform Law).
Transferring trust funds without proper authority can result in liability for breach of trust, breach of fiduciary duties, and contravention of the Uniform Law, including pecuniary penalties.
