Updated: Apr 5
Attorneys routinely receive and handle money that belongs to clients for future use such as security settlement payments, fees advanced for services not yet distributed.
Sometimes, the amount of an individual client is large and holds for a long time, so an attorney can deposit the funds into an individual bank account, known as a Client Trust Account with the interest earned belonging to the client.
However, most of the time lawyers usually handle client funds that are too small in amount or held too briefly to earn interest for their clients. In that case, they must participate in the Interest on Lawyers’ Trust Accounts (IOLTA) program. The interest generated from these accounts is remitted to the state IOLTA program for charitable purposes.
What is IOLTA?
IOLTA stands for Interest on Lawyers Trust Account. An IOLTA account is a pooled, interest-bearing checking account used by lawyers to hold client funds in trust. The interest rate earned from those trust account generates funds for the state IOLTA board, which uses those client funds for charitable purposes such as:
Provide legal aid in civil matters to low-income residents
Help Improve justice system
Fund law school scholarship programs
Provide grants for non-profit organizations and public service programs
Holding clients’ funds in trust is a requirement of the rules of professional conduct. Specifically, Rule of Professional Conduct 1.15 provides for the safekeeping of property that belongs to clients or third persons.
In this rule, lawyers are required to hold client funds in one of two types of client trust accounts. The first is an IOLTA account and the second is a separate non-IOLTA client trust account.
IOLTA accounts are maintained for the deposit of client funds that are nominal in amount or be held for a short period of time. Lawyers may not deposit client funds in accounts that do not bear interest, and all property of clients should be kept separate from lawyers’ business accounts. They could not earn interest from funds that belong to their clients.
How to open an IOLTA accounts
IOLTA accounts must be approved and placed at eligible financial institutions. If your law firm currently holds IOLTA accounts, it’s important to follow the rule and learn more about becoming eligible. An IOLTA account should be an interest-bearing trust account and need to be named after the attorney or law firm that holds that account.
When the lawyers begin to receive funds on behalf of clients, such as advance fees or unearned costs, they must immediately
Five Common Mistakes that Lawyers Make with IOLTA Accounts and How to Avoid Them
Not keep your clients and business accounts separate
As mentioned, attorneys are required to keep clients’ funds separate from lawyer accounts or operating business accounts. Although you are able to move money from the client’s trust accounts to your business account, you have no right to use money from these accounts to pay for your operating expenses.
Charging Payment Fees
The nature of IOLTA accounts is that service charges for baking services cannot be charged against the principal account. That means the bank service charges such as e-transfers, paper statements, re-ordering checks, and fees involving other clients’ cases can’t pass along to your client’s IOLTA.
Trying to ‘withdraw’ or ‘borrow’ money from an IOLTA account before it is earned is considered an intentional act. It’s not a mistake because every attorney is trained on how to manage client trust accounts.
Nevertheless, some attorneys are trying to take trust account money maybe because they’re having cash flow problems, or simply they might think “I will pay it back in the trust account before it’s earned”. Regardless of the reasons, there is no legitimate way to borrow these funds from trust accounts.
Poor Record Keeping
Some attorneys fail to keep detailed and specific records, and that shows they are disorganized and may be judged as incompetent to handle a trust account. Basically, it’s easy to make the mistake to forget to write your client’s reference number on their trust account checks. Another common way that breaks IOLTA rules is that you fail to keep a separate ledger for each client, or simply by misplacing a record.
According to the recommendation of the American Bar Association, IOLTA account records should track all deposits and disbursements through the accounts. Additionally, each transaction should be associated with a particular client.
Not getting help
While every jurisdiction has its own rules that require lawyers to know and comply with, it’s unavoidable to make mistakes. It’s simply human nature and attorneys are no exception. Now you may identify the common potential mistakes, or even you’re dealing with them and trying to look for solutions. The good news is, there are plenty of great options out there to help you with better IOLTA management.
If you are just starting out in the early stage of setting up the account, you can contact a CPA or bank to help resolve your questions and hypothetical scenarios.
If you suspect your IOLTA accounts may not be in compliance or mismanaged, contact a practice management advisor in your state. They have experience dealing with IOLTA account rules and help recorrect your problems.
If you simply don’t have time to learn the rules and handle these accounts, consider hiring an online bookkeeping service. Bookkeepers have equipped themselves with a deep understanding of the rules and carefulness in keeping records that can help you avoid potential problems, financial losses, and disciplinary action in the future. In that way, you don’t need to worry about managing your client’s accounts or committing mistakes. Instead, you can save valuable time to develop your business.