When a company hires a law firm or an attorney to look after their legal matters, the attorney or the firm is also responsible for handling a certain amount of money. The main reason the firm is provided with this money is to provide them with monetary flexibility they might require while dealing with a legal case the company is involved in. The money is placed in a trust account. This account is basically what we call an IOLTA account (Interest on Lawyer Trust Accounts.)
To understand the functioning and knowledge the attorneys have around IOLTA, which indeed is a great matter of importance for any firm, I was shocked to see how little these attorneys are informed. To justify it, they convinced me that they have never worked with an IOLTA account for any client. Naturally, I then looked for firms and attorneys who have worked with these trust accounts. But the results were not even close to great. These attorneys were as unaware of the functioning as the ones from the previous set. I took the matter into my own hands, dived deep into it, and gathered everything I can around the topic.
As a company owner who is giving away the responsibility of a huge chunk of money, you cannot stay in dark. As an attorney, you are wise enough to understand how crucially you are required to be educated on the matter. This article here will not only give you the required knowledge but will also save you from committing common mistakes that attorneys commit.
To start with, IOLTA accounts are complicated functioning of a specific set of rules. The penalties to break these rules can be as severe as the disbarment of the attorney. This article will help you understand everything you need to know about IOLTA.
What will you find in this article –
- Understanding IOLTA account
- States Using IOLTA
- What is Attorney Trust?
- The difference between IOLTA and Attorney Trust
- LIVE Example of IOLTA account
- Common Mistakes to avoid while dealing with IOLTA account
- What to do if you mismanage? Best Practices
- Key Takeaways
Understanding IOLTA Account
A law firm or an independent attorney has to hold on to some amount of the client’s money. Naturally, this money cannot be held in cash. The amount again cannot go into the firm’s asset account as the money does not belong to the firm. For the same, a new trust account is created to store the money. This account is called IOLTA. The amount can be a big chunk of money or several small amounts. The firm merges the money and keeps it safe in the IOLTA account. The account is accessible by the client as well as the law firm.
IOLTA is an interest bearing trust account. This means the amount kept in an IOLTA account generates money in the form of interest. This interest, however, does not go to the client. The state IOLTA board uses this interest for multiple financial activities benefiting the underprivileged residents and improving the administration of justice in the criminal segment.
IOLTA was established in the year 1981 in the U.S. Before IOLTA was established, law firms had to keep their client’s money in a non-interest-producing account, which was coming out as a loss. To come over the situation, IOLTA was established in all the states.
States Using IOLTA
Yes, IOLTA was established and put into effective use in 1981 in all the states in the USA. However, it is not mandatory to use an IOLTA account in all the states. While using an IOLTA account is always a better choice as it raises funds for non-profit purposes, it is kept mandatory in some states and voluntarily in others by the state Supreme Courts.
To know if it is a must to use an IOLTA account or not speak and learn from a professional account or the bar association of your state.
What is Attorney Trust?
An attorney trust account is an account where an attorney or a law firm keeps the money of their clients. This money is not the law firm’s earned money and belongs to the client completely. Attorney trust is ideally the traditional way of managing funds for legal matters of the client. The trust account holds the client’s money but may or may not generate interest on the same.
An attorney trust account is an account made for individual clients that hold a huge chunk of money. This account cannot be clubbed with other clients of the firm. This may seem a little similar to IOLTA but there are differences.
The Difference Between IOLTA and Attorney Trust
While the two accounts may have a similar purpose, there are differences between the two. To start with,
An IOLTA account is an interest generating account that raises funds for the state to use for non-profit purposes. The account runs for a company to keep their money for legal purposes. The account can be accessed by the company as well as the law firm or the attorney. IOLTA accounts were established by the state with the sole purpose of generating interest while the base amount is kept safe and protected.
Attorney trust account on the other hand has some different purposes. Yes, the account is meant to keep the client’s money safe, but no interest is generated out of the account. The account is generated for individual clients with large money holdings for legal purposes. The money is majorly used for payments like paying for personal injuries and not for charitable causes.
IOLTA account even though established in 1981, it became popular in the last couple of decades. Attorney trust account has been in use for several decades as the traditional method. Since IOLTA came into popularity, the Attorney Trust Account took a back and is used much lesser in the present day.
LIVE Example of IOLTA account
Alright, to understand anything thoroughly, you have to see how it is working practically. We went through a lot of theoretical knowledge, dos, and don’ts but here is an example to help you see how it actually works.
Delta and Partners is a law firm. They started working for Dr. Richard Taylor to give him legal assistance in a lawsuit. Dr. Richard presented a check for $6,000 to the firm. The check covers the firm’s fee.
No matter how the firm records this transaction when it comes to accounting, the transaction has to be recorded with the principles of double-entry accounting. The duration of holding the money is irrelevant to the entry you make. Be it for a long period or a short period, the law firm will have to record the entry. Here is how the firm will record the money transferred by Dr. Richard Taylor.
|
Account |
Debit |
Credit |
|
Trust Bank Account (Dr. Richard) |
$6,000 |
|
|
Client Trust Liability (Dr. Richard) |
|
$6,000 |
The entry here is for the money Dr. Richard transferred to the firm. The money still belongs to Dr. Richard. Yes, the firm has control over the money but can only withdraw the amount of money earned.
Delta and Partners worked on Dr. Richard’s lawsuit for 5 hours. The hourly price is $100 per hour. Since the $500 has been earned, the firm can withdraw the same amount from the IOLTA account and transfer it to its business account. Also, even though the firm has earned the money, it is unethical to withdraw the amount without Dr. Richard’s permission.
Here is how the law firm will record the account ledger after the transaction
|
Account |
Debit |
Credit |
|
Trust Bank
Account (Dr. Richard) |
$6,000 |
|
|
Client Trust
Liability (Dr. Richard) |
|
$6,000 |
|
Trust Bank
Account (Dr. Richard) |
|
$500 |
|
Client Trust
Liability (Dr. Richard) |
$500 |
|
|
Your Firm’s
Business Account |
$500 |
|
|
Income |
|
$500 |
How Can Deskera Help?
Deskera is a bookkeeping software that helps you escape all the errors that a human can possibly make while making an entry in the books. A law firm at once is dealing with several clients and several IOLTA accounts. This increases the possibility of making errors when done manually. With Deskera, recording and maintaining the ledgers as well as the accounts become viably simple.
Common Mistakes to avoid while dealing with IOLTA account
Mishandling or misusing a client’s trust account can land the lawyer with some serious consequences. The consequences can be as massive as paying a huge penalty amount or disbarment. Here are some of the most common mistakes an attorney can make while handling an IOLTA account. Learn them, escape them, and keep yourself.
1. Taking Money From the Account
An attorney has easy access to an IOLTA account. In most cases, the client or the firm does not even keep an eye on the account since it is the attorney’s responsibility. Here are here the mistakes that happen. The attorney, under any circumstances, is not allowed to withdraw any amount from an IOLTA account for personal use. Even if the withdrawal made is due to a lack of cash flow and for a very brief period of time. This is considered a serious crime. An attorney is only allowed to make withdraws from an IOLTA account for personal use when they have earned it. This withdrawal only takes place after approval from the client.
If an attorney is caught in the practice, the most common punishment for the same is disbarment of the attorney.
2. Share Bank Information
The attorney is in charge of maintaining and supervising the IOLTA account. But most time the responsibility is passed on to the accountant of the firm. While it is convenient for the attorney, it can turn out to be a mistake. The accountant can make errors or worst can withdraw the amount without permission. Since the attorney is in charge of the trust account, supervision is absolutely necessary. The account can be mishandled. While accountants and bookkeepers are professionals at managing ledgers, they are not so well versed in managing IOLTA accounts. The bank details of an IOLTA account should be a secure piece of information, if it goes in the wrong hand, the attorney in charge can face serious repercussions.
Sharing bank information of a client is breaking attorney-client confidentiality which is a serious crime and unethical.
3. Firm’s Business Account and IOLTA Accounts Should be Separate
The law firm or the attorney can transfer the earned income or fee from the IOLTA account to the business account. In some cases, firms tend to leave the earned amount in the IOLTA account of their client using it as a savings account. While the firm can withdraw the amount whenever they want, there are ways to hold this conduct.
A firm may have its earned income in the client’s account but the amount cannot be used directly to make the firm’s or attorney’s personal payments directly under any circumstances. To use the earned income the firm has to transfer the amount to the firm’s business account.
In several states, an IOLTA account can have debit card privileges. However, in any case, using a debit card at an ATM is prohibited by the state. The code of conduct to make payments is a must follow.
4. Bookkeeping Errors
First of all, it is important to know that an IOLTA account is the attorney’s responsibility but it does not belong to the attorney. All the payments made through an IOLTA account have to be recorded. One may assume that it is fine to not record a minor payment due to lack of time or any other situation. An assumption that the entry can be made on some other day, or can be clubbed with another transaction is wrong.
Every transaction, minor or major, has to be recorded on the same day as the transaction was made. Each transaction, irrespective of the amount of the transaction should have proof of payment as well. This responsibility is of the attorney and not of the bookkeeper. The payments made must be for the client and not for the attorney or the law firm.
Separate ledgers are to be made for each client or each IOLTA account to maintain a clear record. The law firm is accountable to show the account balances of each IOLTA account under its record at the end of each day.
5. Not Keeping Records Long Enough
You never know when a problem may arise and a transaction’s proof is required. The state ideally mentions keeping records for a long term. This period can be of five to six years after the tenure with the client is over. Yes, the proofs are necessary to be kept even if the attorney or the law firm is not associated with the client anymore for safe practices. While it is great to store hard copy proof but the states now validate electronic copies as well.
What To Do If You Mismanage?
If you are new to managing or dealing with an IOLTA account, the chances are you will need help or you are going to make errors. Don’t worry, you can find help if you know where to look for it.
Mismanaging an IOLTA account is not appreciated. To take the right measures find the practice management advisor in your state. A practice management advisor is a professional with thorough experience in dealing with IOLTA accounts.
Consult an advisor, figure out the problem, and correct it before it is too late. If there is an error with the IOLTA account the client as well as the attorney should both be aware of it. The consultant is an advisor with liberty from the state where they do not mandatorily have to complain against the errors made.
If you are setting up an IOLTA account for the first time and committed errors while it, the best way is to involve an experienced accountant in the process.
If a law firm is dealing with multiple IOLTA accounts at once, it increases the probability of errors. The best way to escape this is to hire an accountant with experience working with a law firm on software like Deskera.
Best Practices
As we read through the entire article, the one thing you can escape understanding is that an IOLTA account is tricky to handle. Here are the best practices to ensure safety and eliminate misconduct of an IOLTA account in a law firm. These best practices work the same irrespective of the size of the law firm.
-
A Law firm’s business account and a client’s account are two separate entities that cannot be merged. The firm cannot make any firm-related transaction from an IOLTA account.
-
The firm can hire an accountant to manage the IOLTA accounts but the best practice is to hire an experienced law firm accountant who can use software like Deskera.
-
To keep it ethical, the client must be aware of the transactions, balance, and operations of the account in short period of time.
-
The checks coming in should be deposited on the day of receiving. The transactions have to be recorded on the same day or it is counted as malpractice.
-
An IOLTA account is not meant for a law firm or for an attorney’s personal use. This is why it is important to transfer the earned money from IOLTA to the firm’s business account as soon as it is earned. IOLTA should not be used as a savings account.
Following best practices for IOLTA accounts not only saves the firm from committing fraud and mishandling of the account but also helps in establishing better relationships with clients. Mistreating the IOLTA account is not just ethical but has serious consequences no law firm or attorney would like to face.
Key Takeaways
Alright, the article ends here and we hope you have read it thoroughly. All the information you need to start and use an IOLTA is covered in this article. We get it, you must have missed something or the other while scrolling through the article. Here are some of the most important key takeaways that you just cannot overlook while working with an IOLTA account.
- IOLTA is an account that holds the client’s money but is operated by the law firm for legal expenses.
- An IOLTA account is mandatory to be used in most states as the account generates interest that goes to the state to carry out charitable legal work.
- This account can hold a large or a small amount of a client’s money but cannot be clubbed with a law firm’s business account.
- The attorney dealing with the client is responsible for operating the IOLTA account in the right way.
- IF an IOLTA account is mishandled or used for unethical practices, the attorney and the law firm can be disbarred by the state.
- Each individual client has their own individual IOLTA account.
- An attorney does make a lot of mistakes while operating an IOLTA account. Make sure to read all the rules made by your state for IOLTA. The rules may vary from one state to another.
- When hiring an accountant or a bookkeeper to manage IOLTA accounts make sure they have experience of working with a law firm or on IOLTA accounts previously.
- Ethically, the client should be informed of each transaction made through an IOLTA account.
- Before withdrawing the earned amount from the IOLTA account, the attorney or the law firm should take clearance from the client.
- In case the IOLTA account is mishandled or has any errors, a practice management advisor should be involved to manage the situation.
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