If not done correctly, your firm could face serious penalties and could even end in the disbarment of one or more attorneys within your practice. Educating yourself on what is an IOLTA account and what the requirements are for your state are vital first steps. Are you a bookkeeper or accountant who is trying to understand the best way to handle client funds? This blog post will help explain these accounts, why they matter for bookkeepers and accountants, and how to set them up and properly maintain them. Knowing about both IOLTA and trust bank accounts can make all the difference in ensuring your clients are protected, and their finances remain secure. When a firm establishes an IOLTA account, they can then pool their short term client funds together.
A busy law office has so much more on its plate than just making sure its clients receive the best advice they need and the counsel they deserve. Think of all the good you can help support by way of simply doing your job and helping clients. For example, the New Mexico IOLTA program was approved by the State Bar of New Mexico and operates under the state’s legal and regulatory framework.
Are IOLTA Accounts the Same as Other Bank Accounts?
The interest earned on these pooled funds is used for civil legal aid programs, assisting those who cannot afford legal representation. An IOLTA account is a pooled, interest- or dividend-bearing business checking account (such as a NOW account) for the deposit of client funds which pays all interest earned to the Lawyers Trust Fund. Under Rule of Professional Conduct 1.15B, Illinois lawyers are required to deposit funds of clients and third persons into IOLTA accounts unless those funds can otherwise earn net income for the client or third person. The reason that clients’ retainers were put into non-interest-creating bank accounts was that the government had decided it was unethical for attorneys to receive any sort of interest or financial benefit from a client’s money they were holding for them. Up until 1980, it was customary for law firms to hold clients’ money in non-interest-bearing checking accounts.
It is also, however, an unpredictable revenue stream because IOLTA income is entirely dependent on the current interest rate environment and economic conditions. They also are helpful to law firms in that they allow short period client funds to be pooled together, instead of having to continuously open new trust accounts for each new client. If you are a law firm that is practicing in any of the 50 states and are holding short term client funds, you will need to set up an IOLTA account with a partnering bank or financial institution. Clio’s legal trust accounting management software makes IOLTA easy for lawyers, helping meet the above requirements with trust accounting features and workflows.
Benefits of IOLTAs
From hiring employees to handling clients, there are hundreds of tasks that need to be completed, kept up with and carefully thought through. Because of the sometimes complicated nature of IOLTA programs, it’s going to be in your firm’s best interest to do what is necessary to make sure that your IOLTA account is set up correctly and is being run accurately. The financial institution that holds the IOLTA account will be responsible iolta stands for for remitting the net interest on a monthly or quarterly basis. Clients who have larger retainers with a firm will have their own separate accounts, and the interest earned on those accounts will be earmarked for them. The first and only national digital and print magazine that connects individuals, families, and businesses to Fee-Only financial advisers, accountants, attorneys and college guidance counselors.
Lawyers may need to hold funds for retainers, settlement proceeds, court-awarded damages, among other reasons. Using an IOLTA account ensures any interest earned is remitted to state bar associations, which are donated to support legal aid programs and other public service initiatives. IOLTA accounts are regulated by state-level legislation and overseen by the relevant state bar associations. Rules may vary from state to state, but general requirements include identifying eligible client funds and depositing them into an interest-bearing, IOLTA account. Attorneys and law firms are required to ensure that their IOLTA accounts meet the standards imposed by their state’s respective bar association or IOLTA program authority.
The good news for your law firm is this.
A recently published article outlined a vision for the future of IOLTA accounting, hinting at innovations to be expected in this area3. Embracing advanced accounting practices can increase efficiency and effectiveness, ensuring streamlined management and distribution of IOLTA funds. To effectively reconcile and track IOLTA transactions, it’s essential to maintain meticulous records, regularly compare bank statements with internal records, and conduct periodic audits to ensure compliance with regulations and ethical standards. Some firms will also intentionally use their IOLTA accounts to hide assets, or will leave funds in their IOLTA even after they’ve been earned, using it as a “savings” account. Regardless of how your law firm does its accounting, the system that you use to keep track of an IOLTA account must conform to the principles of double-entry accounting. (For example, state Supreme Courts have made IOLTA mandatory in some states and voluntary in others.) That’s why it’s important to consult your State Bar Association and a professional accountant before finalizing your accounting setup for IOLTA.
Any interest generated from an IOLTA account is then transferred to the state’s IOLTA program which is then used for various purposes as established by each individual state. Most states have stringent rules and regulations around IOLTA accounts and the state IOLTA program they benefit from. An attorney and/or law firm can find themselves facing some dire consequences if these funds aren’t handled properly, from heavy fines to even potential disbarment, depending on the severity of the situation. Bank accounts, trust accounts and QuickBooks Online are in continuous sync and in-line with state bar standards, so you are well positioned for your weekly or monthly three-way reconciliation.
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