While it may seem simple on paper, the reality is that maintaining a compliant and ethical IOLTA account can be incredibly complex and time-consuming, especially without the proper tech stack. The strict state-specific rules and accounting intricacies can be a malpractice trip wire for the most experienced lawyers. After all, even big law firms with dedicated accounting teams have specific processes to maintain IOLTA compliance.

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When the Supreme Court and state legislatures created IOLTA in the 1980s, attorneys could deposit their earnings into an interest-bearing trust account. The banks would typically donate the interest to a program or charity controlled by the state bar. But they still fulfill their ethical and fiduciary obligations by safeguarding their clients’ money. So, the firm must keep accurate and detailed records of the money deposited and withdrawn from the account.

Best practices

• Software like MyCase’s legal accounting solution makes this easy by assigning trust account funds to specific clients.
• Track every deposit and withdrawal in separate client ledgers, recording transactions as they occur.
• When a lawyer obtains a large sum for a client, they usually deposit this money in a trust fund that accrues interest.
• Clients benefit from IOLTA as they gain peace of mind in knowing their funds are held in a secure place.
• Make sure you verify what rules apply to your law firm with your state bar association.
• Any assets transferred into the trust account belong to the client and must be managed on their behalf.
• If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor.

All attorneys holding clients’ funds in an attorney trust account have a duty of recordkeeping. We are fiduciaries and the fiduciary legal standard puts the burden on the lawyer to prove that it was done right, not on the client to prove it was done wrong. Typically, trust funds are used for short-term deposits — things like money to be expended on attorney’s fees online bookkeeping or costs in a relatively short period of time, such as under six months.

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And remember, if you choose to have a third-party bookkeeper maintain your trust account, you are still responsible for the conduct of those people. Marc Garfinkle practices in Morristown, focusing exclusively on legal ethics, attorney discipline, bar admission and judicial conduct. He is also an adjunct professor at Seton Hall University School of Law in Newark.

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• Principal among them is the development of proposals to change legal practices that provide opportunities for dishonest practitioners to exploit the trust of clients.
• If you completed all services and paid all expenses, you will return the remaining unused $7,250 to the client.
• Before IOLTA came about in the early 1980s, trust accounts were to be put into non-interest-bearing checking accounts since lawyers were not to benefit from their clients’ money.
• For the sake of simplicity, some law firms report trust deposits as income in their legal accounting software.
• The interest generated typically depends on the type of account and the institution holding the funds.
• This is so even when the funds are earned and even if the engagement agreement provides for immediate withdrawal.

That “record” must include the “date, source and description” of every deposit and the “date, payee and purpose” of every withdrawal. Under normal IOLTA programs, no trust account will earn interest that can trust accounting for lawyers be divided and paid to the individual clients. Almost all lawyers in private practice are required to maintain a firm trust account under their state’s attorney trust account rules. The rules in various states might be written differently, but the concepts are the same. Clearly, trust accounts are very important to the lawyer, but it should be emphasized that these accounts are also very important, and desirable, to the bank where they are deposited. Client trust funds can offer a large and stable deposit for the bank, although this depends on the nature of the law practice.

After all, your clients could be paying you a big pile of cash as a retainer, and they would love to know what happens with their cash. While trust accounting seems like a relatively straightforward concept, keeping track of client trusts can get complicated if you’re managing accounts for multiple clients. The ABA requires firms to keep client funds separate from business funds. This distinction helps prevent law firms from accidentally misappropriating client funds for non-client expenses. Before opening a non-IOLTA trust account, check your local jurisdiction’s https://www.bookstime.com/ laws and the local Bar Association’s requirements to confirm this is allowed. Since you’re acting as a fiduciary on behalf of your client, you must also disclose information related to the non-IOLTA account to clients, like interest rates and fees.

Step 3: Use the Right Trust Accounting Software

Lawyers sleep soundly knowing they’re compliant and can confidently continue to help their clients. Explicitly, IOLTA applies only to funds that are “nominal in amount or held for a short period of time”. So larger amounts of money held for single clients are exempt from the IOLTA program.