What Is An IOLTA Account?
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Originally Posted On: https://rdlegalbookkeeping.com/what-is-an-iolta-account/
Attorneys usually receive a large retainer before beginning a legal case. The money is required up-front to ensure that their hard work will be paid for and the client won’t have to scramble to meet payment deadlines along the way.
The retainer does not belong to the attorney. They must be placed into a Client Trust Account and held there as long as the attorney and clients are working together. As the attorney earns money he/she can send a bill to the client, and withdraw earnings from the account. At the conclusion of the case any remaining funds, plus the interest earned, will go back to the client.
An IOLTA (Interest on Lawyer’s Trust Account) is also a Client Trust Account, but it is set up a little differently. This fund collects interest on small client retainers, or retainers that will not be held for very long. The interest does not go to the client.
IOLTAs are special accounts that earn interest for the IOLTA program which uses the money to provide legal services to people who otherwise couldn’t afford an attorney. The funds are also used to improve the legal system in each state. Most of the United States have a requirement that every attorney maintain an IOLTA for small retainers. These programs are strict about how the funds are used, how they should be recorded, and how an attorney should handle the account.
The idea for using interest on small retainers began in Australia in 1964, then Canada, and soon after was adopted by Florida. The program faced opposition in the U.S. because of a rule already in place stating that an attorney should never earn interest on a client’s money. However, the rule was modified in order to serve this charitable program. Now banks will allow IOLTA checking accounts to earn interest and that interest goes straight to the IOLTA program.
An attorney must be certain to follow the correct rules when recording the IOLTA in the books. If an attorney’s bookkeeper does not record the deposits and withdrawals promptly, the attorney can face severe consequences, possibly even losing their license. This is where a bookkeeping service that specializes in attorney trust accounts can be very beneficial.
Attorneys and bookkeepers must be sure that IOLTA does not pay bank fees directly from the funds in the account. The bank fees must be paid by the attorney from a normal checking account. This is a common problem when operating an IOLTA but can be arranged correctly with proper communication between the attorney and the bank. (Many jurisdictions allow attorneys to deposit their own funds to cover the payment of bank fees.)
An IOLTA is a pooled checking account allowing the attorney to deposit funds from several clients into one place in order to earn interest. This can make the bookkeeping a little tricky, so it’s important to keep accurate records about how much each client has in the account, how much money has been earned from each client, etc. Failure to keep the records straight can result in a big mess and ramifications for the attorney. Attorneys must follow proper bookkeeping procedures to keep things running smoothly.
The following are steps that will allow for a proper IOLTA account:
- Receive the retainer (or funds held in escrow) and decide if it is within the parameters of a CTA or an IOLTA.
- Deposit the retainer into the IOLTA and record the deposit in the books under the client’s name. The retainer will go on the books as a liability.
- Once it is time to bill the client for some of the work, send the bill to be approved, then withdraw the appropriate payment immediately from the account. Keeping earned money in an IOLTA can get an attorney in trouble with the state.
- The next step is to deposit earned money into the attorney’s business account. The attorney now has the freedom to use the money for bills, expenses, or payroll. Attorneys should never use IOLTA money for business expenses. IOLTAs should not even include an ATM card with the account to prevent such mistakes.
- The next step, transferring interest to the IOLTA program, is done by the bank, but it can still be recorded in the books. Every month the IOLTA must be reconciled using bank statements and the IOLTA records. It is wise to have a bookkeeper on board with a good understanding of the methods needed to keep everything in order.
- Finally, once the work is done, if any money remains in the client’s IOLTA, the money is then returned to the client. Using their small retainers or briefly held funds to earn interest did not cost them a dime, instead it was used to fund a very helpful program.
In most states there is a 3-way reconciliation that balances three things: your internal books, your trust account bank statement, and the client ledger balances. It is important that the Trust Ledger and each Client Ledger is maintained in a proper bookkeeping system and that their balances always match.
Once the interest reaches the IOLTA program, it is used in one of two ways: either providing legal services for the indigent, or going towards improving the legal system in the state. Some years, the amount of money that channels through the IOLTA program reaches over one hundred million dollars throughout the U.S. Of course that number rises and falls based on interest rates, but again, that money wouldn’t even exist if the IOLTA advocates had not worked tirelessly to improve the rules of attorney accounts and whether attorneys could collect interest on client funds. The idea has worked very well, and as long as the recording and tracking rules are followed, every attorney should rest easy knowing they contributed to this incredible program.