Poor IOLTA management has significant implications for law firms. Interest on Lawyers Trust Accounts (IOLTA) programs are operated in every state, as well as the District of Columbia and the U.S. Virgin Islands. Most IOLTA programs are mandatory, but a handful are opt-out or voluntary.
IOLTA programs are do the following:
- Prevent the co-mingling of client funds held in trust with the law firm’s operational funds and other business assets; and
- Pool funds to earn interest that is used to support charitable efforts. This could involve providing low-income folks with access to legal services, improving the administration of justice in the courts, or supporting educational programs.
On the surface, the management of an IOLTA might seem fairly simple. For example, if a client sends you a $2,500 retainer, it can’t be deposited into an operations account. It has to be placed into a trust account, such as an IOLTA, because that money hasn’t yet been earned. As you perform billable services, you can move earned funds into an operations account.
But how do you manage an IOLTA in a way that meets ethical standards? How do you avoid serious issues if you’re ever audited?
From an accounting standpoint, some billing systems have built-in functionality to help with IOLTA management, but they need to be configured to do exactly what you need them to do. If you have funds from 10 clients in a single trust account, managing the funds of each individual client is complex.
Do: Best Practices for IOLTA Management
Record-keeping requirements vary from state to state, but transparency and accountability are key.
- The IOLTA and individual clients’ funds should be reconciled each month.
- All funds should be properly tagged when deposited into the IOLTA.
- All deposits and disbursements should be tracked.
- Each transaction should be associated with a specific client.
- Each client’s transactions should be logged and tracked separately.
- Hard and soft (digital) copies of all statements, checks, deposit slips, etc. should be retained for auditing purposes.
- Trust reports, including all transactions and balance information, should be provided to each client.
Don’t: Examples of IOLTA Misuse
Misuse or mismanagement of an IOLTA can result in discipline from the state bar. Law firms are also expected to train and supervise any staff members who handle client funds. As a result, there should be documented procedures for monitoring the handling of client funds and reviewing bank statements.
Examples of improper use of an IOLTA include:
- Borrowing client funds to compensate for cash flow issues.
- Accepting one check that covers both work completed and advance fees.
- Hiding assets in an IOLTA account.
- Using IOLTA as a savings account by failing to remove earned funds.
- Sloppy record-keeping.
IOLTA programs were introduced to help attorneys meet their ethical and fiduciary obligations. However, the complexity of IOLTA management has led many law firms to outsource these tasks to a third party to ensure compliance and minimize risk in case of an audit. If your firm doesn’t have the in-house resources or accounting expertise to properly manage an IOLTA, outsourcing may be the most effective way to address the problem.
At Virtual Paralegal Services, we enable solo and small law firms to focus on providing legal services while we manage the accounting side of your business. Contact us to find out how we can take IOLTA management off your plate.