IOLTA Accounts: What They Are and Why You Need One

Never record client trust account deposits as income, even if that is the easiest way to do so with your accounting software. This type of trust account is used by lawyers to responsibly hold client funds. Law firms need to follow specific rules on how client funds are handled, and maintaining an IOLTA account ensures compliance with ethical and legal obligations. For example, most states have decided to direct a large portion of the interest earned in an IOLTA interest bearing trust account toward providing civil legal aid to assets = liabilities + equity the underserved population in their state.

Legal Accounting

You will now receive statements from this account as you would any other. Each state has specific criteria surrounding an IOLTA account and great care is taken to ensure that a financial institution meets the rules and regulations that have been established. If you’re a firm in New Jersey, you’ll need to understand the NJ IOLTA requirements. But, with the passing of federal regulations that allowed checking accounts to be able to pay out interest to their customers, a new challenge was realized for law firms’ accounts.

What is an IOLTA Account? Definition and Compliance Rules

• It’s important to note that client funds should never be put into a law firm’s operating account.
• Prior to the establishment of IOLTA in the U.S. in 1981 –when Florida became the first state bar association to adopt the system –federal law required law firms to place client money in non-interest bearing checking accounts.
• Failure to maintain best practices with IOLTA accounts can result in serious consequences.
• Though many administer their IOLTA accounts through the state’s bar association, IOLTA accounts can also be monitored and managed by other entities as well.
• Though opening an IOLTA account is fairly straightforward, making sure that it’s being managed correctly is a bit more of a challenge.
• Holding clients’ funds in trust is a requirement of the rules of professional conduct.
• That means, typically, that client funds eligible for IOLTA involve small amounts of money held for a long time, or significant amounts of money held for a short time.

Additionally, IOLTA transactions should be recorded the moment they happen to avoid anything from slipping through the cracks. Keeping business and trust accounts separate is simply the only way to reduce your IOLTA compliance risk. However, what does iolta stand for as many state bar associations have specific requirements for establishing and administering IOLTAs and other legal trust accounts, it’s always best to consult an expert. While any unearned client money is required to be deposited into a trust, it may or may not be mandatory to use an IOLTA, depending on the rules in your state. It’s best to check in directly with your state bar association or a legal account expert to confirm whether or not using them is required. That said, given that an IOLTA raises money for a number of worthy causes, it’s almost always beneficial to use them.

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• The reason the accounts were non-interest-bearing is that prior to 1981, commercial banks were prohibited by federal law from paying interest on demand deposits (e.g. checking accounts).
• IOLTA changed this by allowing law firms to place these funds into an interest-bearing trust account instead.
• When the amount of money held for an individual client is substantial, the funds are placed in an interest-bearing trust account.
• 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.
• Provide monthly details to clients as part of their bill to limit any allegations of mismanagement.

IOLTA accounts are a useful way to keep client funds separate from a law firm’s operating expenses while benefiting the community. However, as previously mentioned, trying to administer them manually using spreadsheets or non-specialized accounting software can open you up to risk. This gets even more complex as more law firms continue to modernize by offering digital payments for their clients since even small payment processing fees have to be handled correctly to stay IOLTA compliant.

How to Stay in Compliance with Your State’s IOLTA Program

Despite the fact that mismanaging or commingling money in an IOLTA can result in a reprimand or, in more extreme cases, disbarment, many attorneys still have a fuzzy grasp on how to manage them properly. In the late 1970s, The Florida Bar and other organizations filed a petition to establish the first IOLTA program in the United States. After legislation permitted the establishment of interest-bearing checking accounts in the early 1980s and the Florida advocates obtained important tax rulings from the IRS, the Florida Bar Foundation launched the first IOLTA program in 1981. Shortly thereafter, California, Idaho, Maryland, and others followed suit. If your bank does not participate in your state’s IOLTA program, you will need to contact another financial institution in your state and ask them to set it up for you instead. Most larger financial institutions will have the ability to open and maintain an IOLTA account for you.

• It’s also important that you make sure there is no connection between your business banking accounts and your IOLTA account.
• Most states’ IOLTA programs then use the interest earned and collected to help fund things like civil legal services for those who can’t afford to retain legal assistance.
• While manually keeping track of this can be a logistical nightmare, legal billing software like LawPay can significantly streamline and simplify the process.
• IOLTA accounts are a useful way to keep client funds separate from a law firm’s operating expenses while benefiting the community.
• If you’re a firm in New Jersey, you’ll need to understand the NJ IOLTA requirements.

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Trying to navigate the accounting and bookkeeping tasks Bookkeeping for Painters for your IOLTA checking account on top of that can be overwhelming and a huge waste of your valuable – and billable – time. 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. Now, they use accounts that earn interest, which means more money to help people with legal needs. The story of IOLTA in the United States is about thinking creatively. This state paved the way for a national answer to funding legal help.