Banking and IOLTA Accounts

Banking and IOLTA Accounts

Like all small businesses, a new law firm needs a business checking account. But law firm banking is different than ordinary small business banking in one important way: most lawyers in private practice are required by law to keep client funds in a separate IOLTA account, and they must manage the account properly.

IOLTA is an acronym for Interest on Lawyers Trust Accounts. Whenever a lawyer has funds that belong to a client, state ethics rules require that those funds must be kept in a trust account that’s separate from the lawyer’s general operating account. When a lawyer has possession of relatively small sums (usually retainer money), the lawyer is allowed to pool these client funds into a single IOLTA account, rather than opening a separate trust account for each client. Interest earned on the account is transferred to a fund supporting legal aid for the poor and public service programs.

You can usually set up an IOLTA account at the same bank where you have your regular checking account. Then you should review your state ethics rules for guidance on how to handle the IOLTA account properly. Here are some general rules:

Handle retainers properly. Money that you have received but have not yet earned goes into the IOLTA account. When you prepare your monthly bills, you can list fees and costs, the amount you will deduct from the client’s retainer to cover that month’s bill, and the retainer balance. Once the bill has been sent, you must move the month’s payment from the IOTLA account to your operating account. Most state ethics rules prohibit you from keeping money in the IOLTA account once it has been earned.

Don’t pay operating expenses from the IOLTA account. You can’t pay operating expenses directly from your IOLTA account, even if you have already earned the money you are using. Money must always be transferred to your operating account first. Lawyers have also landed in ethical hot water for borrowing IOLTA funds to pay operating expenses.

Keep Good Records. IOLTA accounts have stricter recordkeeping requirements than a regular checking account. You must maintain a spreadsheet or ledger that tracks funds transferred in and out of the account for each client and how much money each client has in trust. Look for legal practice management or accounting software that helps you automate and stay on top of IOLTA recordkeeping.

Know When You Need an Individual Trust Account for Client Funds. IOLTA accounts are designed to hold relatively small amounts of money for relatively short periods of time. If you are holding a large amount of money for a client, or if you are keeping money in trust for a long time, those funds should be deposited in a separate trust account that earns interest for the account beneficiary.

Consult your state bar’s IOLTA account rules to determine what types of funds must be deposited in individual accounts, and for guidance and answers to questions about IOLTA accounts generally.