Top Do’s and Don'ts on IOLTA Accounts for Law Firms
The interest on a lawyer's trust account, commonly known as IOLTA, is one of the most mysterious accounts in attorney's chart accounts. Yes, we know it's a bank account; we know that there's interest, but we're not sure how to put that interest on the books. It's basically interest in interest out.
Did you know that interest in a trust account called IOLTA has a particular purpose? Its purpose is to allow that money to be used for legal assistance for low-income people and underserved populations. This funding has many benefits to help people who can't afford to hire an attorney.
What are the challenges that attorneys run into when maintaining proper trust account records? Here are a few don'ts and then a few do's:
- Never commingle client funds with the operating money in your firm.
- Compliance dictates that we have proper recordkeeping. Remember, this money is not the firms' money until it's earned. Best practices include tracking the individual trust money in sub-ledgers on the chart of accounts. Remember, failure to properly maintain accounting records can cause an attorney to face professional discipline suspension and even disbarment if it's found to be an egregious act.
- Ensure the client funds are kept separate in that trust bank account until the work has been performed and invoiced by the law firm.
- Do not hold retainer payments. Be sure to deposit them into the trust account immediately and efficiently.
- Reconciliation is key to maintaining proper records. We always reconcile monthly regardless of what the local bar recommends as the max. It Is far easier to detangle a mess if it's tracked monthly and figure out where the records went awry.
- On your regular billing cycle, typically monthly, but sometimes we see by monthly, move your earned fees immediately out of the trust account. Don't let the funds hang in the account as a buffer.
I hope you enjoyed my do’s and don'ts of trust accounting if you have any questions or require some help balancing your trust account or even just cleaning up your law firm records, you found the right place. Contact us!