Are you grappling with the complexities of managing Interest on Lawyer’s Trust Accounts (IOLTA)?  

Ever felt overwhelmed by the meticulous record-keeping, stringent regulations, and the high stakes of handling client funds?  

You’re not alone.  

Many attorneys, solo and small law firms, new attorneys, and paralegals face these challenges daily. But understanding IOLTA accounts is not just a regulatory requirement—it’s a cornerstone of ethical law practice. 

The good news is that mastering IOLTA accounts is achievable, and it can transform your practice. Let’s review what IOLTA accounts are, their importance, and how to handle them. With these practical tips in mind, you’ll have the confidence to manage them effectively.  

What is IOLTA? 

An IOLTA account is a special type of bank account for law firms. It’s used to hold client funds separately from a firm’s funds. These accounts earn a small amount of interest, and instead of the interest on client funds being kept by law firms, it is typically collected by the state bar association so that it can be used for charitable purposes like funding legal aid for those who are unable to afford it. 

When and how to use IOLTA accounts 

IOLTA accounts come into play whenever a lawyer or law firm receives funds that belong to a client. These funds could take various forms, and each has its own specific context and purpose. 

Retainers 

A common scenario that triggers a trust account is when a client pays a retainer for future legal services. This advance payment is held in an IOLTA account until the law firm earns the fees by providing the agreed-upon services. As the law firm’s attorneys and staff work on the case, they withdraw funds from the IOLTA account to cover those services, usually by transferring them to the firm’s operating account. 

Case-related costs 

Lawyers often incur costs while working on a case, such as court fees, expert witness fees, or deposition costs. If a client provides funds to cover these costs, the funds are held in an IOLTA account until the expenses are incurred. 

Settlement amounts 

In cases where a lawyer or law firm receives a settlement or judgment amount on behalf of a client, those funds are placed in an IOLTA account. The funds are held there until they can be properly disbursed to the client and any other entities entitled to a portion of the funds, such as lienholders or the law firm itself (to pay for legal fees). 

The key principle in all these scenarios is keeping funds separate—avoiding “commingling.” Commingling occurs when a law firm mixes client funds with its own funds, and it’s strictly prohibited because it can lead to ethical and legal violations, including misuse of client funds.  

By holding client funds in an IOLTA account that’s separate from the law firm’s operating account, lawyers can avoid commingling and uphold their ethical and legal obligations. 

What are key considerations for IOLTA accounts? 

There are several considerations and potential issues with IOLTA accounts that attorneys need to be aware of: 

Commingling of funds 

This is one of the most common issues with IOLTA accounts. Keeping client funds separate from the firm’s funds is crucial to avoid ethical and legal issues. 

Disbursements 

Funds should only be disbursed from the IOLTA account when they are earned or expenses are incurred. It’s important to keep meticulous records of all disbursements. 

Bookkeeping and reporting 

Accurate and timely bookkeeping and reporting are essential for IOLTA accounts. This includes maintaining individual client ledgers, reconciling the account regularly, and generating necessary reports. 

Credit card payments 

Accepting credit card payments can be tricky because of the potential for chargebacks and disputes. It’s essential to have a system in place to handle these transactions correctly. 

Ethical and legal obligations 

Lawyers have an ethical and legal obligation to handle client funds appropriately. This includes promptly notifying clients of received funds, promptly delivering funds clients are entitled to, and providing a full accounting of funds upon request. 

What are the risks for improperly handled IOLTA accounts?  

Improper handling of IOLTA accounts can seriously impact an attorney or law firm.  

While rules surrounding IOLTA accounts may vary from state to state, the penalties for improperly managing them are uniformly stiff. Mismanagement of IOLTA accounts can lead to accusations of misappropriation of funds, disciplinary action, reptuational damage, and even disbarment.  

Tips for handling IOLTA accounts 

1. Use trust accounting software 

Trust accounting software can automate many of the tasks associated with managing an IOLTA account, such as preventing common trust accounting mistakes like ledger overdrafts or commingling. They can also be used for tracking and disbursing third-party lien claims and generating comprehensive trust recordkeeping reports. 

2. Regularly perform reconciliation 

Regularly reconcile your IOLTA account to ensure that all transactions are accounted for and there are no discrepancies. 

3. Maintain individual client ledgers 

Keep a separate ledger for each client to track their funds accurately. 

4. Train staff 

Provide regular training for all staff members who handle IOLTA accounts to ensure that they understand the ethical and legal obligations associated with these accounts. 

5. Turn to a professional 

If you need clarification on anything related to IOLTA accounts, seek help from a professional. This could be your state’s IOLTA program, a legal accountant, or a trust accounting software provider. 

Mitigate risk with trust accounting software 

Trust accounting software like CosmoLex can be a game-changer for law firms. It offers comprehensive and complete trust accounting, preventing common mistakes, facilitating online payments, and generating necessary reports.  

With no long-term contracts and a simple pricing structure, it’s a valuable tool for any firm seeking to streamline its IOLTA management. 

CosmoLex provides:  

• Comprehensive trust accounting software that’s baked into your practice management software 
• Safeguards to help prevent common trust accounting mistakes like ledger overdrafts or commingling of funds 
• Automatic trust-to-general transfer 
• Simplified reporting for three-way reconciliation, recordkeeping, and other audit measures 
• Zero-fee credit card processing 

CosmoLex also supports efficient management of trust funds by letting you:  

• Track and disburse third-party lien claims 
• Import electronic bank statements 
• Auto-reconcile books 

Combined, these features can save time and reduce the risk of errors, making the management of IOLTA accounts more efficient. 

Ready to take advantage of legal-specific accounting?  

Consider transitioning to legal-centric accounting software like CosmoLex. Sign up for a free trial today and see how easy it can be to stay compliant.