Client trust accounts are special bank accounts used by attorneys to hold deposits paid by clients for future services. These funds can’t be withdrawn from the account until an attorney or law firm’s fees are earned and the client is given an invoice[1].
For cases involving a large dollar amount or where funds will be held for an extended period of time, client funds can be held in an individual account that allows interest to go to the client.
However, in situations where a client trust only holds a small amount of money or the money is held too briefly to earn interest for the client, attorneys must place the funds in a Interest on Lawyers’ Trust Account (IOLTA). The interest generated in an IOLTA is directed towards increasing access to legal services for individuals and families living under poverty[2].
Although when properly managed, an IOLTA account has no need for overdraft protection. There should never be insufficient funds because an attorney should only withdraw funds when the fees are earned[3]. However, overdraft protection can protect client funds in cases of misappropriation of funds. Beyond conserving resources, an overdraft protection program for IOLTAs can help inform disciplinary authorities before major losses occur and clients are harmed.
Moreover, specific rules regarding IOLTA and client trust fund overdraft protection vary from state to state. California, for example, allows overdraft protection to compensate exactly for non-sufficient funds (NSF) checks and any associated bank charges – anything beyond that isn’t allowed[4].
References
1. Common IOLTA Mistakes (and How to Fix Them)
2. Client Trust Accounts and IOLTA
3. IOLTAs and Client Trust Accounts
4. Model Rules for Trust Account Overdraft Notification – Preface