If you are an attorney in private practice and receive client funds, you may need to establish an IOLTA bank account. What does IOLTA stand for? It is the acronym for Interest on Lawyer Trust Accounts. IOLTAs are also known as client trust accounts or attorney-client trust accounts.
What is an IOLTA Account?
Attorneys frequently handle client monies, ranging from settlement checks to court fee payments. When the amount of money held for an individual client is substantial, the funds are placed in an interest-bearing trust account.
When the money held for a client is relatively small, as often happens, those funds cannot earn the client interest because the fees associated with opening such an account exceed the costs of earning interest. Instead, lawyers place these small amounts, or funds they will hold for a short time, into trust accounts pooled with similar client funds. When lawyers hold such client funds, by law they must keep it in an IOLTA.
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. After IOLTA, law firms could deposit these funds in interest-bearing checking accounts. The interest is then pooled and forwarded by the fiduciary to the state’s IOLTA board for distribution to legal aid programs and related charities.
Today, every state has some version of IOLTA, although it is mandated in some states and done on a volunteer basis in others. The Texas Access to Justice Program (TAJP) administers IOLTA funds in the Lone Star State.
According to the State Bar of Texas, funds that belong in a client trust account include “all advances for fees and most retainers received from clients until they are actually earned by the lawyer.”
What is the Purpose of IOLTA?
The interest from IOLTA accounts provides legal aid to the poor and aids in criminal justice system improvement. In Texas, monies are used to provide grants to non-profit organizations providing poor Texans with free legal civil help.
IOLTA Account Rules
IOLTA trust account rules are quite specific, and failing to adhere to them can result in significant penalties.
Generally, when a lawyer receives a client’s retainer but has not yet earned fees, these funds require an immediate deposit into the IOLTA account.
All IOLTA accounts must use the double-entry accounting method, which tracks the source of the funds and where they go.
An IOLTA account must comply with three-way conciliation. That means the OLTA bank balance not only matches the checkbook trust balance but must also match the total of all client ledger balances. While three-way reconciliations for IOLTA may only be required quarterly, it is prudent to perform these reconciliations monthly. Invest in appropriate trust accounting software for this purpose.
IOLTA is one of the leading contributors to delivering legal services to the underrepresented. Its monies are used to support various types of legal public service programs.
How does IOLTA benefit the client? The interest on IOLTA accounts is not taxable to the client. The same holds true for the lawyer or law firm –no entity pays tax on IOLTA interest.
Is there a downside to IOLTA? Only in the fact that due to its dependence on interest rates, a low-interest-rate environment results in fewer monies going to these charitable causes. The revenue stream from IOLTA changes considerably from year to year and is not predictable. The current low-interest-rate environment will impact IOLTA programs.
IOLTA Best Practices
Failure to maintain best practices with IOLTA accounts can result in serious consequences. Such failures are among the most common causes of misappropriation of funds accusations. If this occurs, even in a best-case scenario your defense attorney will have to argue that you lacked the organizational skills to manage IOLTA accounts. That is not something any lawyer wants to be publicized about their practice.
Avoid this possibility by using the latest trust accounting software to ensure a clear audit trail. Provide clients with a written agreement on how funds are distributed, as well as all retainer fees.
Provide monthly details to clients as part of their bill to limit any allegations of mismanagement.
Common IOLTA Mistakes and How to Avoid Them
Lawyers cannot borrow fees from an IOLTA account before those fees are earned. Doing so results in severe penalties, including disbarment. If your firm is having cash flow issues, never consider taking funds from an IOLTA account even if you think they will be replaced promptly.
Always keep the client trust account and your business account separate. For example, you cannot pay for operating expenses directly from an IOLTA account, although you can move money from the client's trust account to your business account and then pay those bills. Keep in mind that even unintentional client fund misappropriation is still misappropriation.
Never record client trust account deposits as income, even if that is the easiest way to do so with your accounting software. This will cause tax as well as regulatory issues.
Opening an IOLTA Account With Texas Security Bank
As an IOLTA eligible financial institution, Texas Security Bank can handle all of your firm’s IOLTA account needs.
We will establish the IOLTA trust account in the name of the attorney or law firm, with their address. The IOLTA account will be an interest-bearing trust account.
We will complete the IOLTA Notice to Financial Institution form and send it. Texas Security Bank will open the IOLTA account with the TAJF. The IOLTA account uses the TAJF tax identification number, not that of the attorney or law firms.
Texas Security Bank will open these with an interesting-bearing checking account. Texas Security Bank pays interest directly to the TAJF, not the attorney or the client of the attorney.
For more information on IOLTA accounts and how we can help you with all your professional banking needs, contact Texas Security Bank today.