Law Firm Trust (IOLTA)….What You Need To Know
Law firms throughout the US have a fiduciary responsibility for funds entrusted to them by their clients. That is why most states impose law firm trust account or IOLTA rules on the firms.
There are multiple billing arrangements used by law firms: Contingency Fee, Flat Fee, By the hour, etc. We will cover billing and fees in a later blog, but there is a common theme across all of the billing methods. Law firms collect advances for fees and costs. The though is that you collect some cash up front to protect the firm from not being paid.
You speak to 10 lawyers, you will probably get 10 different ways of handling retainers and billing. The most common is to post the retainer to the IOLTA account, work the case, accumulate “billable” time and then invoice for it. That invoice might include reimbursable costs as well. The law firm then “transfers” the amount due from the IOLTA account to their operating account to pay this invoice.
Seems pretty simple……..It is but it can be a record keeping nightmare.
So at its simplest form IOLTA accounting is basically a collection of accounts that match up the a bank balance and a liability on the books of a law firm. Easy, until you look at the requirements laid out by each state that law firms must abide by. The risk of non-compliance? Fines, Suspension, Disbarment…..
How to stay compliant, good record keeping! At a minimum you must:
- Maintain a proper IOLTA account set up at your bank according to your state rules
- Bank fees and credit card processing fees are the responsibility of the firm and need to reimbursed immediately of drafted from the IOLTA account
- Address interest earned according to local rules
- Proper Reconciliation – 3 Way Reconciliation
- Bank Balance
- Check Register
- Individual client ledger balances
- Never co-mingle funds
- Never have a negative IOLTA balance
- Never have an IOLTA account check returned
- Always know of changes in IOLTA or other regulations in your state for example:
