Of the most important ethical considerations for any law firm, but most especially for small practices, is responsibly managing client funds. At the heart of this responsibility lies adherence to the Interest on Lawyers Trust Accounts, popularly known as IOLTA compliance. The IOLTA protects client funds while supporting public interest programs. Compliance with the IOLTA is of utmost importance for gaining confidence and avoiding possible legal penalties that will affect your license to practice.

This course will outline what the small law firm needs to know about IOLTA accounts, best practices to be in compliance with the rules, and a few common mistakes to avoid.

Understanding IOLTA Accounts

An IOLTA account is a special trust account in which attorneys hold small or short-term money belonging to clients. In simple words, it is a legally compulsive account that functions under various rules and conditions. The accounts generate interest in a collective manner to fund legal assistance and other charity initiatives.

Key Features of IOLTA Accounts:

  • Segregation of Funds:The client’s money should be set apart from the firm’s operating account.
  • Minimum Earnings: The IOLTA money, which the attorney will be holding, cannot, as a practical matter, generate earnings for the client’s benefit.
  • Regulated Use: Unauthorized or improper uses of IOLTA money results in disciplinary consequences.

How to Open an IOLTA Account

Step 1: Find Your State’s Rules

The rules regarding IOLTA accounts vary by state. Because of this, the specific requirements in your state should be obtained from your local bar association including what financial institutions have been approved and what type of reporting is required.

Step 2: Open an Approved Bank

Open a bank or credit union account in your state that is IOLTA-compliant. Most state bar associations maintain a list of approved institutions.

Step 3: Open the Account

When the Account is opened:

  • The account name must reflect the name of the law firm, and it must identify either “IOLTA” or “Trust Account” in the title of the account.
  • Provide a copy of your state’s IOLTA registration form to the bank.
  • Do not make the account offer overdraft protection.

Best Practices in Maintaining IOLTA Compliance

Record Keeping

The key to being in IOLTA compliance involves just one circle of record keeping-accuracy and timeliness of the record. Document all deposits and disbursements, and all the various balances.

  • Record all the transactions with the use of a specialized trust accounting software program.
  • Perform a reconciliation every month, ensuring bank statements agree with the general ledger books internally.

Do Not Commingle Funds

Never commingle any client funds with the operating funds of your law firm. What may be innocent oversights can become serious legal and ethical problems.

  • Deposit only personal or firm funds to pay bank service charges if your state allows it.
  • Maintain large or long-term client funds in separate accounts.

Educate Your Staff

Educate every one of your staff who will be handling the trust accounts on the IOLTA rules and best practices.

  • Have ongoing training in place to keep your staff current.
  • Have a written policy and procedure in place to assist staff in complying with client fund handling requirements.

Monitoring Account Activity

Be alert for mistakes occurring in account activity. Periodic reconciliations can avoid costly mistakes.

  • Consider having a compliance officer or partner to be the responsible person of IOLTA accounts.
  • Establish notifications of unusual transactions.

Common Errors to Avoid

Overdrafting the Account

Overdrafts may be subject to disciplinary action against the owner even though it may happen as an honest error. Always have adequate funds on deposit before drawing checks or making disbursements.

Failure to Reconcile

This can be an invitation to errors. This is a routine activity that has to be performed at your organization.

Improper Disbursing

One of the most frequent mistakes occurring is disbursement prior to clear funds being in the bank. It should be disbursed when the funds are available.

Inadequate Recordkeeping

Inaccurate records or those which are not maintained prove to be reasons for non-compliance. Records form an important function in creating a proper audit trail.

Advantages of IOLTA Compliance

Trust of Clients

Good management of client funds inspires trust and adds to your firm’s integrity.

Penalties may be Avoided

Following the IOLTA rules keeps your firm free from legal and ethical discipline.

Public Interest Support

Participating in the IOLTA program undergirds funding for legal aid and community programs serving the interests of justice.

Technology Tools for Managing IOLTA

Modern technology has made it easier to follow the IOLTA:

  • Trust Accounting Software: Solution providers like Clio, QuickBooks, or LEAP offer feature sets designed for a law firm.
  • Automated Reconciliation: Software that automates reconciliations reduces errors and saves time.
  • Electronic Payment Management: Have electronic payment management on Attorney-designed platforms have secure transaction modes in modern ways for paying. 

Final Thoughts

Protection of IOLTA means not only keeping the regulators at bay, but it speaks volumes to your firm’s ethics, too. Let us at IOLTA regulations make the best practices and training of your team easy with technology leverage for your small law firm.

Compliance is proactive protection of the rights of the client, the law firm itself, and the legal world in general. Ensure IOLTA compliance that secures the very building blocks of professionalism and trust within your practice for long-term success.