The Interest on Lawyers’ Trust Account, commonly called IOLTA, is one of the most valuable tools for expanding legal representation to appear in recent decades. Unlike traditional attorney trust accounts, IOLTA programs, available in all 50 states, the District of Columbia and Puerto Rico, allow lawyers to hold client retainers, settlements and other money in interest-bearing accounts. The interest collected statewide funds legal assistance programs for low-income people and traditionally underserved populations. The community and social benefits of IOLTA programs range from financial assistance for legal fees to clinics, classes and workshops.
But IOLTA management can present a major challenge for lawyers, particularly those in solo practice or small firms.
IOLTA regulations vary from state to state but tend to be complex and time-consuming. Moreover, the penalties for mismanagement can be severe, including disbarment.
While large law firms have advantages of scale, including dedicated accounting and bookkeeping resources and robust technology solutions, solo attorneys often manage their own office finances. That creates a significant burden and has several drawbacks, especially regarding IOLTA management:
- Most attorneys don’t have accounting or financial management training or experience.
- Spending time on bookkeeping means less time for helping clients.
- Spending time on bookkeeping reduces billable hours.
For lawyers working long hours without proper training in financial management, an oversight or accounting error can quickly develop into a major transgression.
Common Mistakes Lawyers Make in IOLTA Management
Commingling client funds with the firm’s operation account, failure to maintain three-way reconciliation and poor record-keeping, in general, are the most common mistakes lawyers make. Avoiding these common errors requires time and attention — precious commodities in a lawyer’s life.
Lawyers who fail to maintain proper accounting for IOLTA can face professional discipline, including censure, suspension or even disbarment. In fact, some lawyers, anxious over the complexity and risk, simply avoid IOLTA and other trust accounts altogether. Structuring their retainers so fees are deposited directly into their operating accounts simplifies their financial management obligations. However, they miss an opportunity to support the people in their state who can’t otherwise afford legal assistance.
Fortunately, there are multiple solutions for attorneys who want to maximize the opportunities and advantages of IOLTA without adding to their workload. Many accounting, payment processing, and practice management software programs automate some of the time-consuming manual processes that make IOLTA oversight a challenge.
IOLTA Management Best Practices
In addition to using the appropriate technology, solo and small firm lawyers should make sure the following best practices are observed in their office:
- Make sure business funds and client funds are kept separate.
- Familiarize yourself with three-way reconciliation to sync the client ledger, trust account and bank statement.
- Reconcile at least once a month, or more frequently if possible.
- Deposit incoming checks immediately.
- Move earned fees out of IOLTA immediately.
In the legal world, time is money. Every minute spent on administrative tasks such as IOLTA management is time that could be spent helping clients.
Note: References to “IOLTA” may include “IOLA,” or “Interest on Lawyer Account,” and “IOTA,” or “Interest on Trust Account,” as applicable in a particular state.
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More Tips on Keeping Your Finances in Order:
“Avoiding Common Trust Accounting Errors for Well-Intentioned Lawyers” by Megan Zavieh
“Delegate, Don’t Abdicate, Client Trust Accounting” by Sheila Blackford
“Would You Pass a Trust Account Audit?” by Peggy Gruenke
“Everything a Lawyer Needs to Know About Drafting Fee Agreements” by Megan Zavieh
“Five (More) Things to Consider About Drafting Fee Agreements” by Megan Zavieh