The terms IOLTA, Trust Account and Escrow Account are many times used interchangeable in the discussion of funds held on behalf of a client. IOLTA stands for Interest on Lawyers Trust Accounts. IOLTA was set up to provide a way to provide legal aid to low income people through the use of the interested income collected on client deposits. What specifically differentiates IOLTA funds from other Trust and Escrow funds is the donation of the interest income to the IOLTA organization. (See the special note at the end of this post regarding IOLTA rules for each state.) 

 Basic Rules:

  1. Funds that belong to an attorney or the law firm cannot be held in an IOLTA or Escrow account. A small amount of firm money may be held to cover just the cost of bank administration fees. Therefore, there is no commingling of funds between a client and the firm. All funds in an IOLTA or Escrow account belong solely to the client. One client’s funds may be pooled with other client’s funds in the same IOLTA account, just no firm funds.
  2. IOLTA accounts pay interest directly to the IOLTA program.
  3. Normally larger client funds that that would pay interest amounts deems valuable to the client would be set up in an interest bearing Escrow account with the interest going directly to the client. If a large amount of client money is to be deposited for a short period of time, therefore never really generating much interest it may be deposited in an IOLTA account.
  4. Money advanced against future legal fees is normally placed in the IOLTA account.
  5. Record keeping for cash deposits, cash disbursements and client/matter account activity is required for all IOLTA, Trust and Escrow accounts.

 Best Practices:

  1. Use trust accounting type software to handle all IOLTA/Trust/Escrow account activity. Spreadsheets and paper ledger cards may work but leave too much room for error and little or no audit trails.
  2. Provide a written agreement to all clients explaining how client funds provided to the firm will be handled. If the firm requires a “retainer” clearly identify it and how it will be applied. Normally a retainer is considered firm money, non-refundable unless un-used, and deposited into the firms operating account. The retainer may be applied to fees and/or costs and may be used as needed or maintained to insure payment at the end of an engagement.
  3. Balance your IOLTA/Trust/Escrow accounts monthly including the following components:
    1. Balance and reconcile your records to the banks records for cash, wire transfers and credit card deposits into the back account(s).
    2. Balance and reconcile your check register and wire transfers for all funds paid out of the accounts with the bank provide statement.
    3. Balance and reconcile your client/matter sub-account totals to the bank account totals.
    4. Maintain image copies of all checks, deposit slips, bank statement and client engagement letters.
    5. You should require an internal authorization form, signed by an attorney to authorize the payment of any IOLTA/Trust/Escrow funds either to the firm or any other third party. This can be part of a check request form or built into workflow in your e-Payables system.
    6. You should establish internal procedures that separate the printing or writing of the IOLTA/Trust/Escrow funds check from the person who will sign the check.
    7. The firm should require more than one signature on all checks above a certain threshold.
    8. You should provide each client with a monthly analysis of all fund activity including starting and ending balances as part of the client’s monthly bill. In addition, you may want to provide the client on-line access to fund activity and balances from a secured web site.
    9. Make sure to allow adequate time for deposits to be cleared in the account before disbursing funds for that client.
    10.  If you accept credit cards or wire transfers for IOLTA deposits insure that there is no “claw-back” capabilities on the IOLTA account and that any bank servicing fees are fully covered by firm funds or have these processing fees paid directly from the firms operating account.

 IOLTA, Trust and Escrow accounts are a normal part of a law firm’s financial responsibility and everyday practice. Extra care and safeguards need to be maintained to insure the firm is not at risk for claims of misappropriations of client funds.  

 Special Note:

State law or bar associations govern the rules for handling client funds and each state has different requirements. This article is mean to provide an overview and best practices that may be useful to law firms and other interested parties. Parties looking for specific information can research iolta.org or their state bar associations for additional information and how IOLTA applies in their state.