When you're dealing with legal matters, it's not uncommon for your lawyer or law firm to handle some of your money. In fact, based on a recent poll, almost 45% of attorneys manage client funds at some time in their profession. But where and how is this cash spent? That is exactly where an IOLTA (Interest on Lawyers Trust Accounts) account comes in. For people not familiar with IOLTA accounts or need to know what to watch out for, this article will describe the way they function, common errors individuals make, and best practices for managing accounts correctly.

What Is an IOLTA Account?

An IOLTA account is a trust account where lawyers or law firms keep funds for their clientele. These might be advance payments for legal fees or settlements to be distributed. Rather than being put into a standard checking account, the cash is put in an IOLTA account which generates interest.

But here is the interesting part: Interest generated from IOLTA accounts goes to neither the lawyer nor the client. Rather, it's appropriated by the state to finance programs which offer legal help to poor individuals or even to improve the legal system on the whole. This system has existed in the U.S. since the 1980s and offers funding for many essential legal assistance projects.

Why Use an IOLTA Account?

The basic reason to make use of an IOLTA account is that it keeps client money separate from law firm cash. This is important because the lawyer is holding that money just temporarily. It might be needed back by the client or used for future payments associated with the legal issue. With an IOLTA account, lawyers can avoid improperly or accidentally mixing client money with their own, staying away from legal and ethical issues.

And because the cash produces interest which benefits various other causes, IOLTA accounts have a wider social purpose too. They make the justice system more accessible to the ones most needing it.

Preventing Common Mistakes with IOLTA Accounts

IOLTA accounts are one way to handle client funds, though they actually do have rules and regulations. Many attorneys and law firms make errors managing these accounts and face fines, disciplinary actions, or disbarment. Among the most common mistakes to be avoided are:

1. Mixing Client Funds & Firm Money

A huge mistake that lawyers make is mixing their client's money with their own business funds. For instance, in case your lawyer deposits your cash into their company bank account, that is regarded as misappropriation of funds, which may possibly be accidental. This may result in heavy fines, including losing their license to practice law.

2. Improper Withdrawals

Only lawyers may withdraw cash from an IOLTA account when it is earned or utilized for the client's case. Any withdrawal with no client permission or withdrawal for personal use could put you in serious legal trouble. As an example, a lawyer that plans to "borrow" cash from an IOLTA account and pay it later on is still committing a violation.

3. Poor Record Keeping

Each transaction in and from an IOLTA account must be documented. That means tracking every deposit, withdrawal and interest payment. Failure to maintain detailed records can result in accounting blunders and possible legal violations by tracking client funds incorrectly. A number of lawyers could believe that little transactions do not have to be recorded, but that is a huge error.

4. Not Supervising Staff Correctly

Many law firms leave IOLTA accounts to their accounting staff, which can be risky if not adequately supervised. It's the lawyer's duty and not the bookkeeper's to make certain the IOLTA account is now being managed correctly. And when staff members improperly handle the account, the lawyer will be accountable for any violations.

5. Not Reconcile Accounts Regularly

Another common issue is failing to reconcile the IOLTA account regularly. This means lawyers don't match their records with the bank's records. Without frequent reconciliation, errors can slip by while not being noticed till it is way too late.

Best Practices for Managing IOLTA Accounts

To prevent these common mistakes and ensure your IOLTA account is appropriately handled, stick to these best practices:

1. Separate Client & Business Funds

Keep client funds in a separate IOLTA account and never mix them with your law firm's operating accounts. This assures compliance with state regulations and also creates trust with your clients. They'll know their money is secure and being handled rightly.

2. Record Every Transaction

No matter the total amount, record every transaction into and out of the IOLTA account. Keep logs of who put in cash, when, how much was deposited and withdrawals. These records should be maintained for several years even after the client's case closure.

3. Reconcile the Account Monthly

To keep up with your IOLTA account, reconcile it every month. That means comparing your internal records with your bank statement. This catches any discrepancies early and avoids bigger issues down the line.

4. Oversee Your Staff Closely

In case you have personnel who manage the IOLTA account, ensure they understand the rules and are following them. Don't assume your bookkeeper or accountant knows the way to manage an IOLTA account - get them trained!

5. Use Specialized Accounting Software

A few law firms have IOLTA accounts handled by specialized accounting software programs. Tools like Clio or PracticePanther might automate some of the record keeping and reconciliation activities, reducing human error.

6. Educate You and Your Team

Lastly, you and your team need to keep educated regarding IOLTA account rules and regulations. Many American states provide training courses, and the American Bar Association has resources to help lawyers manage these accounts correctly. Being educated will help you stay away from mistakes before they occur.

Final Thoughts

The rules and best practices for managing an IOLTA account will enable you to stay away from common issues and keep your profession running efficiently. Whether you're a customer relying on your lawyer with your funds or a lawyer managing an IOLTA account, keeping everything clear, organized and recorded is essential. With this, you not only comply with legal requirements but help boost the legal system and fund essential programs for those in need.

For assistance with IOLTA accounts and other legal financial matters, turn to The Fino Partners today.