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Everything You Need to Know About IOLTA and Trust Bank Accounts

Apr 17, 2023
 

Are you a bookkeeper or accountant who is trying to understand the best way to handle client funds? IOLTA and trust bank accounts are essential tools you should be aware of. This blog post will help explain these accounts, why they matter for bookkeepers and accountants, and how to set them up and properly maintain them. Knowing about both IOLTA and trust bank accounts can make all the difference in ensuring your clients are protected, and their finances remain secure.

When it comes to law firms and their finances, a few specific bank accounts are commonly used. One of these is the IOLTA bank account. But what is an IOLTA account? And what is a trust bank account? In this blog post, we will explain the purpose of both types of accounts and provide some tips on managing them effectively.

Law Firm Terminology

As you work with attorneys, you may hear the term IOLTA, IOLA, and IOTA or just plain Trust account. IOLTA stands for Interest on Lawyer Trust Account, and IOLA is Interest on Lawyer Account (used with clients that have accounts in New York--they have their own nomenclature. And IOTA is Interest on Trust Accounts, meaning the account is in Florida. The aim of IOLTA, IOLA, and Attorney Trust account types is identical.

How Does IOLTA Work?

Under an IOLTA program, attorneys place their client’s funds into a special bank account. These funds may be held for short periods of time, such as a few days or weeks, while the lawyer waits for a settlement check or other payment from the client's opposing party. Because these funds are held for short periods of time, they do not earn enough interest to cover any administrative costs associated with individual accounts; so rather than allow these funds to just sit idly in separate accounts earning nothing at all, they are pooled together and invested into a larger account that can earn enough money to cover administrative costs and generate additional revenue for legal-aid organizations.

Trust Bank Accounts

Trust bank accounts are special accounts that lawyers must open to participate in an IOLTA program. They are used solely for holding client funds and cannot be used by clients or attorneys themselves. Unlike regular savings or checking accounts, trust bank accounts pay no interest—instead, any interest earned is donated directly to legal-aid organizations through the IOLTA program. Furthermore, trust bank accounts must be opened with specific features such as dual signatures on checks and automatic sweeps of excess balances into an investment account where the money will earn more interest than sitting idle in the trust account itself. This helps ensure that all client funds remain safe and secure until they can be returned to their rightful owners after their case.

New Lawyers

Newly practicing attorneys must obtain their bank accounts from authorized banks approved by the Bar Association. Setting up such accounts can be lengthy, and the attorney in charge of the funds must physically visit the bank to initiate the account creation process.

It is always a BEST practice to review and discuss the local bar rules with your attorney-client regarding maintaining the records surrounding trust accounts, as they can be complex. A fantastic link from the folks at MyCase that provides you links to most of the state's Bar Association rules.

Conclusion

In Conclusion, IOLTA and trust bank accounts are an essential part of the financial system for attorneys. They help to ensure that client funds are kept separate from business or operating accounts while also providing a way to support civil legal services for low-income individuals through interest gained on these accounts. It is vital for lawyers to understand how to manage their trust accounts to ensure compliance with state regulations as well as ethical standards. With proper management, you can make sure your clients’ money is secure and used ethically.

If you need more information about IOLTA or other types of attorney trust accounts, join the Accountant's Law Lab. Our mastermind group meets every Friday to discuss this topic and many more regarding legal accounting.

Do you want to join our private group? We have a large collection of videos that you can learn from, and we hold weekly meetings every Friday at 9 am PT/12 pm ET.

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