Pitfalls to Watch Out For with Zombie IOLTA Funds
Oct 13, 2025I am continuing the topic from last week, which is removing the zombie Iolta funds. You know the ones. The lingering small amounts that remain year after year. If you have ever sent the funds back to the state, we call that escheatment. While escheatment clears your books, it's fraught with risks. Here's what can go wrong:
- Post-Escheat Check Cashing: This is a classic pitfall—if you've escheated funds but forgot to stop payment on the original check, a bank might still honor it (though rare for checks over 6 months old). I’ve seen banks honor checks that are over two years old! You'd then face an overdraft in the IOLTA account, potential bar discipline for mismanagement, and the hassle of reclaiming funds from the state. Always void/stop payments first to mitigate this. Remember, a stop payment has an expiration date.
- Non-Compliance Penalties: Not to scare you more, but failure to escheat can trigger audits, interest accruals, fines, or even criminal penalties under state laws. In North Carolina, lack of due diligence incurs penalties; overall, 28% of audits reveal issues here.
- Ethical and Confidentiality Breaches: Escheating client funds without proper diligence or while disclosing privileged information can violate rules such as ABA Model Rule 1.15. Some states grapple with the balance of judicial versus legislative authority, leading to inconsistent processes.
- Administrative Burdens and Disputes: Late claims can lead to refunds from legal aid funds (e.g., no statute of limitations in Oregon), adverse publicity, or interpleader lawsuits. Physical property (e.g., valuables in trust) adds storage fees. Attorney retirement or death often uncovers these, complicating resolution. If you have ever had health issues with the death of one of the partner attorneys, it can be complex to navigate.
- State Variations: What works in one state (e.g., directing to IOLTA rules at the local bar association) might not in another, risking improper remittance. Always base decisions on the owner's last known address.
To stay ahead, implement firm policies for regular reviews, utilize trust accounting software for tracking (such as Clio or LeanLaw), and consult ethics hotlines or unclaimed property offices promptly. By proactively addressing zombie balances, you not only comply but also protect your firm from undead liabilities resurfacing.
What are your experiences with these in your state? We would love to hear from you! Join our mastermind group, The Accountants Law Lab, to connect and continue the conversation.
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