If you have been an attorney for a while, then chances are you have either seen or did business with a client that required IOLTAs or Trust account services. Despite being an attorney and having vast knowledge of the law, law institutions and schools usually train their students very little on to handle an IOLTA account. With inexperience and minimal training, these beneficial services can quickly turn into a liability suit that may end in one being disbarred, if proper measures are not taken. Here are some tips to keep you and your practice out of harm’s way when it comes to these accounts:
1) Know the history of this account. IOLTA stands for Interest on Attorney Trust Accounts. The program was first established in Canada and Australia in the late 1960s and early ‘70s as a way to accumulate funds for indigent legal clients. Soon, word of the program and its benefits spread to the states and is now mandated nationwide, with the exception of Alaska, Kansas, Nebraska, and Virginia.
2) Be knowledgeable about the concept of the account. According to the IOLTA website, these accounts should be used when an attorney receives funds that belong to a client. The attorney must place those funds in a trust account separate from the attorney ’s own money. Client funds are deposited in an IOLTA account where the funds cannot otherwise earn enough income for the client to be more than the cost of securing that income. The client - and not the IOLTA program - receives the interest if the funds are large enough or will be held for a long enough period of time to generate net interest that is sufficient to allocate directly to the client.
3) Avoid common or careless mistakes. While there are many ways that trust accounts can be abused and mismanaged, here are the three most common:
a. Withdrawing funds from the account for personal use.
As an attorney, some may feel that they have the right to deposit and withdraw as they please because they legally manage the account. This however is incorrect. One example would be when an attorney takes money from a trust account before it is rightfully earned. This often happens when an attorney has a cash flow issue. Another example would be when an attorney uses funds from the account to pay for business expenses, with the intent of paying it back. Attorneys who are often in a deep financial bind justify this by thinking that if he/she can’t pay their bills, then they can’t stay in business, which hinders them from even managing the account. Lastly, Trust account theft. In this situation, either the attorney or someone with access to the account, withdraws funds from the account with ill-intent. If committed by an attorney, this usually marks the end of his/her legal career. If committed by the bookkeeper, the attorney is still obligated to repay the funds stolen. This is why hiring a bookkeeper who is reputable and has had many years of experience is necessary.
b. Mixing of attorney and client funds.
This mistake involves commingling attorney funds with client trust accounts. Mistakes such as these are often due to a lack of understanding of how a trust account is managed and its concepts. Wrongdoings include placing personal funds in trust with client funds, using one check for two, separate purposes, and not removing earned fees or repayment from a trust account. All of these instances are considered mismanaged. Mismanagement, intentional or not, is against the rules of many State Bars and may result in disbarment if found guilty.
c. Incorrectly balancing the client balances against the overall account.
In addition to making sure their overall accounts are correctly balanced, attorneys should also ensure that the trust balances of each of their individual client accounts are as well. Attorneys should compare the two together and balance them against each other, as this often reveals errors such as an outstanding check or deposit being overlooked. These easy steps can greatly reduce the chances of un-caught errors that may result in a bounced trust account check.
Still feel Overwhelmed?
Trust account management can be tricky and if done wrong, can result in horrendous legal problems. Most attorneys are already knee-deep in trust account issues and don’t have the means to remove themselves from the problem. Googling for help usually brings back weak, irrelevant, or heavy bookkeeping jargon that even most attorneys can’t untangle. Despite this, I have provided a few online resources in which you can lengthen you understanding of the subject.
Correctly managing a trust account can be a hassle, but becoming disbarred over sloppy record keeping is even worse. Attorneys who are having trouble managing their trust accounts should promptly address the problem by getting help from a qualified accountant or from a law practice management consultant.