When it comes to the operation of a Lawyer’s trust fund, or Interest Only Lawyer’s Trust Account (“IOLTA”), an attorney needs to know and follow various rules and regulations pertaining to said type of account. As the rules and regulations vary depending on the attorney’s jurisdiction, the following is intended to provide a general outline of common mistakes and solutions to properly maintain an IOLTA.
“But I just borrowed against my fees.” Do not borrow funds from the IOLTA for any reason, if they truly are earned fees, then the earned fees should be transferred to an operating account before any loan is made. Following the proper procedures to ensure a clear audit trail is of the utmost importance.
“I only borrowed money from the IOLTA for a couple of days.” The length of time the funds are not in the IOLTA is irrelevant as the funds should be maintained in the IOLTA until they are earned and then transferred to an operating account.
“I was so busy I didn’t have time to keep track of my trust fund.” It should be a top priority of anyone holding funds on someone else’s behalf to always use professional care in maintaining said funds. The IOLTA should be maintained by an individual with some sort of bookkeeping experience. This person should NOT have signatory powers on the account. Furthermore, the signatories on the account should physically sign each disbursement and stay away from the use of a “signature stamp”. A different person should reconcile the bank account every month. It is understood that many small star-up firms simply do not have the manpower or resources for a different individual to reconcile the IOLTA on a monthly basis, the attorney should review the reconciliation and the checks that cleared the account.
“I opened my own law office and I thought I knew how to account for a trust fund.” As with practicing the area of law, not everyone has the knowledge to understand how an operating account differs from an IOLTA. An Attorney should always consult a CPA or Professional Accountant relating to how to initially start an IOLTA.
“I can’t explain the shortfall in the IOLTA, either way it’s de minimis.” This is never an acceptable excuse. Proper documentation should be maintained relating to each and every distribution from the IOLTA.
What kind of documents do I keep with my IOLTA’s books and records? With many law firms striving to go “paperless”, advances in technology has greatly improved the access and organization to records and files. A separate set of records, apart from the client’s records, should be kept for each transaction within the IOLTA. Each settlement check, deposit and/or bank credit should be scanned and placed into a folder. Each disbursement check and/or bank debit should be scanned along with the corresponding invoices, lien, and other supporting documentation for said disbursement and placed into another folder. In addition, a copy of all statements and bank reconciliations should be scanned and kept along with the deposits and distributions.
What should be involved in a Disbursement Sheet or Settlement Sheet?” This is an important question as proper documentation should be kept when maintaining an IOLTA. The most important document should be a “Disbursement Sheet” or “Settlement Sheet”. This can be in the form of a spreadsheet including the following:
Client Information including: Name, Address, Telephone number and/or Email.
Settlement Information: Settling Party(ies) and Date of Settlement(s), Amount of Settlement(s)
Lien Information (If applicable): Name of Lien holder(s) and Amount of Lien(s). A copy of each Lien should be accompanied with the Disbursement Sheet.
Client Distribution Information: Date of Distribution(s), Amount of Distribution(s) and Check Number of each Distribution.
Lawyer’s Fee Information: Percentage of Fee and Amount of Fee.
Any other Fees or Expenses to be paid for by the Client: Any other fees or expenses to be paid for by the Client should be included in this section.
Client Acknowledgment Information: Prior to the distribution of ANY of the above funds, the client(s) should sign and date that they agree to the said distribution(s) outlined in the Disbursement Sheet.
“How do I know if my IOLTA is in balance?” In determining if an IOLTA is in balance, one must take the bank balance, per the books and records and not the bank statement, and compare it against the offsetting liability. If the IOLTA account balance is the same as the off-setting liability, then the IOLTA is in balance. A discrepancy between the IOLTA and the liability indicates an imbalance IOLTA which should be addressed immediately.
“When can I transfer my fees and how should I transfer them?” An attorney’s fees should only be removed from the IOLTA upon client approval of fees and costs. Many times, an attorney invoices the client and simultaneously removes the fees and costs from the IOLTA. A client should have the opportunity to review the invoice and approve or dispute the invoice. Once client approval has been received, the attorney should write a check out of the IOLTA to the operating account for just that invoice. Said check should include the invoice number in the memo section of the check. Writing a check for each invoices can be rather time consuming, however, it provides a clean trail in the case of an imbalance or audit of the IOLTA. Wires and online transfers between the IOLTA and Operating Account can be done, however, we discourage such practice as the record keeping becomes more relaxed and often leads to an imbalance within the IOLTA.
Larry L. Bertsch, CPA & Associates can assist an attorney in creating and maintaining an IOLTA. We have assisted attorneys with setting up an efficient and effective methods of administering an IOLTA. We have also helped attorneys with reconciling their IOLTAs so they are in compliance with their local rules and regulations. We understand the complexities involved in properly maintaining an IOLTA. Please contact your local State Bar regarding the rules and regulations within your jurisdiction pertaining an IOLTA.