IOLTA accounts are trust accounts managed by lawyers. It holds money that was received from the client for the purposes of funding their matter. Mismanagement of an IOLTA account is one of the most common ethical violations committed by lawyers. While every jurisdiction has its own rules that practicing lawyers should know and abide by, there are eight rules that exist in practically every locale.
How IOLTA Accounts Must Be Opened
This particular rule is covered in detail in every jurisdiction. It’s important for lawyers to find, read, and follow this rule. Most jurisdictions require that IOLTA accounts be held in the state where the matter takes place. It may also need to be titled as an “attorney-client trust account.” Whatever the rule for your jurisdiction is, do not deviate from it.
How to Handle Retainers Paid by Clients
IOLTA accounts will be covered by rules in your jurisdiction that will detail how you handle retainers paid by clients. Usually, when you receive a retainer from the client and you’ve yet to earn fees, you must immediately deposit the money into the IOLTA account. The money should not be placed in any other account if there are unearned fees. That includes your firm’s operating account. UPDATE: (As highlighted by my highly respected colleague David Cameron Carr, in California there is currently no requirement that unearned fees be in trust. In most states there is a requirement to hold unearned fees in trust, and even in California it is certainly a best practice. However, as of November 1, 2018, unearned fees will be required to be kept in trust. Flat fees paid in advance may go into your operations fund only if you make certain disclosures to the clients paying the flat fees and they must agree to this.)
When You May Withdraw Funds
You may withdraw funds from IOLTA accounts once you’ve earned the fees. Unearned money is kept in the trust account because it belongs to the client. When you earn those funds, they are yours and you may withdraw them. You do not have to withdraw fees on a daily basis. However, you do need to ensure that you’re sending your client a bill on a regular basis and withdraw the funds at the end of each period. The best way to withdraw money and account for it to your client is on a monthly basis.
How to Receive Previously Earned Fees
Sometimes, a client’s bill will be more than the amount of money in the IOLTA account. If the client pays the remainder of the balance after you’ve earned fees, do not put the money into the trust account. Remember, the purpose of the trust account is to hold money that belongs to the client; money in that account is money that you’ve not earned. In this instance, you’ve already earned the funds. So, you would not put the money received by the client into trust account.
How to Handle Disputed Fees
If you believe that you’ve earned fees from the IOLTA account and the attorney disputes their bill, do you know what to do? Disputed fees should remain in the trust account until the matter is resolved. You may remove funds that are not disputed. For example, your client pays you $5,000 as a retainer. You bill them at the end of the month for $3,000. They disagree and believe they only owe you $2,0000. You would immediately withdraw the amount of $2,000 and leave the other $1,000 in the account until the two of you conclude the billing dispute.
If the client disputes the fee after you’ve withdrawn it from the trust, you may need to return the funds to the trust until the matter is resolved. If there’s no clear rule on this in your state, you should contact the ethics committee to make sure that you properly handle this issue.
Giving a Refund
When a client demands the return of the money still held in the account, the refund should be given right away since it is unearned money.
Keeping IOLTA Accounts Separate
While you may use a general attorney trust fund that outlines how much of the deposited funds belongs to each client, you must keep the money segregated. For example, if a client gives you $1,000 to handle a matter and their costs are $1,200, you cannot “borrow” the other $200 from another client’s funds to pay for it.
Using IOLTA Accounts to Hold Large Sums of Money
If you’re given a large sum that goes well above the fees that the matter will likely require, check the rules in your jurisdiction to find out if you need to open a completely separate account to generate interest on the balance.
Follow the Rules to Protect Yourself from the Consequences
Violating rules related to IOLTA accounts in your jurisdiction can come with serious consequences. It’s very difficult to defend against the allegation of misappropriation of client funds. The defense attorney will have to show that you’re disorganized and simply don’t have the skills to handle a trust account. That’s not something you want said about you or your practice (even in the name of protecting your career).
Get educated. Know the rules in your jurisdiction and follow them to protect your career.