Attorneys usually receive a large retainer before beginning a legal case. The money is required up-front to ensure that their hard work will be paid for and that the client won’t have to scramble to meet payment deadlines along the way.
The retainer funds do not belong to the attorney. They must be placed into a Client Trust Account, and held there as long as the attorney and client are working together. As the attorney earns money, she can send a bill to the client, and withdraw her earnings from the account. At the conclusion of the case, any remaining funds, plus the interest earned, will go back to the client.
An IOLTA – Interest on Lawyer’s Trust Account – is also a Client Trust Account, but it is set up a little differently. This fund collects interest on small client retainers, or retainers that will not be held for very long. The interest does not go to the client.
IOLTAs are special accounts that earn interest for the IOLTA program, which uses the money to provide legal services to people who otherwise couldn’t afford an attorney. The funds are also used to improve the legal system in each state. Most of the United States have a requirement that every attorney maintain an IOLTA for the small retainers. These programs are strict about how the funds are used, how they should be recorded, and how an attorney should handle the account.
The idea for using interest on small retainers began in Australia in 1964, then Canada, and soon after was adopted by Florida. The program faced opposition in the US because of a rule already in place stating that the attorney should never earn interest on a client’s money. However, the rule was modified in order to service this charitable program. Now banks will allow ILOTA checking accounts to earn interest, and that interest goes straight to the IOLTA program.
An attorney must be certain to follow the correct rules when recording the IOLTA in the books. If her bookkeeper does not record the deposits and withdrawals properly, the attorney will face severe consequences, possibly even losing her license.
Attorneys and bookkeepers must be sure that the IOLTA does not pay bank fees directly from the funds in the account. The bank fees must be paid by the attorney, from a normal checking account. This is a common problem when operating an IOLTA, but can be arranged correctly with proper communication between the attorney and the bank.
An IOLTA is a pooled checking account, allowing the attorney to deposit funds from several clients into one place in order to earn interest. This can make the bookkeeping a little tricky, so it is important to keep great records about how much each client has in the account, how much money has been earned from each client, etc. Failing to keep the records straight can result in a big confused mess and may cost clients extra money in the long run.
Attorneys must follow the process of the IOLTA program to keep things running smoothly.
- Receive the retainer (or funds held in escrow), and decide if it is within the parameters of a CTA or an IOLTA.
- Deposit the retainer into the IOLTA, and record the deposit in the books under the client’s name. The retainer will go on the books as a liability.
- Once it is time to bill the client for some of the work, send the bill to be approved, then withdraw the appropriate payment immediately from the account. Keeping earned money in the IOLTA will get an attorney in trouble with the state.
- The next step is to deposit the earned money into the attorney’s own accounts to be used for her business. She now has freedom to use the money for bills, expenses, or payroll. Attorneys should never, under any circumstances, use IOLTA money for business expenses. IOLTAs should not even include an ATM card with the account, to prevent such mistakes.
- The next step, transferring interest to the IOLTA program, is done by the bank, but it can still be recorded in the books. Every month, the IOLTA must be reconciled using bank statements and the IOLTA records. It would be wise to have a bookkeeper on board with a good understanding of the methods needed to keep everything in order.
- Finally, once the work is done, if any money remains in the client’s IOLTA, the money is then returned to them. Using their small retainers or briefly held funds to earn interest did not cost them a dime, instead, it was used to fund a very helpful program.
Once the interest reaches the IOLTA program, it is used in one of two ways: either providing legal services for the indigent, or going to improve the legal system in the state. Civil services can greatly benefit people going through hard financial times, and will help them improve their lives without the burden of a large legal debt.
Some years, the amount of money that channels through the IOLTA reaches over one hundred million dollars throughout the United States! Of course that number rises and falls based on interest rates, but again, that money wouldn’t even exist if the IOLTA advocates had not worked tirelessly to improve the rules of attorney accounts and whether attorneys could collect interest on client funds. This idea has worked very well, and as long as the recording and tracking rules are followed, every attorney should rest easy knowing that they contributed to this incredible program.
