Linda Artesani explains lawyer trust accounts (IOLTA, IOLA, IOTA): why the bar requires them separate from operating funds, how to open one, and critical rules like never using trust money for expenses or letting banks charge fees against it. Proper bookkeeping with sub-accounts and interest tracking keeps you compliant.
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Hi there, Linda Artesani from the Accountants Law Lab. You probably landed on this particular video because you want to understand what an IOLTA trust bank account is. So we're not talking at all about the liability account, not at all. We're just talking about the bank account, the one that physically holds the upfront deposits from the clients. So that's an important piece of understanding trust accounting. And the, the Bar Association requires attorneys to have this special bank account. And it's a place that they put the money that they have that they're holding. So they don't intermingle it at all. There's no commingling of these funds at all with their operating account, and there's a specific flow. So when a client comes in and you ask for a retainer, the law firm asks for retainer. That money is put in this special bank account. And that's kind of like sacred money. It's money that doesn't belong to the attorneys at all. So you have to remember that, that it's only until the money is earned that that trust fund is applied. Those monies held in trust is applied to the invoice that it becomes law firm funds, and then the money is transferred over. And it comes by a few names. So there's IOLTA, Interest on Lawyer Trust Accounts. IO, IOTA, which is a Florida term. It's all the same thing. And IOLA, which is a New York term, but they all mean the same thing. So don't get tripped up on the terminology. Just know that if the attorney's calling it IOLA, they're not making a mistake. They're using the terminology that's specific to their region or location. Also, as far as these bank accounts go, the attorneys have to open them. So if you're working with a brand new attorney just leaving a big firm and starting out, starting on their own, know that there's only specific banks that are approved by the bar that can have these types of bank accounts. So they're not— every bank has them. So remember that when they go to get these accounts, and then when they do go to open one up, I've worked with many attorneys that are just starting out like that. It takes a lot of time and patience. I've, I've heard from attorneys that took 2 hours to open their bank account. So make sure that they know that. Just say, yeah, I understand that, that sometimes it's, it's quite a process to get one of those accounts open. That money, sometimes they open it with a penny. Sometimes the bank will open it with nothing. Sometimes the bank will allow, depending on the jurisdiction, they'll allow the law firm to put a little bit of money in, like $100 or $250 depending on the state, and they just kind of keep it there. That's kind of for bank fees. If bank fees are ever withdrawn from the trust account, that's a big no-no. So they let them keep a little bit of money there, and you just target that and call it the law firm name underneath the subaccounts of the law firm so that you're kind of holding it in place if it's needed. And then of course, that those funds are always reimbursed. I have seen some banks take out a check order. If the bank— if the law firm orders checks, they take it out of the trust account, and that has to automatically— that's why you have to stay on top of trust accounting, because that has to be reimbursed right away. So the trust account is really held sacred. It's a sacred account. It's never— monies are never paid for operating expenses or anything like that, payroll with this trust fund, and the trust accounts actually make a small amount of interest, and that interest will go into an account called interest clearing, and then the money will come in and will go out every month. We track that so that, that way those money are used for people who can't afford counsel. It goes back to the Bar Association's account for this, and then and they actually have money to pay for legal representation to people who don't have the money for that. So it's really a, it's actually a really nice thing that they do with the money, the interest money that's earned. So those trust bank accounts, just remember that you target it as a trust. Always make a trust, make a bank account header account and then start to list the subaccounts underneath. And then when you set up the chart of accounts, if you've got multiple trust accounts, you want multiple trust funds held in trust. If you've got one at Bank of America, one at Chase, you want funds held in trust, Bank of America funds held in trust, Chase. Believe me, that will save you a lot of heartache when you're trying to reconcile and understand where it went awry. That's— it's just an important tip. And that's really all you need to know about the physical bank account, which is what this, this particular video is about. Obviously, we go into more detail if you want to learn this stuff. If you just got your first client, you're like, where do I start? We have a course called Fast Track Legal Accounting. You can jump in there and get everything you need to know about all of these things in more detail there. Or you can join our mastermind group, The Accountant's Law Lab. And if you wanna keep following me for more tips, hit the subscribe button. And I thank you all for watching and we'll see you all next week. Bye now. Bye.
