How to Handle Zombie IOLTA Balances

Another topic, another blog post topic, title of this video that I think is just hysterically funny. This came from a client. They asked, how do we handle the zombie IOLTA balances? And I was like, that is the next title of my next blog because I love the title and it's fitting for October, right? So as professionals, as legal bookkeepers, we're in charge of handling the IOLTA, IOLTA and trust accounts. And I'm sure you're already familiar, if you've been following this channel, you're already familiar with all the challenges of maintaining compliance and safeguarding the client funds has in place. You've worked through it. You probably know the things that the client does on a regular basis or things that come through the bank feed that this isn't in Clio, why isn't it? And all the things we have to do to take care of it. But when we talk about zombie balances, we're talking about those dormant unclaimed funds from stale checks. Unidentified deposits, abandoned client money that just linger on the trust account. And I've seen some with one penny. So it got— a lot of times it's with personal injury and you got that one penny left on the bank, on the statement. Like, there's still a penny in the trust account. What do I do with it? So these balances are not just only nuisance, nuisances for the client, but they also pose ethical and legal and financial risks if they're not handled properly. So I'm going to provide you a little guidance on the leg— on legally returning these funds and what the state wants you to do, including some of the process to handle that money and send it to the, the state for unclaimed property, which is the last step, obviously. So zombie balances refer to the dead ones on your ledger, the ones that have been hanging around for years on cash checks that are over 6 months old, leftover amounts from settlements like I just mentioned. Like that penny deposits where the owner can't be identified. They can, they, but they can't be identified, but they seem to resurrect if they're claimed later. Like I mentioned a couple videos ago, I've had attorneys where we've cleaned up their money and we just have money in there that we don't know where it came from. And the client doesn't know where it came from, which is crazy to me. So you need to follow the rules of the Bar Association and these funds need to be treated with care. Extra care because they're somebody else's property, right? They belong to the client and they're governed by those bar rules. And I think that a lot of times, and I mentioned in the article that in North Carolina, there's 25, 28% of audited lawyers fail to properly designate these funds and send them to the state. They just leave them on the books forever, and that's not cool. So what do you have to do to return these funds to the state? So the process of handling these zombie funds is always you need to consult your jurisdiction where your attorney is residing or doing their work, basically where they do their work. What are the bar rules? What are the ethical opinions? How do you handle unclaimed funds? That's the first stop for you to go look. Go look at the State Treasurer's Office website. That'll probably give you more insight under the process of handling it. And so as you start to transfer unclaimed property, back to the state after the dormancy period, you need to ensure the funds are really reclaimed by the rightful owner. And basically you want to identify the funds, classify the funds. And so as you're doing your, your monthly or quarterly trust account reconciliations, you want to review the outstanding checks and balances. You want to flag any that are uncashed, any— you might find duplicates there that really should have never been there. Make sure that the actual balances are accurate and that everything ties back to the bank. And then anything older than 6 months, I like to let it go to a year. But a lot of the states say that, that you have to do it, you have to do it more. You have to do it at least quarterly. 6 months is a great guideline, but a lot of times it takes a little longer than that. You wanna stay on top of them as soon as they become— that way we actually send the clients reports saying these are the things that never cleared the bank. And sometimes we just see it. We see that there's a check supposed to be going out to a client. It never was printed in the office. So simple things like that. Once you nail down the list and you get it down to exactly what we would classify as potentially abandoned, and there's no owner activity at all, and the client's gone, the job is done, the case or matter's closed. Now you have to start communicating with the client to try to get that money back. That's the first step is trying to get that money back to the rightful owner. You have to perform due diligence. You have to make a good faith effort to locate the owner. That can be including reviewing the firm records, doing a search, looking at the notes, any external soft— Sources, sending a certified mail to the last known address, searching public databases can help, like the Unclaimed Property site. You want to make effort to try to get that money back to the client before you dump it off into the state's hands. And then you want to document this. So you want to have a little file with every step you took to try to get that money back to the client. That's important. And next step you want to do is if you are going to send that money to the state, void the check. That's inside the system, contact the bank, pay the fee, void it. Void any stale checks before you send money off, because we've seen it happen where the client will get the money from unclaimed and then all of a sudden the check is clearing and the check can be 3 or 4 years old and all of a sudden it clears. Like, what is this check that came outta the bank? We've seen this happen. That's happened in one of our clients in California. It's horrible. So know that when you stop payment on a check, sometimes depending on the bank, it's good for 30 days, 60 days, 90 days. Know that you might have to stay on top of that. And then remit it to the state. Give it a list. Let the owner know that— let them know that the owner could not be located in the— after the dormancy period. File a report with your state's unclaimed property division. This is where you're going to reach out to that treasurer or controller's office. Include the details of everything you had on this person, where the last known address is, the amount, and the due diligence efforts that you made to try to return this fund, these funds. And then That's how you'll be able to get those— that's getting that money off the books. So you have to process that off the books. You're gonna send that check off to the state to remit it to the state, to hand the funds over to the state, and then you're gonna process it out of the accounting by each amount that you sent out for each client, which will then zero out all their matters. For any unidentified funds, some states allow remittance to the courts or the programs. In Massachusetts, for example, after 4 months of efforts, if you don't have it, if it's a small amount, $10 to $50, the check in the amount total, if a client consent was obtained up front to retain it, they can actually write that off, the small amounts. But you have to maintain the funds in the IOLTA account until the actual moment that you're sending it off to the state, and you start to— you write that check out, and you, like I said, line item it out. Zeroing out the funds. Keep detailed records. It's important. And ensure that you have this all written down very meticulously so that if you're ever audited, you can explain where those funds went. Hope that's helpful, and we'll see you all next week. Bye now. Bye.