Understanding the importance of an IOLTA account as a legal bookkeeper

This week's post and video is all about understanding the importance of an IOLTA account for your client's law firm financial management. One crucial aspect of law firm financial management is establishing and maintaining an IOLTA account. An IOLTA is short— is a short version or an acronym for Interest on Lawyers Trust Accounts, and it's really vital in managing the funds that attorneys collect before they do the work. So it ensures ethical and efficient financial practices within the legal industry. It really was developed just for that. By having a law— having an IOLTA account, law firms can easily segregate their clients' funds and separate them from the operational funds and avoid commingling, because commingling will definitely get them in trouble if they start to shift and move the funds around in an untimely fashion. It's really to hold the retainers, the money that the client gives to the attorney to secure their services for whatever case or matter they may have, like a criminal matter. Maybe they had a DUI. They come to the attorney, and they give the attorney some funds up front before the work is done, and it's held in this special bank account called the trust account, trust bank account. So you will see the trust bank account on, on your clients. Books. You will also see the corresponding other account, which is a— And it is another current liability, and that is also going to be called funds held in trust, and that's where the money will go in. So there's your debit and your credit. Your debit, the money's going into the bank, is going into that trust bank account, and your credit is going into that liability account. The client— the law firm owes this law firm's client work. And once the work is done, the money will shift then into the operating account for the attorney. It's as simple as that. And it's really understanding the importance of IOLTA trust accounting is a fundamental skill set that we have to have to be able to manage law firms, the law firm's books. It really requires the attorney to stay on top of the funds, make sure that it gives pure and pure financial transparency, that none of the funds are commingled or moved around, and allows us to follow ethical guidelines by the Bar Association. It's really to create, to contribute it to the greater good of the legal profession. So this money that's put in this bank account gains interest, and the interest on these special accounts are then used to help people who can't afford legal representation. So it helps to kind of help to help people who are in need of legal services that can't afford it. So the money, the interest that grows in that account doesn't go to the clients of the— that, that actually held the account. It's actually used for a better, for a greater purpose. So there's really multiple reasons why there's a benefit to the ILTA account. Obviously, to keep the funds separate is key and crucial, and it keeps the— you're gonna put it all in one bank account, but you need to know what every penny of it is inside, who it belongs to. So that's important, and we keep those in those sub-liability accounts as little individual mini ledgers on each client. So we know the ins and outs of each amount of money. So if a client gives you $10,000, and then 1,000 of it moves over for, for legal services. Now you're down to $9,000 for that one particular client. Maybe another client brings in money. That money would go under that client's name, and so on. So you really have to keep track of the the movement of the funds. As Sarah likes to say, follow the money. We need to follow the money always when we're working with trust accounting. So the account will need to be balanced. It'll need to be reconciled, not just with the bank. Most of our clients, most clients that you'll run into will have a third software that they track. They do their billing in. It helps them create professional bills, and also to have them be able to present a good bill, a bill that shows the beginning balance of their trust account, any ins and outs, and the final balance. It keeps an accounting of it. A lot of times they're required by law to produce this. So it's important to have that ability to do that. You will see that more in the software. It just saves a lot of steps, makes our life a lot easier. If you add a Clio or a LeanLaw or whatever the other, MyCase or something like that, that you're gonna run into, you really wanna make sure that you have that third piece in place. Here's where your 3-way bank reconciliation comes into play. You gotta balance to the bank plus and minus any transactions in transit. Balance to QuickBooks, balance to that third-party software, that third legal tech software. So it's important as accountants and bookkeepers that work with attorneys that we really need to know the ins and outs of the rules and regulations around the state where the attorney— sometimes the county, sometimes even, even going deeper than that with certain jurisdictions. You want to know exactly where they practice law and what's the rules around where they practice law. For example, in the state of Florida where I'm from, you have to keep a copy front and back of any retainer funds that are brought into the firm. A lot of times attorneys don't always know that little sneaky rule, but it's in there and it's good to keep an image. And I, we keep images right on top of the deposits that we record in the bank. So let's— that's just one example. And there's FAR rules— in many states, in all the states. So you really want to look up the rules where your attorney's practicing law. And if it's more than one state, you really want to track their— all the states so you know the rules. They'll have to have a different trust account for each state that they practice law in. So that's another piece that you really want to track. So managing that account is fairly simple and straightforward, but it's important to stay on top of it. Don't let it pile up and not get tracked as you go along. If you're trying— if you're a new attorney and you're trying to— you're working with a new attorney that's trying to get set up, they will need to find the right bank that will work for them when they're setting up their trust accounting. There's multiple banks that do allow it. Not all of them do. So go to the Bar Association to kind of get that list, and then decide and determine which ones have the better fees and how they're set up, maybe which ones work the best with QuickBooks. Those are kind of important factors as you start to work with attorneys. So we have many reasons why the trust account will become messy. Main one that you really want to avoid is commingling funds. So you don't want to take funds out of trust or have a law firm take funds out of trust because they need money for payroll and pay their payroll. That's a big no-no. And the severe penalties if somebody gets audited, and that is found to be a, an, a process in that firm. You just don't want to ever see that. You want to keep that money separate. It's not theirs until they've earned it. So that's key. Another thing you might see with commingling is that the attorneys may actually try to— the money will process on a credit card but not actually be in the bank, and then they'll try to move it over before the money's actually in. So they'll ask for retainer, the retainer will process If it was with an e-check or something like that, sometimes it takes, you know, 7 to 10 business days. You don't want to be moving the money out of the trust account till that money's in the trust account. So that's pretty, pretty important. Neglecting accounting procedures, obviously, is one. If you fail to establish a regular reconciliation and tracking of all of this, not having the right reporting, not having the right record keeping, you know, messy files, not reconciled, really, really Not a great practice. I've seen attorneys get paid consultation fees, and they just leave the funds inside trust, and they don't ever move it out. That's not exactly proper accounting either. If they're not bringing the money over and they're leaving it as a cushion, you can't leave it as a cushion. You're allowed to put— keep a little bit over there for like bank fee or wire fee that comes out of the IOLTA by accident, or maybe the banks process it that way, but you have to instantly reimburse that. So it's okay. Most of, most of the time the states will say like $250, but you can't have thousands of dollars in there. Now you're hiding income from the IRS. It's not a good practice. So really just know any regulations, know the changes. We had a big one a couple years ago in California. So you really wanna make sure you know the changes. And then really emphasize a proper workflow when you're working with the client to make sure that they understand how it's gonna work through. Get an accountant's login for the bank so you can follow that as well. Those are all important. Mm-hmm. Items that you really need to do. It's really the cornerstone of what we do for, for tracking their finances. And, um, prioritize financial transparency with your clients. Uh, prioritize ethical compliance. Those are just so important. And then it's really important because we're helping people with that interest to help them if they don't have money. So this is also a practice that is important and critical that we track that. Sometimes the entries come in and not go out. You just have to track it. It really comes down to tracking it. Of course, tracking it and knowing where— if you get a messy file, knowing where to start is always interesting. And I've done some other videos on that. Maybe I'll do another one in the future, but that's definitely the fun part of our job. So if you like puzzles, you should really think about becoming a legal bookkeeper or accountant because it's a lot of puzzles. If you're interested in joining the Law Lab, we talk about these kind of topics and more. Please feel free to join us. We'd love to have you. We meet every Friday. Take care now.