Lawyer trust accounts (IOLTA, IOLA, or IOTA) keep client retainers separate from firm operating money. Mishandling them through commingling or failure to disburse can trigger bar complaints and disbarment. Best practice: FDIC-insured account, detailed ledgers, monthly reconciliations, and audit readiness.
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Welcome back. This week we're gonna talk about why trust accounts matter. And this is truly a bookkeeper's guide to protecting client funds at law firms. So in law firms, and I think this is important because trust accounting is one of the main things that sets apart a regular client from an attorney-client. It's a binding responsibility between the attorney and the attorney's client that you're gonna hold money that's not earned, and then you're going to apply those retainers, as we call them, to the invoices as they happen. So the attorneys don't actually earn the money when they collect the retainer, for the most part. I mean, we see it with immigration firms sometimes where the immigration firm actually starts the process before any money's exchanged, and then that's a, scenario where you have to kind of track the percentages of where that is and create the invoice and apply it. That's why a lot of times immigration firms, the way they're set up, they do payment plans and they don't really deal with trust accounting, but that's really done jurisdictionally. So they really have to look at where the client is and where— Where the client's practicing law. Immigration attorneys are a great example. They can be anywhere, they can work anywhere. It's a federal type of practice. So they can be anywhere. And they usually see that with the immigration attorneys, they're in multiple, multiple states. And then sometimes you have to track their income by the state and you have to track their income by practice area. If they do different types, you might wanna practice— their practice area might compose of different factors of what they do for the immigrants, whether it's bringing them in as a citizen, maybe they're representing them in a legal matter. So you wanna practice, you wanna track that separately for the client. Mm-hmm. So what is a trust account and why is it so important? A trust account, and you'll hear the name IOLTA, which is an acronym, or IOLA, and it's really a lawyer trust account, is also called IOLTA or IOLA, and I think there's IOTA depending on the state that you're in. New York is one that's got a different acronym than the rest of the country, and you'll just have to get familiarized with the rules on the states. So think of the trust account, the bank account, as a financial firewall. That money is not commingled at all with the operating account funds for the law firm. It's completely separated and segregated for a good reason. That client money is only used for one intended purpose, and that's to be applied when the law firm has earned the funds or to reimburse client expenses. That's your two reasons you typically see this. And then if it's not all used, the attorney has to return it. So that's another whole case that you have to work through those transactions in your QuickBooks file or your corresponding law firm practice management tool. So mishandling happens. It can happen by accident. It can happen on purpose. Really, you have to be careful. Sometimes the client might get an audit that's random by the Bar Association wanting to know at this snippet of time what the balance in your bank account is and what was in that bank account. Or it can be specific to a client where the client's disgruntled. That's why you have to have complete transparency with the law firm clients in taking care of the funds. Mismanaging trust accounts, whether it's caused by commingling— the other thing we see sometimes is law firms are just so afraid of making a mistake where their trust account is, instead of transferring it to operating, and then obviously becomes income and they have to pay taxes on it, they just leave it in the trust and they're too afraid to move it. And that also is a non-compliance. Factor. You can't do that. And that's usually caused by sloppy record keeping, which can lead to very serious consequences for the attorney. Some of those consequences can be bar complaints, can lead to disbarment, loss of client confidence. You never want that because a lot of times these law firms are referral-based. And it can also ruin the client's reputation, the attorney's reputation. And you can just Google your area and look up the complaints and how they were handled with the bar to understand what can happen and how it's approached with the bar and how they sanction the attorney or whatever they do to fix the problem. So the right way to manage trust account is to open a dedicated bank account, your IOLTA trust account, your IOLA, your IOTA, any of those, whatever the name is of the bank account, you want that separate, you want the funds held separately there. It has to be an FDIC-insured bank. And these days we have run into some where the attorney wants to have interest added to their accounts where they— it's not just IOLTA interest, but maybe it's different estate planning where the funds are kind of being held and managed by the law firm. They're allowed to by the courts to let it gain interest. It's not IOLTA interest, different style, and that money goes to the client, but you have to make sure you track all that. You want to make sure that you maintain detailed and up-to-date records. You can't let this stuff get behind, and this is where we see attorneys that are trying to do it themselves and they fall far, far behind because they're too busy doing law firm work and they don't have time to keep up with those records. That's why they need a good bookkeeper that knows what they're doing. You need to maintain these records meticulously. Keep those little client ledgers. They have to be in balance at all times. Regular reconciliation, and ideally every month, is critical. It might also be part of the rules that the bar has put in place for your clients. So you have to know the rules. Never, ever, ever commingle funds. If the law firm is low on funds and has to make payroll, it is not done through the trust account, ever. Client money must never mix with operating funds, full stop, even temporarily. So know that if you see that, that's definitely an egregious event. You need to go to the attorney and say, "I see this happening." You know, you need to fix this. If they don't, you need to report them. I— sadly, that's what you have to do. If the attorney has earned the funds, they have to disburse the funds promptly. They cannot leave them in the bank account to sit and just, just fester. They can't stay there. You have to move it into the operating account, which is why knowing what's in there is important too. Be audit ready. Have your records ready and prepared. If an audit happens, you're easily ready to get them prepared to give to the auditor. And you don't get a lot of time for this. So If they're messy and not ready, you get like 2 weeks, that's it, 2 weeks to produce the records. So make sure that they're inside and ready at all times so that's not a heavy lift for you. We've had to do it for a lot of firms. We've had to do the letter, we call it getting them out of bar jail. If they're in trouble for something that happened, it can be something simple as they bounced the trust account somehow. We're there to be that outside source, that outside person or their trusted partner, and we validate the numbers. And sometimes we've had to write letters and all of that. That's something we can do. Funds must be tracked to the penny. Anything that's not right needs to be corrected immediately and then put copious notes in the transaction. If the attorney accidentally put the trust account deposit, retainer deposit, into operating and then subsequently moved it to operating— I mean, to trust— you need to document all of that. And attorneys pretty much understand their obligations and just don't let any deadlines slip. —get those records promptly to them, get those reconciliations to happen on time. You know, trust is earned and it's protected through this process. That's why it was created. And the firm's reputation is really as strong as the systems and processes that are in place. When you help attorneys manage trust accounts properly, you're not only keeping the books, you're reinforcing a foundation of their professional credibility. So it's an important job. And in this era where we keep clients informed and we keep it fast-paced, um, and really it's monitored more than ever because we're able to do that, good books and keeping everything by the book is a really good practice. So I hope that's helpful and we'll see you all next week. Bye now. Bye.
