IOLTA Best Practices

Hi, Sarah. It's Legal Accounting Wednesday, first one of 2022.

Yeah, it is.

What a great topic, right? If you work with lawyers, you should be with us in our, uh, our Accountant's Law Lab, right? Um, so today we're going to talk about IOLTA best practices. So if you're new to lawyers and working with attorneys, maybe you just get your first one this year, or you get your first one this month, We get a lot of new clients this month. We're talking about IOLTA. So what does the word IOLTA mean? It's the Interest on Lawyers' Trust Account. IOLTA, it's an acronym. And so it's typically called IOLTA, but it's also called IOLA, which is in New York. Um, there's another acronym too. I'm trying to think if there's another one too. Sarah, do you know it? There's another— I've heard it called—

Uh, just sometimes I hear client trust bank account. Like I've heard people say that because it's easy reference.

Right. And so there's a difference between the bank account and the trust liabilities, right? So you've got the bank accounts when the money comes in and the trust liability is the offset. So that's how we kind of structure it. But today we're talking about best practices and really this is kind of targeted towards the attorneys themselves. So we're going to go over the common mistakes lawyers make in trust management and IOLTA management. I think the number one would be commingling of funds. They mix and match funds. This is one of the things that will get them into trouble. If they— oh, they don't have enough money in their operating for payroll, so they take the money out of trust, which remember is not their money, and they move it into the operating to use it, figuring they'll just put it back when they're, you know, when somebody has to pay them. And you definitely don't want to do that.

Definitely.

Definitely don't do that. That money is sacred. It belongs in its own bank account for a reason, and it's not your money till you earn it. And that's the other way that can be a gray area, because if they haven't earned it, they can't move the money over to apply it to a client invoice. That just doesn't happen.

Yeah.

So that's probably the biggest one. And I think the second probably mistake that they make is the failure to maintain a 3-way bank reconciliation. We probably would run out of fingers counting the people that come to us when we ask them that. They don't even sometimes know what that is.

So if you go back to kind of in between that, though, another one that happens is not just moving the funds over for a moment of time, but they'll have debits. Like, um, the bank will debit, uh, checks, or the interest will get debited, but you don't ever see the interest going in. I mean, you're Don't take it that the bank is right and that, you know, the paper statement is actually what happened on the actual physical bank level. That's not always the case too. We've found that to be true, right?

Exactly.

So some additional—

we have here Steve, Kristen, Kristen, Joy. Wow, we got lots of people here. Katisha, Nina, and Sharon. We've got a crowd today. Yay! Nice to see you all.

Nice to see you guys.

You're all here and wanting to hear about this. But yes, definitely, Sarah, to your point, Um, a lot of times we, we have this happen, which blows my mind because banks understand what trust accounts are for. So you have this trust bank account that's sacred, that's client money, and then the attorney writes— a lot of attorneys handwrite checks— and then they need a new check order. They call the bank, say, hey, I need an IOLTA check order, and the bank takes the money out of the IOLTA account to pay for the IOLTA checks, but they can't do that. The firm has to reimburse the trust account for that fee. That fee is an operating expense.

If the bank does that, right? If that's their— that's how they do it though. But I'm finding, and I think you have found this, Linda, is that the attorney agrees with, okay, the account is going to be handled this way. The bank says they're going to do it this way. And then they find out from us when we do a 3-way, that didn't happen. The value of your 3-way is where I'm going with this, is like these little things that pop up validate why a 3-way reconciliation would be really important. And in a 3-way is essentially balancing what happens at the bank, what happens in your accounting platform, and what happens in your practice management platform.

Right. So your 3 tools, and, you know, like LeanLaw has that very beautifully showcased in when you go to the trust account. You can see those 3 amounts, which I love. That's— they're kind of 3-way, but we actually have a manual process where we create the 3-way. So it's really super clear because you— and you want to save these monthly. I don't agree with the quarterly unless it's somebody who doesn't have a lot of transactions.

Yeah.

And your state allows for that because not every state— some states want you to maintain these records, but these records are You want to have them. You could get audited and you might think, well, my attorney does everything above board and they're probably never going to be audited. There's random audits, so you could be randomly audited. It's not necessarily caused by a client not happy with whatever they were told the funds were and then triggering an audit. It can happen randomly.

Yeah, I mean, you need to validate your numbers. You need to make sure you understand what's in there. Some people operate their trust accounts a little differently. So they are the type of a firm that will maybe take everything into operating and then decide where a case lives based on the courts. And they need to move the money over into trust because at that point, that particular case is not going to move forward. So there's some reconciliation that goes on. Those types of firms that exist You just really want to have an open dialogue with them and make sure you understand what the money is. If they have maybe ongoing payments, just anything going on, you just want to make sure you're understanding it so that the money's in the right place, in the right account, or you're giving them a reminder.

Oh, absolutely. And, you know, sometimes attorneys, they get creative. So some attorneys will actually, when you work with them, they understand the importance of keeping the trust as a sacred space, that it's not their money. And they get so nervous about it because they learn about it in law school that they'll leave a cushion. And you'd be like, why doesn't this add up? And there's this odd amount that you can't validate, and it ends up being really the firm money. They'll leave it behind to keep it, um, to keep it so that it's, so that it's in there just in case, to cover like if the bank takes a wire fee out. And that can all be Corrected, and you don't need the cushion if you have someone like Gravity Payments being on the file that handles just that trust side. And they do both, but you can have them— they are a firm that, like a LawPay, that will handle— we like Gravity. They handle the trust payment side of the client paying by credit card or ACH, and then they— that app puts the money into— the software puts the money into the trust account, bank account. And then it puts the fees— it takes the fees up for the credit card transaction out of the operating. So it keeps the client in compliance. So if you're starting to work with attorneys now, this is something you want to offer to the client. Some of them don't even know about that this tool exists. So they'll have their credit card go into operating, and then they move the funds over to trust because they don't want to have it coming out the other way. Although we've seen that too. It makes a mess.

You're seeing the credit card Payment. So if they're presented a bill, they're presenting a bill to their client, the client wants to pay with credit card, that's what we're talking about, right? Is that— Provider gravity and delineate them, which is a great point. And you do want— if you do see credit card fees coming out of the trust bank account, yes, then you just want to bring that to the attention because you want to make sure those fees actually get debited or that there's a transfer to replenish it because that is an operating expense. And you just need to make sure that that's made whole on a regular cadence of like a monthly, uh, totally, totally.

And we have 2 more people that, uh, actually Sharon Miller, Kimberly, and Deb are here with us today too.

You are on it today. 2022 is like, you're just like, I'm standing up.

I'm sitting. I know we both walked on the treadmill this morning, kind of a healthy 2022. But yeah, so those are the things when you when you start to think about working with lawyers, these are the things— this is kind of why the lawyers need us, because it's a lot to manage the funds there, and they need us to help them track it.

Yeah.

Which makes working with lawyers such a great niche to go towards, because it really will help. You help them so much. A lot of times, Sarah and I have found in our experience, we find that once we— they'll come to you and they'll say, you know, I know my trust is a mess, it doesn't balance to the bank, I can't get it to balance. And they mean just just the balance to balance to the bank as a regular reconciliation. They're not even into the 3-way yet.

Yeah.

But then when you get into the records, you'll see that maybe they recorded transactions or sales where they did the work for the client in their software, like their LeanLaw or their Clio, and then they never moved the money over to the operating. And you get to be that hero saying, hey, Mr. and Mrs. Client or Ms. Client, you have to move X amount of money over because you never did that action of moving the money over. It was still sitting in trust when you had actually earned it.

it.

So that's kind of one of the fun jobs we get to have, I think.

Yeah, well, I just going back to ultimately, it's a, it's an industry where they are bound by this. It is really critical. It's really important that you understand it. You understand the local jurisdiction as well as the state and everything else behind it. 'Cause there are tricky moments that occur and you're not gonna know the answer. So you're gonna have to make sure you understand how it works. But I think the base of it is the methodical thing like you brought up, Linda. You, you really need to make sure that it's every transaction is accounted for that hits a bank, a bank account. And if you can't validate that, then you've got to figure out why and you've got to make sure it's made whole one way or the other.

So we actually have a question from our friend, our dear friend Steve, and he says, how do you handle a reconciliation when the client uses an outside billing service and they cycle the bills on a date other than the end of the month? Um, the bank statements come out at month end. Hmm, how do you handle it when the client uses an outside billing service And they cycle the bills on a date other than the end of the month date.

Oh, are you saying, Steve, if I'm understanding that, is that the question where let's say the date is 11/30, but the payments are 12/2? Let's say I'm just using an example of like a month cutoff. Maybe it's something like that because the payments are happening, the transfers and the payments from trust don't happen until—

that might be what he's asking. So the actual invoice payments are occurring on the 30th and then the transfer's happening in the next month. I guess in that case you'd have to use your undeposited fund account.

Yeah. And you'd have to make sure that in a report that you're stating what is to be cleared. Right. If that's the question, I—

We might need a little clarity, Steve, on that question. But so getting back to the best, IOLTA management best practices. And this is for attorneys and also for accountants when they start to work and bookkeepers. Make sure your business funds and your client funds are completely separate. This is just the most important, probably the most important thing.

Yeah.

Familiarize yourself with that 3-way bank reconciliation. Make sure you understand what that exactly is. You want to do the bank balance. When we talk about the bank trust bank account balance, we're talking about the adjusted balance at the end of the month, not the actual one off the statement, because there might be Transactions in process. So they might be in transit. You might be looking at checks that didn't clear the bank from, you know, your client didn't cash it, or deposits that are kind of put in the bank at the end of the day on the 31st, but it didn't actually clear till the next month. So those are the things you have to really watch out for. And then of course your individual client register, and then your, your software that you're using for the law side. If you don't have that, you want to match it up to that total of the parent ledger account. We like that hierarchical view.

Yeah.

Reconcile once a month or more frequently if you have a lot. You might want to like soft reconcile. Have you ever done that, Sarah? When you worked in construction, I soft reconciled on a lot of accounts back in the day when it was a lot harder with no bank feed matches. So you can soft reconcile if that makes you feel a little bit more comfortable. Um, you know, deposit incoming checks immediately. Don't let them hang. Make sure that they're deposited. If the client, you know, they come in, just make sure they get to the bank. Move the money over too. Move those earned fees over. That should be like part of the workflow when the attorney's doing the work in like a Clio. Okay, X so-and-so paid me and this is the invoice and it's been paid and I'm, you know, I'm showing this in my software. Go to the bank. The next step is move the funds. Make sure that's part of that workflow. Help them with that. Make sure that they do it because it'll just hang as an uncleared—

It'll be any, any platform, any practice management platform.

Yeah, anything.

Yeah.

Yep. So those are basically the most—

oh, the other thing too is, um, depends on the firm. Some firms like to take consulting fees into trust for some reason, and that's fine, but you have to be diligent about keeping up on it. Um, you just— and it's an increased volume at that moment for attorneys, really.

They need to keep their client informed. We just had a couple of firms get purchase by and purchase another firm and that gets in. And there's quite the— and the attorney should know this, but there's quite a lengthy to-do that they have to get that money. Because if it's in one firm and now the other firm's buying it and the money is being moved over, you have to keep them informed. And even in the case of a client that has retainer money, I've seen where some firms will actually send out just statements showing that the retainer money is there so that they're knowing that it's still being maintained and there's not anything happening. Like the amount, you know, they didn't have any activity, but Mm-hmm. you're still sending it out depending on the type of law they practice, depending on their state. All of those things are part of it.

Yeah, depends on which state the purchase is happening from and to. And yep, because there's guidance and notifications and if return of retainers need to happen. I think I saw somebody post something, maybe I misunderstood the question, just it's generic about like When you're returning retainers to a customer, it's not a 1099 moment unless I misunderstood the question that somebody wrote. Maybe I did completely because I don't go on that much, but when I do, I can go pretty quick. Anyways.

But yeah, and for attorneys too, I would really say that one of the ways we've helped out and it actually helps our workflow is to get that Gravity Payments inside, get Gravity Legal. Sign up for it. We'll put a link in there for you guys to sign up for it. And then, you know, if you want, bring that to the client. They might say to you, hey, I already have a merchant processor, you know, it's XYZ, and I'm happy with it. But just tell them this is more of a compliance action. Who cares who's processing your credit cards? And Gravity has a lot of other features where you can pay, you know, monthly depending on— there's recurring, there's a whole bunch of features involved. We get a great dashboard. It's really helpful for us. We can see what payments— Cleared and how they're grouped. There's just so much to it, and a lot of the processing companies don't have that. So having that— but the biggest piece is compliance. It always takes the fees out, out of the operating, and it processes the transactions that belong in the trust in the trust.

I can see you're passionate about this.

Oh, I am. I love Gravity. Well, we're gonna be on Gravity Legal Podcast.

I was— well, I was gonna ask you if you want to like list out for our Friday sessions in our, in our private group. We've got some cool things coming up and we've got some pretty neat, nifty tools.

And oh my goodness, yes, we have a lot of great people. Yeah, some of our favorite workflow tools. So if you're not in the mastermind group of the Accountants Law Lab, definitely join. If you are not in our Facebook group, join. Oh, another thing too, Sarah, one of the things that we noticed too, and I will make this the last because we're over time, but yeah, one of the things too is The attorney should be the only signatory on their own checks. Nobody in the office, no admin, no, nobody should really sign any of the checks, especially when it comes to the trust account, which most of them are pretty good about. But a lot of these trust accounts might get— they've had— we've had a lot of it where they've been exposed and they're hacked. And we see a lot of times where the attorneys will open a second account and make it a sweep account just to protect that from when people are wiring money in. They'll have a wire account, so the bank account will be wired. They'll have that one routing and account number. If a client's trying to wire money in, then it gets swept into IOLTA. It's that bridge that keeps the IOLTA safe and perfectly fine. So some tips that we have found over the time that we've been working with the attorneys.

Yeah, that's true. That's a good point. But this, this month we have, um, several different— we have, well, this Friday we have our LinkedIn follow-up part 2. We have the LinkedIn.

We're gonna dive into LinkedIn and just really get our LinkedIn just perfect. And as a cohesive group, we're going to help each other kind of help boost our, our pages.

So we have that going on. Um, we also have, um, who else is on the, the calendar for the month?

I think we have Keeper coming up.

We have Keeper. Yeah, we have Ben.

And then we have Josh coming on to talk about entity structure.

Yep, that's great.

And then, then hopefully if I get my tax returns done, we're going to do book-to-tax entry. We're going to have um, actually go into physical books and close out the books to tax. So we're going to be teaching that and teaching some hot tips on how to clean up client files and, and yeah, clean up jobs because we're in the season of cleanup jobs. So we're going to get into that. We talk about marketing, we talk about so many things. So yeah, it's a fun group. We're happy. We love all the people in our group. And until we see each other next week, and if you have a topic that you'd like us to talk about Please list it. We'll record this video. Please list it and, um, you know, write, write in the, in the Facebook feed or in where this video is, just what you want us to talk about. We're happy to talk about it and share what we know. And if you want to join our group, I'll add those links too. Sounds good.

Bye-bye.

Bye, everybody.