When you start a law firm, one of the first and most important financial steps you will take is opening a trust account. In most states, that means setting up what is called an IOLTA account. It is a term many lawyers hear early in their careers but do not always fully understand.
What Is an IOLTA Account?
IOLTA stands for “Interest on Lawyers’ Trust Accounts.” It is a special type of bank account that lawyers use to hold client money that has not yet been earned or disbursed. The key idea is separation. Client funds must always be kept apart from the firm’s own money. An IOLTA account helps you do that in a way that also benefits the public.
Here is how it works. When you hold client funds for a short time or in small amounts, it would not make sense to open a separate account for each client because the interest earned would be minimal. Instead, those small balances are pooled together in a single IOLTA account. The bank then sends any interest that accrues to your state’s IOLTA program, which uses it to fund legal aid and access-to-justice initiatives.
If you are holding a large amount for a longer period, most jurisdictions require you to open a separate trust account for that client so that any interest earned goes directly to them.
How to Open an IOLTA Account
The process of opening an IOLTA account is not difficult, but it must be handled carefully. Start by checking your state’s bar association or IOLTA program website for a list of approved banks. Not every bank is allowed to hold IOLTA accounts, and using one that is not approved can lead to compliance issues.
Once you have chosen a bank, gather your firm’s tax identification number, your bar information, and any forms required by your state’s IOLTA program. Some states require a specific form that authorizes the bank to alert the bar if there is ever an overdraft or issue with the account. In many states, the IOLTA program’s tax identification number is used instead of your firm’s, since the interest legally belongs to the program, not to you or your clients.
When you open the account, make sure the name clearly shows that it is a trust account. Something like “Smith & Jones IOLTA” works well. After the account is opened, you may need to report it to your state bar or IOLTA authority, especially if it is your first one.
Managing the Account
Once your IOLTA is active, careful management becomes critical. Every dollar that belongs to a client must be tracked accurately. You will need to keep detailed records of deposits and withdrawals for each client, even though all of the funds are kept in one pooled account. Most firms reconcile their IOLTA accounts every month to ensure their records match the bank’s statements.
The most important rule of IOLTA management is simple. Never mix your firm’s money with client money. When you earn fees, transfer them to your operating account only after the work is completed and billed. Never use your IOLTA account to pay firm expenses. Even a small mistake can create serious ethical and financial problems.
Choosing the Right Bank
Not all banks are the same when it comes to IOLTA accounts. Look for one that has experience working with lawyers and understands the unique requirements of trust accounting. Some banks specialize in law firm accounts and offer favorable terms such as no monthly fees and reporting tools.
Good customer service also matters. If something goes wrong, such as a returned check or an audit request, you will want a bank that responds quickly and knows how to handle these situations. It is also wise to confirm how the bank reports interest to your state’s IOLTA authority and whether any fees could reduce the interest that is generated.
Common Challenges
Many lawyers run into problems not because they are careless, but because they underestimate the details involved in managing trust accounts. Skipping a reconciliation, failing to report a new account to the bar, or depositing firm funds into the trust account can all create issues. Other common mistakes include withdrawing client money before it is earned or neglecting to keep proper records.
Good accounting software can help, but it does not replace careful oversight. Someone in your firm should be responsible for monitoring the IOLTA account, reviewing reconciliations, and staying informed about your state’s specific rules.
The Bottom Line
An IOLTA account is more than a regulatory requirement. It represents a lawyer’s duty to protect client funds and uphold professional ethics. Opening one correctly and maintaining it properly builds trust with your clients, keeps you compliant with bar rules, and supports access to justice in your community.
The process might seem tedious, but it is one of the most important parts of running a responsible law firm. Choose a bank that understands IOLTA accounts, set up clear procedures for managing funds, and take the time to review your account regularly. Doing it right from the start will save you time, stress, and potential disciplinary trouble down the road.
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