IOLTA, standing for “Interest on Lawyer’s Trust Accounts,” is an interest-bearing form of client trust accounts used for safekeeping the funds of clients and third parties. These specialty accounts are used in a few circumstances.
These instances include when a client’s money will be held for only a short period or when the funds are nominal enough that opening an individual client trust account would be counter-intuitive regarding interest. More specifically, if the funds were held in their own interest-bearing account, the interest generated would be less than the costs involved in maintaining the account.
Client monies held temporarily by the attorney must be placed into an account differentiated from the attorney’s personal or business funds. Client trust accounts, however, aren’t regular bank accounts.
Only certain financial institutions are also approved to house IOLTA accounts by meeting the prerequisites. Ultimately, the attorney holds the fiduciary relationship with clients and ensures the accounts are administered correctly. Hence, the advice is to work closely with representatives with the necessary experience when opening accounts for safekeeping funds.
The interest accrued from pooled IOLTA accounts is not earned by the attorney or law firm in charge of the account. Initially, the interest is transferred to the State Bar, but in a charitable effort, the funds are used to support over 100 not-for-profit organizations. The State Bar gives the money to these organizations to assist in providing legal services to those unable to afford them.
The protocol for funds requiring safekeeping that don’t meet or exceed IOLTA requirements is to hold them in a non-IOLTA account.
In many cases, non-IOLTA accounts are used when a client needs safekeeping for funds that are large enough to generate more than the nominal interest.
Often, non-IOLTAs hold funds for one client, needing only one client ledger. Another instance when non-IOLTA accounts are used is in the event of extended safekeeping, such as serving as the administrator of a family trust. Interests garnered on the account tend to exceed the costs of maintaining it, so it is earned for the client's benefit.
Per the Handbook on Client Trust Accounting, the Business and Professions Code section 6211 states that funds that can earn income for clients in excess of costs must be deposited for the client’s benefit. To do this, attorneys must determine whether their client's money meets stipulations for being held within an IOLTA.
State Bar rule 2.110 (B) states that the State Bar will not bring disciplinary charges against a licensed attorney or member for determining in good faith whether or not funds should go into an IOLTA account.
A chosen eligible banking institution may assist the attorney or law firm in determining if funds should be kept in an IOLTA. The State Bar supports that a good indicator that the money being held for the client is “nominal” in amount. The duration is a “short” period of time: the cost of opening and administering an individualized trust account would cost more than the amount of interest earned on the account, and the funds are eligible for IOLTA.
Suppose more detailed information is needed for determination. In that case, the following six factors have been set by the Rules of the State Bar of California Rule 2.110 (A) as consideration for IOLTA depositing:
These factors should help determine if funds belong in an IOLTA. However, attorneys must review their IOLTA accounts at “reasonable intervals” to decide if any changes signify that funds need to be removed from such an account.
While safekeeping client and third-party funds, attorneys and law firms may be required to make payments on behalf of the client. Such payments may include court filing fees, disposition transcriptions, settlement proceeds, and bank charges and fees. Charges such as per-check and per-deposit charges, sweep fees, federal deposit insurance fees, and monthly fees replacing the place of a minimum balance may also be charged by the banking institution.
These charges are against the account’s earned interest. The attorney is responsible for up-keeping the business expenses affiliated with the account, including wire transfer fees, insufficient fund charges, collection charges, and others that arise. The attorney may also receive charges such as monthly fees in excess of interest or dividends that the banking institution does not waive.
In alignment with CTAPP’s record-keeping regulations, client ledgers must be kept for all funds and payments, as firms must maintain an individualized audit trail of payments made on behalf of the client.
The duty of making client payments includes payments to the attorney that are all of the following: agreed upon, earned, and undisputed by the client. Attorneys should “promptly distribute any undisputed funds or property in the possession of the lawyer or law firm that the client or other person is entitled to receive” per Rule 1.15 (d)(7).
These conclude the only payments that should be made out of the account. Any funds paid from the client trust account must be done by a wire transfer or check. Payments must be made via a conduit that specifies who is being paid and from whom.
As expected, certain things can and cannot be done within an IOLTA. Foremost, attorneys cannot pay money that a client does not have; using another client's funds to cover a payment is also prohibited. Further, any transaction to cover personal or business expenses unrelated to carrying out duties to the client may not be completed. The same goes for any payments in dispute by the client or third party. Using these funds constitutes misappropriation; they will be held until the dispute is resolved.
For both IOLTA and non-IOLTA accounts, attorneys must report complete accounting to the State Bar and should be available to clients if requested. The reporting standards for Interest on Lawyer’s Trust Accounts are the same across client trust accounts per the Client Trust Account Protection Program (Rule 2.5). Attorneys are required to complete these main reporting specifications for the IOLTA accounts.
Attorneys must certify every year that they understand and comply with the prohibitions and responsibilities applicable to safekeeping clients’ funds and property.
Attorneys are required to register client trust accounts (IOLTAs included) with the State Bar every year.
All attorneys must complete an assessment of their client trust account management practices. This may be done individually or through a firm but will be completed annually. In tandem with the aforementioned Rule 1.5, these protocols mandate that the reporting must be completed through the licensee's My State Bar Profile. Annual registration applies to all client trusts, and interest on lawyer’s trust accounts is open at any point during the reporting period. Licensees must also certify compliance with the safekeeping funds rules and complete a self-assessment.
Our uniquely experienced team at SmartBean® can navigate the intricacies of IOLTA. Let us help ensure your ethical obligations to the State Bar of California and your fiduciary responsibilities to clients are met. We offer free consultation for our monthly, affordable Trust Account Bookkeeping (TAB) services. Choose SmartBean® – we’re not just bean counters; we are the Beans you can count on!