When should our law firm create an individual trust account?
Client trust accounts are common for law firms. But how do you know when a client should have their own individual trust account rather than keeping all client funds in a single trust account?
With a typical Interest of Lawyers Trust Account (IOLTA), all the funds of clients are kept in a single trust account. Each of those clients and matters still needs to have its own individual ledger to track withdrawals, deposits and balances. But there are times when it makes sense to open a trust account just for one client or matter.
When you are acting as a fiduciary for your client and distributing funds to third parties, rather than holding onto funds on more of a retainer basis, this can warrant a separate trust account. For example, the administration of an estate or holding funds in escrow during a real estate transaction would both be good times for individual trust accounts[1].
Another time that a separate client trust account could be warranted is when the interest would be substantial enough to be significant to the client. IOLTA accounts make sense when you are only going to be holding on to the funds for a limited amount of time or when the amounts are small. Interest from the funds is used for providing legal services to indigent individuals through a state’s IOLTA program, but normally the amount isn’t high enough that the client would be concerned.
However, for larger amounts that you’ll be holding onto long enough where the interest that could potentially be generated would be significant, you’ll likely want to open up an individual trust account.
Setting up an individual client trust account
Be sure to check with your state bar association rules in determining how to properly set up an individual client trust account. Some states have rules regarding what name the account should be under and who should have access. For example, in Vermont, the account must be set up under the client’s taxpayer ID and the lawyer should be a signatory on the account
You may even need to have your client approve the creation of a separate client trust account for interest-bearing purposes. If they decline, you could be required to use the general IOLTA account for the funds.
