What Happens to the Interest in a Trust Account?
As an attorney, you know that funds in a trust account legally belong to your clients, not you or your firm. But what happens to the interest?
Whose interest is it anyway?
In some cases, the money being held for a client in a trust account is a significant sum or will stay in the account for a while. In these situations, the interest will be large enough to offset the cost of collecting on it, and it should go back to the client.
But although the money accruing interest in a trust account belongs to clients, there are situations where client funds aren’t large enough or held long enough to effectively earn interest for the client.[1]
And it would be unethical for the attorneys who operate the trust account to receive financial benefits from it.
When should I use an Interest on Lawyers’ Trust Accounts (IOLTA)?
For large sums and time, your firm should open a Client Trust Account (CTA) that earns interest for the client.[2]
But when the interest earned won’t be significant enough to go back to the client, an IOLTA account may be the way to go. Optional in some states and mandatory in others, the interest from IOLTA accounts goes to funding charitable legal work.
Is bookkeeping different for IOLTA accounts?
Because IOLTA accounts often involve pooled funds from multiple clients, more stringent bookkeeping requirements apply.
From the financial institution you choose for your IOLTA to who is allowed to be a signatory on the account, regulations vary by state.
But whatever your local requirements, you cannot commingle funds in your IOLTA account. And if you want to accept credit cards, the charge fee cannot be withdrawn from the IOLTA account — it must be withdrawn from the firm’s operating account instead.
Fortunately, legal-specific tools come with built-in safeguards that help keep law firms compliant — and even allow them to accept credit cards by sending the charge fee to a separate (operating) account.
IOLTA accounts contribute to important charitable work and are mandatory in some states. Regardless, leveraging the right tech can help you and your firm adhere to requirements and stay compliant.
