If you’re a lawyer in Texas who handles client money, you need to know and understand Interest on Lawyers’ Trust Account (IOLTA) rules. While IOLTA accounts aren’t applicable to all lawyers, it’s important to know whether you must use such accounts and how to manage them.
What is an IOLTA Account?
An Interest on Lawyers’ Trust Account (IOLTA) is a trust account designed to fund legal aid for people who can’t otherwise afford a lawyer. It also acts as an account where lawyers can responsibly hold client funds.
The interest earned on those trust accounts is sent by the financial institution to the Texas Access to Justice Foundation, which is pooled and used to pay for civil legal services for financially vulnerable Texans.
How do I know if I need an IOLTA account?
Reasons you might hold client funds include:
- Holding small retainer fees: the money isn’t earned until the work is done, so it must be held separately from your operating funds.
- Safekeeping settlement funds: You may receive funds from a lawsuit that must be safeguarded until it can be distributed to your client.
- Handling escrow funds: In real estate transactions, you might hold money in escrow until the sale is closed and the money is transferred to the seller.
Benefits of using IOLTA accounts
Texas IOLTAs provide peace of mind for clients, ensuring their funds are securely held separate from law firm expenses. Lawyers also benefit from streamlined compliance and reduced administrative burden and public confidence in ethical fund management strengthens across the legal industry. The interest generated from these accounts funds vital public service programs, supporting legal aid, scholarships, and access to justice initiatives.
Avoiding common mistakes with IOLTA Accounts
To avoid malpractice risks associated with IOLTA accounts, diligent management and accurate record-keeping are crucial. Risks include:
- Commingling funds, mixing business and client funds in the IOLTA
- Misappropriation of funds, using client money for non-legal
- Improper recordkeeping, lacking detailed and accurate IOLTA account
- Inadequate staff training on IOLTA
Opening an IOLTA Account in Texas
You must open a Texas IOLTA if:
- You are in the private practice of law, and
- You receive or handle client
Any client funds that are nominal in amount or are short-term must be put in the IOLTA.
To open an IOLTA account in Texas, you must first select an eligible financial institution; if your chosen institution doesn’t offer IOLTA, they can request eligibility from the Texas Access to Justice Foundation. You’ll then open an interest-bearing account in your or your firm’s name using the Texas Access to Justice Foundation’s tax identification number.
The Foundation pays reasonable service charges on the account but will not pay for:
- Checks
- Wire transfers
- Other associated business expenses
Once your IOLTA account is opened, you must submit the completed IOLTA Notice to the Financial Institution and Foundation form within 30 days of opening and annually update the Foundation on your account status.
Final Thoughts on IOLTA Accounts in Texas
The purpose of an IOLTA is to provide legal aid to people who cannot afford legal help on their own. Lawyers often temporarily hold small client funds, where the interest earned in individual accounts doesn’t cover account-opening costs. However, by pooling the funds into a larger account, the interest earned can be forwarded to the Foundation and used for public good.
Legal trust accounting doesn’t have to be intimidating. Clio’s Legal and Trust Accounting Management features give you the peace of mind that every trust transaction is recorded in a compliant manner across ledgers according to industry regulations.