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Understanding Interest on Lawyer's Trust Accounts

The Rules and Canons of Ethics mandate that law firms and attorneys not commingle attorney funds with client funds. Attorneys are required to place client funds into a separate account. Any interest earned on these accounts is then used to fund services for low income clients. The accounts are usually referred to as IOLTA, Interest on Lawyer's Trust Account. Many states have very specific rules on the handling of these accounts.
Deposits from Clients
All client funds are placed in the IOLTA account. When a client pays funds to the attorney for services not yet rendered, the funds are placed in the account and are withdrawn as the fee is earned. Prior to that time, the money belongs to the client. Payment may also be made from that account for services provided for the client such as transcription fees or expert witness fees. As stated in Arkansas Standards 65D, "No personal funds of a lawyer shall ever be deposited in a trust account and no funds shall be withdrawn from such trust account for the personal use of the lawyer maintaining the account except earned attorney fees debited against the account of a specific client and recorded as such.”
Deposits on Behalf of Clients
Where damages are awarded to a client, the payment is placed in the IOLTA account. When the check clears, the attorney should disburse the funds. In doing so, the attorney must provide a balance sheet explaining how much was received, the exact amount of the attorney's fee, and an explanation of any expenses deducted from the gross payment.
It is important that all withdrawals be made timely and for a proper purpose. It is difficult for some clients to understand that endorsing a check made payable to the attorney and the client does not mean that the funds are available immediately. Any check for damages must be deposited into the IOLTA account and cleared before the attorney may disburse the funds. At the end of the calendar year, an attorney might be tempted not to disburse funds for attorney fees in order to avoid the tax consequences. However, the result is that the attorney's funds are then commingled with client funds in violation of the Canon against commingling. When a deposit consists of part client funds and part attorney funds, such as a settlement check, Maryland Rule 16-607 states, "The portion belonging to the attorney or law firm shall be withdrawn promptly when the attorney or law firm becomes entitled to the funds, but any portion disputed by the client shall remain in the account until the dispute is resolved."
Most states require reconciling the IOLTA account on a monthly basis. This requires showing the total amount left in the account each month and how it is distributed among the clients of the law firm. Records of the monthly reconciliation must be kept for the period of time required by the state rules, usually from five to seven years. While large law firms often have accounting departments responsible for reconciling IOLTA funds, small law firms and solo practitioners are also required to do so. If necessary, smaller firms and solo practitioners must either learn how to reconcile the account or contract out the process.