IOLTA Interest on Lawyer Trust Accounts – Law Firm Accounting
IOLTA is an acronym for "Interest on Lawyers Trust Accounts." An attorney who receives funds that belong to a client must place those funds in a trust (bank) account separate from the lawyer's own money. So the law firm will have an operating checking account and a Trust checking account. Lawyers deposit the funds into trust accounts, where the funds can earn interest for the client. Banks will then forward the interest earned on these accounts to the state IOLTA program. These funds are used for a variety of charitable causes, primarily the provision of civil legal services to people who meet a low-income threshold. Per the American Bar Association:
"All states have IOLTA programs. IOLTA accounts are mandatory in some states and voluntary in others. Whether mandatory or voluntary, the IOLTA mechanism pools funds that could not otherwise earn interest for individual clients, and the interest on the pooled funds are payable to a state-sponsored IOLTA program. IOLTA programs, in turn, use the funds to finance charitable and educational endeavors, improvements to the administration of justice, and to provide indigent and low-income persons with legal services."
American Bar Association
As an attorney, the rules around setting this account up vary by state. In some states, you have open the account at a bank from a list of participating financial institutions. Once the application to open the IOLTA account is complete, the state bar requires submission of an application form from the lawyer within a specified time period following the opening of the account. The financial institution should be able to provide the attorney with this paperwork.
Accountant or Bookkeeper’s workflow
How do you, as an accountant, handle the interest "in" and interest "out "transactions? So the first thought is to put it into interest income. Then when it transfers out, use the same account. Money in/out. It should not ever hit an account on the profit and loss report. My business partner, Sarah Prevost from Mintage Labs, prefers that this account is set up as a clearing account.
"Because the interest on the IOLTA bank account doesn't belong to the attorney, it should neither be entered as interest income when the funds are received nor interest expense when the money is paid to the state. Instead, the credit and debit should be marked as an interest payable account. This will ensure that your client's records will accurately reflect what those funds are for in the IOLTA account.
Sometimes, banks will deposit the interest in one month, but withdraw the money in the next month. If you run the balance sheet for the first month, it should show your client currently owes the interest to the state. Then, when the money is paid to the state, the money is no longer owed, and the interest payable account will be zero."
- Brandy Derrick-
Remember, if you're working with attorneys and law firms for the first time. It's essential to check out the website of the local Bar Association or the Bar Association website where your client is located and the state they practice in if you are a cloud accountant.
Of course, if you have any questions or comments or need assistance with your law practice books, we are here to help you! I'd love to help you and give you peace of mind. Call us at 239-349-2004.
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