IOLTA and Attorney Trust Account Bookkeeping

The names

IOLTA stands for Interest on Lawyers’ Trust Accounts. It is one type of client trust account, the pooled kind, where funds from many clients sit in one account and the bank sends the interest to the state’s legal aid program. New York calls the same thing an IOLA, Interest on Lawyer Account.

Attorney trust account, lawyer trust account, and client trust account are the general terms, and they include the non-IOLTA kind: a separate interest-bearing account for one client with a large or long-held balance, where the interest belongs to that client. An escrow account holds funds during a transaction and is a different thing, though the bookkeeping question is the same.

The bookkeeping on this page applies to all of them.

Whose money is in the account

Most firms hold client funds in a single pooled account. The balance is the sum of many smaller balances, each belonging to a named client.
Ordinary bookkeeping asks what a transaction was for. IOLTA bookkeeping asks that and one more question: which client the money belonged to.

The deposit is not income

Under cash basis bookkeeping, money a business receives is recorded as Income on the date it arrives. A client’s advance deposit into an IOLTA account is the exception. The money stays the client’s while the firm holds it. The firm pays costs from it on the client’s behalf, and the balance can be returned.

The Balance Sheet reflects that. The Trust Bank Account appears as an Asset, and a Liability for Client Trust Funds Held appears at the same figure. The Liability total is the sum of the individual client balances, and each of those falls as fees are earned and costs are paid. The Profit and Loss shows nothing on receipt, because nothing has been earned. Income is recorded when an earned fee moves from the trust account to the Operating Bank Account.

A $5,000 advance fee deposit

A client deposits $5,000 as an advance fee for a family law matter.

• Deposit received. Trust Bank Account increases $5,000, Client Trust Funds Held increases $5,000, Profit and Loss unchanged.
• Filing fee of $435 paid from trust on the client’s behalf. Trust Bank Account decreases $435, Client Trust Funds Held decreases $435, Profit and Loss unchanged.
• Firm invoices $1,200 for work performed and transfers it. Trust Bank Account and Client Trust Funds Held each decrease $1,200. Operating Bank Account and Fee Income each increase $1,200.
• Case concludes and $3,365 is refunded. Trust Bank Account and Client Trust Funds Held each decrease $3,365, Profit and Loss unchanged.

Only the $1,200 earned fee reached the Profit and Loss. The filing fee never appeared as a firm Expense, because the firm paid it with the client’s money rather than its own.

A cost the firm advances from its own Operating Bank Account and bills back later is recorded differently, as a Receivable. A true retainer paid to secure availability sits outside all of this, since it is earned on receipt.

Cost advances

A single matter produces a long series of small payments out of the pooled account:

• Court filing and electronic filing fees
• Service of process and courier charges
• Certified copies and recording fees
• Publication of required notices
• Probate referee or appraiser fees
• Bond premiums
• Court reporter and transcript charges
• Expert, consultant, and records search fees
• Mediation and arbitration administrative fees

These come at unpredictable intervals, which makes the client name easy to postpone. Entering it at the time of payment keeps the record complete without a later reconstruction.

Three numbers that agree

The monthly reconciliation ties three figures together: the bank statement balance, the balance on the trust account transaction report, and the sum of all individual client balances.

A firm can reconcile the bank statement every month and skip the step of confirming both of those match the total of the client balances. The three-way comparison is what catches a negative client balance early. A negative balance means funds held for one client were used for another client’s costs, and in most instances it traces back to a timing error rather than anything more.

What the records consist of

The trust account transaction report showing all deposits and withdrawals. The same report filtered by client. Bank statements. Canceled checks. The monthly reconciliation report.

The State Bar of California registers client trust accounts annually under its Client Trust Account Protection Program, CTAPP, and selects firms each year for a compliance review of those records. Firms of many sizes have been found missing one or more of them. A firm with the monthly reconciliations on file has something to hand over. A firm reconstructing a year of trust activity under a deadline does not.

Where a spreadsheet stops

With one or two clients holding funds, a spreadsheet with a tab per client does the job well. The picture changes as matters accumulate. Partial deposits, cost advances on different dates, transfers of earned fees, and refunds multiply the number of places a single figure gets entered by hand.

Software built for trust accounting, or general accounting software set up with client tracking and a dedicated trust account, produces the per-client breakdown from the same entries. Streamline works in both the practice management platform and the accounting file, which is what makes the three-way reconciliation possible.

Services

• Monthly three-way reconciliation of IOLTA, IOLA, and non-IOLTA attorney trust accounts
• Per-client ledger setup and maintenance
• Cost advances recorded to the client at the time of payment
• Cleanup of prior periods where reconciliations were not performed or not retained
• Reconciling the practice management platform against the accounting file
• Ongoing legal bookkeeping for the firm’s Operating Bank Account
• Preparing records ahead of a CTAPP compliance review

How it divides up

The attorney is responsible for the account. The bookkeeper maintains the history, and the attorney and the CPA work from it.

The money in an IOLTA account is there for a reason that matters to the person it belongs to. A filing that lets an estate move forward, a settlement waiting to reach a family, an expense paid so a case can close. Records kept in the ordinary course let a firm say what belongs to whom on any day someone asks.

Streamline Bookkeeping works with small businesses, individuals, estate planning attorneys, and professional trustees, from Los Angeles and Orange County to San Francisco, across California, and in New York. Reach out to discuss a firm’s situation.

General information about bookkeeping services. Not legal or tax advice. For guidance on a specific situation, an attorney or CPA is the right resource.