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IOLTA 101: Ethically Handling Your Trust Account To Avoid Disciplinary Concerns

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IOLTA 101: Ethically Handling Your Trust Account To Avoid Disciplinary Concerns

Mismanaging an IOLTA account is one of the primary reasons that attorneys find themselves in disciplinary hot water, and misconduct, even if “innocent,” can lead to discipline, including loss of the ability to practice. In many cases, the attorney involved has never been trained how to handle a trust account, and does not know the best practices for handling one. In this program, attendees will learn about the relevant Rules of Professional Conduct, particularly Rule 1.15, and best practices for handling client and other funds in their IOLTA accounts.

Transcript

- Welcome to this continuing legal education program, IOLTA 101: Ethically Handling Your Trust and IOLTA account to Avoid Disciplinary Concerns. I'm Attorney Daniel J. Siegel from the law offices of Daniel J. Siegel, LLC. and I will be taking you on a tour of the issues relating to the proper and ethical handling of client and other funds that are placed into IOLTA and trust accounts. I am a practicing attorney in suburban Philadelphia. I operate my own law office and a workflow consulting firm known as Integrated Technology Services, but my primary focus is on assisting lawyers and law firms in dealing with professional responsibility matters and ethics matters, also representing attorneys in ethics and disciplinary matters and BAR admissions, those types of areas where these problems can arise. So what we're gonna do today is talk about IOLTA accounts, Interest on Lawyers' Trust Accounts, which are available and required in every state in the United States where lawyers practice, but why are we here? Lawyers are required to handle their IOLTA and trust accounts consistent with the rules of professional conduct that are in place in every state in the country. Although every state's rules are slightly different, the general rules are the same, but lawyers make mistakes handling their IOLTA accounts. Sometimes they're mathematical mistakes. Sometimes they are inadvertent distribution of funds from wrong accounts. There can be a lot of different reasons why lawyers make mistakes while handling their IOLTA accounts, but the failure to properly maintain and handle and balance an IOLTA account can often have disciplinary consequences. And what I mean by that is consequences that can result in disciplinary proceedings, potentially suspension or disbarment, depending on the severity. And as a result, we need to be aware of it as lawyers and you need to take proper precautions to assure that in fact, you are handling your account properly. The program today has a few different goals. One is to discover and discuss the most common reasons why attorneys can get into trouble for IOLTA-related issues. You also have to understand how IOLTA and IOLTA accounts work and how to handle an IOLTA account to avoid the problems. In addition, lawyers have to understand and know their responsibilities for IOLTA accounts under the rules of professional conduct. And finally, I will discuss and outline some best practices for accounting for IOLTA funds. While lawyers, typically in larger firms, may not even be aware of how their IOLTA accounts work, in most states lawyers do have to report the bank and the account number of the accounts and are supposed to certify that their accounts are properly handled. Solos and small firm lawyers in particular often have to do everything from the basics of an office, to the important things, maintaining, balancing trust accounts and IOLTA accounts. The topics we're going to discuss today include Rule 1.15 funds. Under the Model Rules of Professional Conduct, IOLTA accounts fall under Rule 1.15. And in most states, the funds that are subject to IOLTA are called Rule 1.15 funds, but there are exclusions and there are exemptions. There's also issues regarding credit cards, because can you accept a credit card to deposit funds into an IOLTA account? What if there are fees and chargebacks? We'll discuss the best practices and I will provide a simple example to handle your IOLTA accounting in ways using Microsoft Excel software that pretty much all of us have. So what is IOLTA? IOLTA, I-O-L-T-A, stands for: Interest on Lawyers' Trust Accounts and the IOLTA funds are really a method of raising money for charitable purposes, primarily to provide civil legal services to indigent persons. Every state has IOLTA accounts and they currently operate in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. So IOLTA accounts are required in every jurisdiction and each state though has its own specific rules, and I'm not going to be going through the rules in each state. What I'm going to do is be talking about the general rules because they are typically applicable in most states, but every state does have its own specific issues. IOLTA's important because these are interest-bearing accounts. They're designed to hold pooled client funds. So that it's the settlement of the Jones case. It might be money for a real estate deposit, etcetera, et cetera. The funds are generally considered nominal and they're held for a short period of time. An IOLTA account is not a place to handle funds that you know will have to be deposited and may sit in an account for a year or more. And the interest earned on IOLTA accounts is used, as I said, to support civil legal aid and other similar programs. I urge you to look at the reports of your own state bar and other states or the American Bar Association to see where these funds are used and the funds are used differently in every state. But as an example, in 2008, which is really one of the most recent years that there have been studies done, IOLTA accounts provided grants of $263 million and they also are used to help and to fund and to support innovative programs that can help deliver legal services to the poor and to others who do not always have either access to courthouses or cannot afford the cost of an attorney in matters where legal assistance would benefit them. So you might see IOLTA accounts and the interest on those accounts used to help in loan repayment programs, state-based legal information websites so the public understands parts of the legal system and other legal assistance hotlines. They fund a wide range of activities. You might see alternate dispute resolution programs, young lawyer public service projects, victim support programs. There's also court-appointed special advocate programs, minority lawyer recruitment initiatives, law school scholarship programs, and a lot more. The reality is that IOLTA has been used in many ways, often very creative and also at times to fund programs to see if they would work in a broader range. IOLTA is defined, as I said, in Model Rule of Professional Conduct 1.15, and the comments to the rule. It's important, particularly when you're talking about IOLTA 1.15 funds to understand that you have the Rule, which are the guidelines obviously that we all must follow, as well as the comments, which are designed in general to provide explanations and assistance. But in many states, the comments are as valuable or more valuable than the rules for IOLTA accounts, because they will provide guidance as to what items go into the accounts, how they're maintained, even things such as how to be accounted for, when to be accounted for, what to do. Every state is different. Now the Model Rules are exactly that. They're models for the rules that are in effect in every jurisdiction. And what happens is Model Rule, such as 1.15, gets passed and approved, and then the states decide if they're going to adopt it as written by the American Bar Association or whether in fact they're going to do something else and modify those rules. So the rules do differ. For example, I practice in Pennsylvania. Our Rule 1.15 is not the same as the Model Rule. It contains a lot of guidelines and requirements for how to handle funds that aren't in the Model Rule. It also contains a slightly different definition of what funds and what items have to be placed in an IOLTA account. So you need to be aware of that, as you think about your particular one. But what I'm gonna talk about today is Rule 1.15 as written in the Model Rules. Rule 1.15A, also known as the Safekeeping of Property Rule, talks about the fact that lawyers shall/must hold property of clients or third persons in the lawyer's possession in connection with a representation. Those funds must be kept separate from the lawyer's own property. So a lawyer would have an IOLTA account for those client or third-person funds, as well as the lawyer or the firm's business account, where you have pooled funds, expenses, et cetera, et cetera. The IOLTA rules require that those funds be kept in a separate account and in an account that is located in the state where the lawyer's office is located or elsewhere, depending on your state rules, with the consent of the client or third person. Lawyers are also required to keep other property identified and appropriately safeguarded. We're not gonna talk about it today, but you might be required or have a need to safeguard a piece of jewelry or some other valuable item. That also falls under Rule 1.15, obviously not though the funds part. Lawyers are also required to keep and maintain complete, complete is a critical word, detailed records of the funds and other property. And under the Model Rules, it says they should be kept and preserved for at least five years after termination of the representation. It's my recommendation and considered the best practices by many that you should maintain those records indefinitely. Particularly now when those records are generally kept electronically and there is no reason not to maintain those records indefinitely because if for some reason there is an inquiry from Disciplinary Counsel or some other authority, it will benefit the lawyer and the client for there to be complete detailed records of the funds. Under Rule 1.15B and C, lawyers may deposit the lawyer's own funds in a client trust account, but only for the purpose of paying for service charges on the account and only in an amount necessary for that purpose. So although many banks are set up so that IOLTA accounts, if there are fees, they are charged to a business account, if for some reason the financial institution where you are holding your IOLTA account doesn't do that, you may place funds, nominal, in an amount in that account sufficient to keep and to cover those costs so that client funds are not used to cover those costs. You may also need to do that if a bank has a requirement for a minimum amount in an account to keep the account open and you have to deposit into an IOLTA account fees and expenses that are paid in advance, such as retainers, and those fees are only withdrawn as the fees are earned or the expenses incurred. Generally the best practice is they are deposited into the IOLTA account, and then a lawyer presents a statement, generally monthly, to the client as to the fees and expenses. And after a client has an opportunity to review and address if there are any questions, then the lawyer withdraws those funds. And if a lawyer receives funds under Rule 1.15D in which the client or some third party has an interest, lawyers are required to notify the client or third person and deliver those funds to the client or third person and render an accounting of them. So if they receive funds and the third party who is entitled to them, it could be a real estate matter or something, the lawyer is required to produce those funds and to provide an accounting as to what the funds are and where they came from. However, we know there are circumstances where it's not so simple and not so straightforward. Under Rule 1.15E, if you, as an attorney come into possession of property in which two or more persons, one of them could even be the lawyer claims interests, you must keep those funds separate until the dispute is resolved. Consider for example, a personal injury settlement in which there is a dispute between the client and a medical provider about a bill that's due and owing and that the client has either authorized payment and then has decided that the authorization is being withdrawn or something like that. But in all of those circumstances, you have to keep those funds separate. There could be other disputes. It could be funds that came in a family matter and there's a dispute between the spouses as to whose money they are or could be funds that there is a dispute between the lawyer and the client as to what fees or expenses or the lawyer is entitled to. You can see that there are many circumstances, but until those disputes are resolved, the funds must be kept in the Rule 1.15 IOLTA account. Now there is also a separate model rule, not part of the Model Rules of Professional Conduct, called the Model Rule On Financial Recordkeeping. And this is an important rule and one that I think is as important as the Model Rules of Professional Conduct relating to IOLTA accounts. And I'm not the only person who thinks so. In Pennsylvania, for example, where I practice, the Model Rule on record and financial recordkeeping has actually been for a large part incorporated into Rule 1.15. Every state, as I said, does it differently. But the Model Rule on Financial Recordkeeping is intended to give additional sort of definition, explanation, et cetera, to the requirements of Rule 1.15. The Rule itself was created and really adapted from existing court rules. And what it does is provide uniform and what I would say are minimum, in other words, the minimum you have to do, standards for maintaining law firm financial records. So they are far more detailed than the basic IOLTA rules. And they form the basis, the Model Rule on Financial Recordkeeping for the rules and guidelines in many states and they guide lawyers in law firms in what to do. And if you're new to the practice or new to handling an IOLTA account, the Model Rule on Financial Recordkeeping is an excellent place to begin your education. And under the Model Rule, a lawyer has to maintain current financial records and retain those records again, for at least five years or whatever the jurisdiction says after termination of the representation. What do you need to keep as part of the ideal or per best practices financial recordkeeping? You should have receipt and disbursement journals that contain a record of deposits to, and withdrawals from the accounts where the funds are kept specifically identifying the date, source and description of each item deposited, as well as the date, payee and purpose of each disbursement. If you think about it, and you're old enough to remember the days when we had paper checkbooks, that's what you would write in your checkbook. You would put in the date, the name of the person who gave you the money or you're giving the money to, along with what it was to pay for and the account number. That's what the rule of financial recordkeeping is suggesting. What else do you need? For lawyers, each client whose funds go into an IOLTA account should have a separate ledger, a separate sheet, so that you would have one global account that lists all the funds in the account, and then a separate ledger showing for each separate trust client or beneficiary the source of the funds, the names of the persons, et cetera, et cetera. In other words, you have your main account that shows you made the checks for the Jones and the Smith matter, but then the Jones matter and the Smith matter would have their own sheet so you could show just the funds that were received for each of those matters. And of course the amounts in the individual ledgers should match and reconcile with the amount in what I will call the global ledger. And you should also, as part of the Model Rule, maintain copies of your retainer, your fee agreements, and any other documents that relate to that under the Model Rules. So you're keeping those records. What else do you have to keep? Copies of accountings to clients showing this disbursement of funds. So in other words, if you have a personal injury claim and there is a settlement sheet that shows X dollars received, this is paid in fees, this is paid in expenses, this may pay off a lien and here's the net to the client, you need to keep a copy of that. You also need to keep copy of the bills and for fees and expenses that are charged. So if you're charging for a delivery service or for photocopying or some expert expense, you would also maintain those records. And the benefit to that is that if there is a question about the account and you have maintained all of those records, it is very easy to produce the information to Disciplinary Counsel or disciplinary authority and to as demonstrate what you did and why what you did was proper. You need to keep copies of the record showing the disbursements. In my office, we make every disbursement by check. There are no exceptions. We do not use, if our bank allows it even, and some do and some don't, we don't make electronic transfers, we write a check. When we make a deposit, we scan and maintain copies of every check. So that we have the checkbooks, we have the bank statements, nowadays they're electronic, but we save them, and any other items so that we have a detailed record that shows exactly what came in and exactly what came out. You are also required to have a trial balance and a reconciliation. In some states, these are required monthly, others, it might be required quarterly. It is my recommendation and considered the best practice in many jurisdictions that these accounts be reconciled at least once per month, why? Because that will eliminate the potential that something or some mistake has fallen through the cracks and that there could be an overdraft or some problem. Diligent recordkeeping and reconciliation is critical. And if you need to, you may have to, as the rule suggests, maintain copies of the portions of client files so that those items in the client file demonstrate what the transactions are in the IOLTA account. The Model Rule on Financial Recordkeeping has some other requirements that are not adopted in every state. They suggest that only a lawyer admitted to practice law should be an authorized signatory. That is not a requirement in every state. Some states will allow others to sign, but if you are a lawyer on those accounts, you need to be extremely vigilant that only proper disbursements are made, receipts should be deposited intact, and your deposit slip should be in detail enough to understand what the items were that were deposited. And the Model Rule on Financial Recordkeeping recommends that withdrawals only be made on a check and not be payable to cash or by bank transfer. I strongly suggest that you adopt those items. The Model Rule on Financial Recordkeeping says you can maintain the records electronically or other media, and in a method such that when needed, if you have to present printed, physical copies, that they can. The Model Rule recommends that all of the records be kept at the lawyer's principal office in the jurisdiction where the lawyer is licensed or a readily accessible location. Some states still do random audits. And if the auditor comes to your door and you do not have those records, it will delay the process and could create problems. Should a firm dissolve or close, lawyers must make appropriate arrangements from maintaining the records in the IOLTA account. Again, these are the Model Rules on Financial Recordkeeping, but as you listen to them, you should recognize that, oh, if I do all of this, I'm doing best practices and I shouldn't have any problems, which is the point of it. And if you are selling a practice, then the lawyers should make arrangements for the transfer of the IOLTA account records. Now many states and under the Model Rule talk about a term called qualified funds and the qualified funds are the Rule 1.15 IOLTA account funds that I've been discussing. They are typically defined as funds that are nominal in amount and are held for a short period of time, such that the interest generated wouldn't justify the expense of administering a segregated account. So consider a real estate closing where you're holding the deposit money of $10,000 and you're holding it for 30 days. Well, the interest on those funds is going to be nominal, particularly in these days when interest rates are low, even though right as I record this, they're going up a little, but not significantly. And for a nominal amount of interest, it would normally not make sense to maintain separate accounts. That's what qualified funds are, where it wouldn't make sense to go to the expense and hassle of having separate accounts. So funds are qualified funds even if... And let me talk about this. For example, you have a retainer, an advanced payment that only covers a few hours of work that could be completed quickly. Does it have to go into an IOLTA account? And the answer is yes. Even though the interest is minimal, does it have to go into an IOLTA account? And the answer is yes. Now in certain states, lawyers, if you are receiving funds for a specific project that is a payment in advance, you may, and you have to check your state rules, be able to avoid or not having to deposit the funds in an IOLTA account. But in those circumstances, it is considered best practices that your fee agreement, retainer letter, whatever you have, be very specific and state that the fees are a flat fee, they are earned upon receipt, they will not be deposited in an IOLTA account and are not refundable. If all of those conditions do not exist, then the funds must go into an IOLTA account. You can't commingle funds. Commingling funds is sort of IOLTA 101 trouble because when you commingle funds such as if you get a deposit today for $100 and one tomorrow for 50, and then one for 200, and you need to pay the $200 person their money but the funds haven't cleared, you can't make that withdrawal using the funds that have cleared from the other clients. You always have to make sure the individual person whose funds they are has cleared the account. The only exception to commingling is the funds that are put into an IOLTA account to pay service charges on the account, or if a bank requires a minimum balance. And as I said, the fees can only be withdrawn after they've been earned or the applicable expense is incurred. So it is not considered acceptable that you just tell a client in your fee agreement, every month, I'm just gonna withdraw the fees. You generally must present the client with a statement, outlining the fees that you have earned and the expenses that you have incurred and to provide the client with an opportunity to review and if necessary, to dispute or question any transactions. Only after a reasonable period of time, typically about 7-10 days is common practice, may you withdraw those funds to reimburse yourself. So that's how that part works. Now, not everyone has to have an IOLTA account and each state has its own rules with regard to who is exempt from having an IOLTA account. Examples could be a government lawyer who doesn't receive qualified funds, a professor, a judge. In some states, lawyers whose practice is such that they never receive funds may be able to obtain an exemption, but in order to have the exemption or an exclusion for having funds, you need to check your rules to make certain that they in fact allow those exemptions or that you have to file certain forms in advance to be exempt from the requirements. As I said, these are the types of rules that will differ from state to state. So you need to look at each state's rules. And in most cases, the rules require that each state where an attorney practices, you have to have a separate IOLTA account. I work for example, with an attorney who is licensed in Pennsylvania, New Jersey, Maryland, and New York, and she is regularly writing checks from all those accounts. She has to follow the separate rules for each of the states where she is licensed and it can be confusing, et cetera. So as we talk about with best practices, one of them for her is that each of the checks for the IOLTA accounts should be different colors, should be prominently marked or stored in a way in each of her offices, such that she knows that when she's writing a check, she's not writing a check from the New Jersey account for New York expense, but each state has different requirements. Again, I talked earlier about credit card deposits. And if you have credit card deposits into business account, that's permissible, and there are services that assist lawyers with accepting credit cards for IOLTA accounts. And that means that a client pays money on a credit card and those funds are deposited into an IOLTA account. However, you need to be concerned with a couple of things. One is that there may be chargebacks, the client disputes the bill or something of that effect, or the card, even though it was approved, didn't go through. So you need to be careful about that and make sure that you have precautions in place to prevent that. As I said, the vendors and companies who work with lawyers and banks who work with lawyers often have arrangements to have all withdrawals such as that be made from a business account. There also may be tax implications from credit card deposits because credit card companies will issue end-of-year statements. And in those cases, you would have to address that, but that's something you have to address with your accountant, your financial person, and it's beyond the scope of my advice to you in this program. And then you have issues regarding unclaimed or for lawyers whose records are not good, unidentifiable funds in an IOLTA account. How are funds unidentifiable? Well, with proper accounting, there should never be any unidentifiable funds in an IOLTA account, but sometimes particularly lawyers who aren't maintaining the accounts regularly, or older lawyers, or lawyers who are maintaining paper records, or lawyers who are not withdrawing their fees as earned every month, which is a violation of most states' IOLTA rules could end up with funds in an account that they can't identify. And that's generally because of sloppy recordkeeping. If you handle your accounts properly and make the timely withdrawal when those funds are earned, in other words, once the client approves the bill or the time for objecting is gone, lawyers should be withdrawing those funds and should not be leaving funds in the account as sort of a savings account or a rainy day fund. Every state has its own rules relating to unclaimed and unidentifiable funds. And you need to look at multiple rules and statutes about that. Do you have to estreat the money? Do you have to give unidentifiable funds to the IOLTA Board or similar organization in your state? All of these items are factors to be considered as you analyze your IOLTA account in the event you have unclaimed or unidentifiable funds. It's more likely to have unclaimed funds where for whatever reason, a client does not accept the funds, it happens. And you need to look at the specific rules, which do vary from state to state. In every state of which I am aware, lawyers may only have IOLTA accounts in what are commonly known as eligible institutions. Eligible institutions are banks approved by your state Supreme Court or other entity that agree to handle the funds, deal with the minimal interest deposits and withdrawals. In every state of which I am aware, these eligible institutions also agree to report to whatever entity your state has designated when an item is presented against an IOLTA account with insufficient funds, even if the bank chooses to honor the item. So suppose there was a check and it was $5 more than the amount in the account. The bank may honor that check, but it will still report the overdraft to your state entity and lawyers have to then explain why there was an overdraft, because in theory, if the account is properly maintained, documented, et cetera, there should not be an overdraft. Now I talked about qualified funds. Let's talk about non-qualified funds. It could be an example and I1 is that you're an attorney. You receive the net proceeds from the sale of a marital residence and the parties all acknowledge that distribution may take many months to resolve, but they want the interest on the funds. In that case, you wouldn't put those funds into an IOLTA account. You would open a separate trust account that would typically be named in the attorney's name for the benefit of a client or the client's spouse. In those circumstances, typically it will not be your law firm's tax identification number on the account, but either a spouse or the client's social security number, so that when statements are issued about interest earned, they are given to those individuals and the interest does not go to an IOLTA fund. Qualified funds are a variety of items. As I mentioned earlier, unearned retainers. There's a $10,000 retainer to be billed at $500 an hour. Those funds go into an IOLTA or 1.15 account. Cost advances: they're depositing X amount of money to pay expected expenses in a matter. Real estate settlement funds are typically placed into an IOLTA account, and you need to be careful about those. There are many ethics opinions in different states as to how real estate settlement funds are handled. Personal injury settlements go into your Rule 1.15 IOLTA account, as do any funds held that are nominal and are only expected to be held for a short period of time, again, where the interest on the funds wouldn't justify the expense of having a segregated account. However, earned fees and cost reimbursements do not flow through your IOLTA account. So you send your client a statement that said this month, you worked and your bill was $5,000 and you had $750 in expenses. The client writes a check or goes through a credit card for $5,750. Those funds are not IOLTA funds. They should not go through an IOLTA account because doing so is in fact commingling because you're putting funds that do not belong to a client or a third person, and you're mixing them with your funds, do not do that. So what's the right way to proceed? Only deposit client funds into a trust account. Those should include advanced fees and cost retainers, flat fees that are not earned until the representation is concluded. I gave you the example earlier of what you have to say in some states to avoid having to deposit flat fees into an IOLTA account. But unless that language is used, flat fees that are not earned until the representation is concluded go into your account. Settlement funds go into your IOLTA account and the real estate funds, as I mentioned. The right way, the best practice. You need to have a separate client ledger for every client. There is no reason not to. And if you do, as many attorneys do, and we talk about this in this program, you can do this with an Excel spreadsheet. You don't need to have fancy software unless you want it or you have a very busy IOLTA account, but you can create a separate ledger that accounts for each client's funds, shows who it comes from, what it was for, who it was paid to, what it was for, when it was paid for, and what those funds were, and then have a separate main page that lists the deposits, et cetera. That is IOLTA 101, the reason you're here. The disbursements, same thing. You shouldn't have a ledger that simply shows $120 with no explanation. It should say for the process server or for medical records or whatever it is, because those are disbursements that are made from advanced funds. Now there's a distinction, where a client gives you a retainer or advanced funds for cost or fee expenses, you pay them out of the IOLTA account. On the other hand, if there are no funds in the IOLTA account or there's no agreement that those funds are used for expenses, then those are paid out of a business account and then billed to the client. So those are the types of things you need to be thinking about. Same as you would do in the old days when we all had those paper checkbooks and we weren't using Quicken and other software, date the check is issued, the check number, the payee, the amount, and the explanation, those are the five essentials. You should also have 'em running balance for each client on each separate ledger so that you know that there are funds available for the client and that there have been no overdrafts. That is very basic and it avoids the potential of using client X's funds to for the purposes of client Y. And note funds should be transferred in excess of a client's retainer balance. So there are lots of ways to deal with IOLTA accounts. What I wanna do is talk about some sample ledgers. And what we talk about with these is what needs to be in a sample ledger, the client's name, ideally, an address, phone number, if they have a file number. There is software that will show an account is balanced or not. The ledger should show the date, the payee, the check number, a memo to explain it, and either a credit or debit and a balance. You can do this with software, especially designed to maintain checking accounts and balances or you can do this with a very simple Excel spreadsheet, and you can use Microsoft Excel or any of the spreadsheet programs. This is the type of ledger that these programs are made to do and are very easy to create. And if you're unable to do that, you need to get someone in to help you, because you should not be just maintaining these records on paper. These ledgers will show all of the relevant information relating to the client so that you can see very simply if the account is balanced or, God forbid, it is overdrawn, which is why you must have a running balance. Because if you receive a retainer of $5,000 and then you send an invoice for 2,600, there's a $2,400 balance, then you send another invoice for 1,500. Well, then there's a $900 balance. When you do your next invoice for $2,000, even though there's only a $900 balance, you can't withdraw the 2,000, you will be withdrawing and commingling funds. You can only withdraw that $900 balance, but your spreadsheet, your software should trigger a warning or something so that you see very clearly, oh my God, if I write this check, I am overdrawn. You also need to do, and this is best practices, it's required in all the different states, just the timing varies, I recommend a monthly reconciliation. This is no different than what we used to do when we got the paper bank statements. And on the back you wrote down, you took the total. In this case, if it's client's, you're gonna take the ledger balances for all of the clients that have money, and you're gonna add the amount of the outstanding checks and that should equal the balance in the account. Or you can take the balance in the account, deduct the total client balances minus outstanding checks and that should equal zero. In other words, you're verifying that the funds that are in the account do in fact match totally what is done. Now, what happens if an account doesn't reconcile? You need to go back immediately and figure out why. Did you transpose a number when you were putting something in? Was there some type of clerical error, but you need to review the deposit amounts on your statement versus the deposits on the client ledgers. Do you need to review the checks that have cleared versus what it shows on the client ledgers? And you should also review the statements for any transaction that is not reflected on a client ledger. If you reconciliation doesn't balance, you need to stop everything because that is a red flag warning that could eventually lead to disciplinary issues unless you fix it. So what are some dues that we recommend as best practices? Obviously, keep accurate records. Maintain individual client ledgers. You should have copies of all checks received from or on behalf of clients. Nowadays, we typically scan them. If you still have paper files, make photocopies. You should also photocopy your scan, every deposit receipt. If you maintain and do electronic deposits through check scanners, you should have the ability to download or to make a record of those electronic deposits. And you need to have copies of all of the invoices paid or cost advance, the same thing as we talked about earlier. You should be preparing monthly invoices or statements and sending them to your clients before you disperse the fees and costs. Unless you have some other written agreement, and even then, I would be very cautious, you must wait till a certain period is done. If you are dispersing money to yourself or your firm, you need to specify what that's related to. So in our office, we might have the statement that says, this is the August billing, or the January billing, or closing a file, it's concluded, those types of things. Your checks should say, IOLTA account or trust account, and they should be a different color from your business or operating account checks. It sounds silly, but it is much easier if the checks are different colors. They are visual clues and reminders and especially if they're at the same bank, but regardless, they should look different enough that if you pick up a business check, you know it's not from your IOLTA account. You shouldn't use, in some states forbid it, a signature stamp. You should limit the number of people who have signing authorities. And really if possible, it shouldn't be anyone but a principal of the firm. There should never be a debit card for a trust account. If you have to make a withdrawal, that withdrawal should be coming from a check, but certainly not a debit card. From personal experience, I can tell you about clients who have gotten into disciplinary problems when they had a trust account with a debit card, because they ended up using it for personal expenses, which is commingling, and their licenses became jeopardized. And do not accept cashiers checks from unknown sources, those emails you get in that, oh, I'm the sultan of some country. Do not accept wire transfers unless you can absolutely verify the accuracy and authenticity of the sender. No cash withdrawals. Again, withdrawals should be made in a traceable paper way. There should not be an overdraft protection on a trust account, why? There shouldn't be overdrafts and you shouldn't endorse checks for deposit only without including the signatures, the payee's or the name of the law firm on those checks. And you should never leave earned fees in your trust account. It is not a savings account or a rainy day fund. Once those fees are earned, those are yours or your firm's. They need to be withdrawn because if you leave firm or your money in the account, you are actually commingling your funds and can risk disciplinary action. So now I'm gonna talk about, as we head toward the end, what you do if you're just setting up an IOLTA account using Microsoft Excel. What you do is generally very simple. You would have the main client ledger that would have a column for date, a column for the name of the client, a column for deposits and a column for withdrawals or debits and a balance column and a memo column. And it should be set up so that the cells automatically, in the balance, add in any deposits or withdrawals that are noted, and that you have a running balance. That way, you can see all the transactions for a given client. It's a very simple item to do. And once you have the formula for the balances, you can copy that formula using Excel into all of the additional cells below it so that the running balance continues no matter how many entries are made. And it's typically like E1 plus C1 plus D1 or something like that. And then when you copy, the next Excel down will be E2 plus C2 plus D2 or something of that effect. Excel does this beautifully. In the client's file, and you can also then list expenses, et cetera, et cetera, and we make the trust account general ledger the first book in Excel. After that, you have separate little books or spreadsheets for each of the clients. And then when a client's matter is over, it can be moved away so that you keep as your tabs, and you can change the color and the look of the tabs to make it easier for you to know this, you have available, right next to that general ledger, the client's ledgers for matters that are open. The individual client ledger is similar, except it doesn't need the client column. It only needs a date, deposit, withdrawal, balance, and memo column so that you see that again, with the balances showing and automatically calculated. Excel is a spreadsheet. Spreadsheets are designed for numbers, therefore use them to calculate numbers. Plus you will be able to see that even if the billing for one month exceeds the amount in the account, how much you can take from that funds before you end up with a zero balance and you are not overdrawing the account or commingling funds. You can easily have the account show deposits and withdrawal so that as clients add in retainers and you make disbursements, they all show up in that balance column automatically using very simple formulas. The formulas in Excel for these are basically the equal sign and pluses and minuses, depending on the cell number, and then you can copy that formula from one cell and then paste it into many others and it will make the corresponding items. So now what we have done in today's program is take you on a tour of IOLTA accounts. We're here because lawyers have to handle those accounts and they make mistakes. And what happens when you make a mistake? If you make a mistake in most jurisdictions, your bank will notify the disciplinary authorities or some other entity about your mistake, your overdraft. At that point, you are going to receive correspondence from that board or entity asking you to explain the overdraft. In many cases, if there is a reasonable explanation, you can explain it and that's fine. But on the other hand, if it turns out you withdrew too much money from one client or account or you in fact didn't have the funds in the account for whatever reason, you can expect that the disciplinary authorities will suggest that you provide them, and I suggest in a very strong way, with your records, because they will perform a forensic audit of your account. And if they do and find that you have been careless, negligent, or God forbid, intentionally mishandling your account, they will find out. How do they find out? In many cases, it's not because of an overdraft. In my experience, many of the situations arise when there is a disgruntled client who contacts disciplinary authorities. When the client contacts the disciplinary authorities, one of the first things they will typically ask for is to see the IOLTA ledger for that client or your current IOLTA ledgers, and they will go through those as well. So there are in fact many ways in which disciplinary authorities learn about the mishandling of IOLTA funds and that's what you want to avoid. You went to law school to have your license and to be sure. So today, in this program, you have heard about the most common reasons attorneys get into trouble for IOLTA-related issues. I've explained how IOLTA programs work and what they benefit and how to handle your IOLTA accounts. You need to look at your state IOLTA rules. You also should consider the Model Rules on Financial Recordkeeping so that you know how to handle your funds with best practices. And then in that circumstance, you will be in a situation where you will handle your account properly. If there is a request for records, whether from a client or disciplinary authorities, you'll be able to produce them and you will be able to do so in an ethically appropriate way, and to avoid the disciplinary concerns or possible disciplinary action that can occur when you fail to handle your accounts in a proper and safe way. I am Attorney Daniel J. Siegel from the law offices of Daniel J. Siegel, LLC. in suburban Philadelphia. You can reach me at [email protected], S-I-E-G-E-L.com, or 610-446-3457. Thank you for attending this webinar and good luck with your IOLTA account. Thank you again.

Presenter(s)

Daniel Siegel
Attorney
Law Offices of Daniel J. Siegel, LL

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