I offer up a lot of free time speaking with attorneys across Massachusetts (and sometimes beyond) who are just starting their own law firm.  I don’t, by any stretch of the imagination, consider myself an expert in law firm creation or operation.  But what I do offer is the benefit of my experience and mistakes.  It surprises me (but I guess it shouldn’t) that when I talk to a lot of these attorneys they have no idea either what the rules are regarding IOLTA accounts or they don’t know what an IOLTA account is.

When new attorneys get sworn in to practice under the Massachusetts Bar, I believe that everyone of them should be given some form of education on law practice management including how to set up an IOLTA account.

For the record, the Boston Bar Association offers a free monthly seminar on IOLTA accounting.  The problem is that not many people know about this free program.

What is an IOLTA account?

IOLTA stands for “Interest on lawyers’ trust account”.  It is what is commonly referred to by attorneys as a trust account for client funds. If you have a law firm, you have to set up an IOLTA account if you take retainers or hold client funds.

An IOLTA account is set up at an IOLTA approved bank and is basically a checking account.

What is IOLTA used for?

The purpose of the IOLTA is several folds.  It is a place to hold client funds before the attorney actually earns them.  When you earn (bill) it, you can transfer the money from the IOLTA to your operating account.  Your operating account is used for your own business use and can be used to pay anything from office supplies to salary to rent.  You cannot use money from the IOLTA account for any business or personal use.  The money in the IOLTA are client’s money and doesn’t belong to you at all.

Transactional practices such as real estate will use the IOLTA to temporarily hold the proceeds of a real estate sale and will use the IOLTA to disburse funds.

Another purpose of the IOLTA is to generate interest for organizations such as the MBA, BBA, LOMAP and other public services.

Can you have more than 1 IOLTA account?

Yes, you can have more than one IOLTA account and you can have more than one operating account.

What do they mean by commingling funds?

When you deposit a client’s retainer into your personal or operating account instead of the IOLTA account, that is commingling funds.  You are commingling your client’s money (the retainer) with your own personal money.  Remember, a retainer does not belong to you until you earn it.

The best way to avoid commingling funds, improper accounting and using your client’s money improperly is to never commingle funds.  Don’t deposit any retainers into a personal or business account with the intention of moving it right away into the IOLTA.  Put the money into IOLTA right away.

How do you accept credit cards with IOLTA?

There are several merchant account services that allow you to accept credit card payments.  The Massachusetts Bar Association recommends (and I use it myself) a service called Affiniscape.  There is also a service called LawCharge.

The main thing to remember is that you cannot use other merchant account services such as paypal or other credit card vendors.  Attorney trust accounting is a lot more complicated than other merchants such as restaurants or retail shops.  Since all retainers must go into IOLTA, any fees charged by credit cards must NOT be taken out of the retainer.  The specific lawyer merchant accounts provides that all client funds gets deposited into IOLTA while any fees, chargebacks (credit dispute) or interest gets taken out of an operating account instead.

Are there special IOLTA rules for flat-fee cases?

If the case that you are working on is not an hourly bill case and your fees are a flat fee, then the funds do not need to be placed into IOLTA.  Once the fee is paid, it can go directly into your operating account.

Where can I find out more about IOLTA accounts for Massachusetts attorneys?

For more information including a FAQ and a list of IOLTA approved financial institutions, you can visit MAIOLTA.