IOLAs are a high-stakes financial tool for attorneys and proper management isn’t just about compliance; it’s about the reputation and success of your practice. When your IOLA is managed properly your settlement disbursements are seamless and your client reporting is transparent. As an authorized participating bank in the IOLA Fund, our bankers have compiled tips for New York attorneys managing IOLAs.
Tips from our Banking Experts
- Only Deposit Client Funds in the IOLA
It isn’t malice that trips attorneys and law firms up in managing their IOLA; it’s messiness. For example, depositing fees into the IOLA and leaving it there to pay for future expenses or paying a vendor directly from the IOLA. This “comingling” of the firm’s assets with client funds is the fastest way to trigger an audit. If the audit should lead to disciplinary action, the “hold harmless” provision cannot guarantee protection. Never use the IOLA for personal or business expenses.
- Make Sure the Account is Properly Titled
Mis-titling an IOLA can result in technical violations of ethical rules and may fail to properly protect client funds under FDIC regulations. Either of these can trigger scrutiny from the IOLA Fund including audits and misconduct charges.
To properly title an IOLA in New York, the title must contain the attorney or firm’s name, the acronym IOLA and one of three terms: Attorney Trust Account, Attorney Escrow Account or Attorney Special Account.
- Maintain an Operating Account for the IOLA
While the IOLA pays interest to the IOLA Fund, the account may incur service fees in addition to needing to pay out earned fees. Maintaining an operating account at the same financial institution as your IOLA is a strategic risk management tactic. While ethics rules strictly prohibit “overdraft protection” on IOLAs to prevent the masking of financial errors, co-locating both accounts creates a seamless internal ecosystem that allows for faster rectifications and automated fee management.
Having linked accounts at the same bank enables you to arrange for IOLA service charges to be automatically debited from the operating account instead of the trust. It also enables you to integrate reporting and monitoring through a single digital portal, making reconciliations easier.
- Maintain Detailed Records
New York requires attorneys to retain seven years’ worth of bookkeeping records. This includes records of all deposits in and withdrawals from firm accounts. With regards to IOLAs, a three-way reconciliation between your bank statement, your client ledgers and your checkbook is the most efficient way to ensure the IOLA is in balance. What you look for in the reconciliation:
- whether the checks that have been written are being covered by money in the account;
- whether the debits and credits listed on the bank statement are reflected in the attorney’s internal bookkeeping; and
- whether each client’s sub-account within the larger IOLA is in balance.
This three-pronged reconciliation ensures that one client’s check isn’t paying for another’s expenses.
Managing IOLAs is a large part of the practice of law in New York. Because the purpose of an IOLA is to safeguard client’s money and fund civil legal services for low-income residents, it is a direct reflection of a legal practice’s integrity and reputation. In the eyes of The New York Bar Association, proper management of IOLAs is not merely an aspirational goal but an imperative.
