All attorneys should know they have a fiduciary duty to safeguard client property and that they are prohibited from commingling their own money with funds belonging to their clients. Indeed, because these obligations are so fundamental, there is no more sure-fire way to face disciplinary sanctions—or professional liability claims—than to mishandle client funds.
Many money-handling problems can be avoided by reviewing the IOLTA account rules and committing to taking a few simple steps to help comply with them.
Establish Separate Accounts
The rules strictly prohibit commingling of client and firm funds. Therefore, keeping client funds and firm operating funds in a single account is a de facto violation of the rules: accounting for funds separately on your firm books isn’t sufficient.
At a minimum, you should have two separate accounts; one for firm operating funds and an IOLTA account for client funds. Ideally, you should have separate IOLTA accounts for each client.
In addition, take steps to help avoid accidentally using the wrong accounts when disbursing funds. For example, name each account to clearly indicate its purpose: use “Client Smith IOLTA Account for Matter 1234,” rather than “IOLTA account 1,” or just an account number. Label checkbooks and electronic banking interface identifiers accordingly.
Never “Borrow” From An IOLTA Account
It is never appropriate to take funds out of an IOLTA account for any reason other than its designated purpose.
If you have taken a deposit on fees, do not withdraw those funds before you have actually earned them. Best, wait until after you have provided notice to the client and given them enough time to contest your statement.
After that, do remove the funds promptly. Don’t be tempted to leave them in the account as a sort of rainy-day fund; that is commingling and courts trouble. But do not pay firm expenses directly out of an IOLTA account. Although it may be convenient to use your electronic banking system to pay your electric bill that way, take the preliminary step of transferring the funds to your operating account first, to avoid any confusion or appearance of impropriety.
Additionally, never overdraw a trust account. IOLTA accounts that are used properly will never be overdrawn. They have a one-to-one relationship between the funds in them and use of those funds, so any overdraft is evidence of mishandling. Because of this, in most jurisdictions, banks are required to immediately report overdrafts to the governing disciplinary body.
If you do accidentally draw from the wrong client trust account, correct the problem as soon as you realize it, document the circumstances, and immediately notify the bar and your insurer. Most jurisdictions allow attorneys to get confidential help regarding IOLTA issues from their lawyer assistance programs. Nevertheless, it is important to report the problem to your insurance company as soon as possible to help trigger coverage for a potential claim or disciplinary response if necessary.