April 1, 2019 | Robin Bull [Zavieh Law, https://californiastatebardefense.com/] Reprinted with Permission
Paying yourself from an IOLTA account is an important concept in law office management. An IOLTA account is a trust account used to hold money paid to you by a client until that money is earned. One of the most common reasons ethics complaints are filed against lawyers is mismanagement of an IOLTA account. Every jurisdiction has their own rules related to when (and how) an IOLTA should be opened, how it must be managed, and when you may pay yourself from that account. Some jurisdictions, including California, require lawyers to use an IOLTA even for flat fee services.
Although this post discusses paying yourself from an IOLTA, it’s imperative that you know the rules in your jurisdiction. You should also review the requirements you must fulfill with starting and managing the account. Ensuring that you know the rules is one of the best things you can do to avoid an ethics complaint.
Withdrawing Funds from an IOLTA Account to Pay Yourself
As mentioned above, the purpose of the IOLTA is to separate the client’s money from your operational fund or the money from which you pay yourself. This is money that is not yet earned. Paying yourself from an IOLTA account is done when you earn the funds.
You do not have to remove the earned money on a daily basis. However, you will want to keep accurate records (and notes) of your time spent and work performed. Then, at the end of your chosen billing period, you may withdraw the funds. Your time spent, work performed, withdrawal of funds, and remaining balance left in the account should be provided to the client as an update. The easiest way to create this update is to use detailed billing.
Paying Yourself Previously Earned Fees
There are times when the bill you send out will have a balance due because the client did not have enough money left in their IOLTA account. How do you pay yourself for previously earned fees when the client pays you?
When the client pays you, do not put the earned money into the trust account. The money owed to you is already earned. The only money you would put into an IOLTA account is if the client sends extra money for you to earn as the case moves forward. For example, if you billed the client for $250 because they didn’t have enough in their trust account, and they send you a check for $700, you would keep the $250 that you’ve earned and place the reminder of the money into the IOLTA account.
What about if the Client Disputes the Fee?
When paying yourself from an IOLTA, there could be a time in your career when a client disputes you removing the funds from the trust. You may only remove fees that are undisputed. If the client disputes the fee before you withdraw it, you may not withdraw it. If they dispute the fee after you withdraw it, you must return the funds to the account. If the client only disputes part of the fee, you may keep the portion that is undisputed. The disputed amount must remain in the account until the matter is resolved.
While the previous paragraph summarizes the general way you would pay yourself from an IOLTA, it’s important to review the rules in your jurisdiction. If there aren’t any rules on this matter, you should contact the ethics committee to ensure that you handle a dispute in the right way.
Know the Rules, Protect Your Career
Paying yourself from an IOLTA is about removing the earned fees. Anything unearned or disputed remains in the account. Refunds of unearned fees should be given immediately. Stay on top of your IOLTA accounting and create invoices that clearly show how you’ve spent your time and earned your fee. Know the rules in your jurisdiction so that you can protect your career.