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Tips to Effectively Manage Client Trust Funds (IOLTA) to Stay Compliant and Boost Cash Flow in 2021

Making simple modifications to the client intake processes and day-to-day business operations, your law firm will boost profits in 2021!

As we all know, the practice of law is challenging and negative case outcomes can sway clients to not pay legal service invoices, especially in uncertain times. Therefore, more firms are offering clients cost-effective alternative fee agreements, payment plans, evergreen retainer options, and the option to have client money held in trust before representation can begin.  

With legal trends rapidly shifting under the new normal, by making simple modifications to the client intake processes and day-to-day business operations, your law firm will boost profits in 2021!  

By offering your clients alternative fee options, your law firm can secure positive cash-flow and lessen the financial risk of having to write-off aged A/R balances on invoices for legal services rendered. Simple changes in business operations will guarantee positive outcomes.

As your law firm revamps its business model moving forward to 2021, your focus will be on retaining more clients, handling alternative fee options, and managing client trust funds efficiently.

As you begin to implement changes to retention practices, it is important to incorporate the Terms of Representation in clear and concise language in your law firm’s Attorney-Client Fee Agreement.

First, let us begin by discussing retainers and why they are important.

What is a Retainer?  

A retainer is a generic term that can mean a few things:

  • Monies paid in advance as a deposit to engage the firm on an hourly case
  • Monies paid in advance as a deposit for a flat fee case
  • Monies paid in advance as a deposit for expected out-of-pocket costs 
  • Monies paid monthly on a recurring basis for unlimited or capped services

As we know, client funds must be kept in a Trust (IOLTA) Account, which is used as a guarantee and upfront deposit to pay legal service invoices. Depending on the Attorney-Client Fee Agreement, client funds used to pay legal invoices must be replenished as funds are depleted, or client funds are held in trust and used to pay the final invoice.

There are a few exceptions when working with a client on a Flat Fee basis, wherein a Flat Fee is considered earned and can be deposited directly into a General Account. However, if the retainer paid includes monies for upcoming costs, that portion of the retainer must be deposited and retained in the Trust Account to pay future costs. 

A best practice here is not to deposit client funds in the General Account as that is the beginning of inaccurate Trust Account record keeping and is punishable by the State Bar.

Difference Between Trust (IOLTA) Account and General Operating Account

  • Trust Account holds client money and pays monthly invoices
  • Trust Account holds client money for future case costs 
  • Trust Account holds client money as guarantee of end of case payment
  • Trust Account holds settlement money until paid out
  • General Operating Account is your law firm’s money to spend!

What is a Trust (IOLTA) Account?

  • A bank account for holding money given in trust for future legal services
  • A bank account that is separate from the law firm’s operating money
  • (IOLTA) “Interest On Lawyer Trucst Account” where interest goes to the State Bar
  • An account that must have accurate and concise accounting records
  • An account that must have Three-Way Trust Account Reconciliation for accuracy

What are Trust Account Funds?

  • Client monies held in trust for future services
  • Client monies held in trust for future expenses
  • Third-party settlement monies held in trust for distribution
  • Client money they are trusting your law firm to hold!

So now that we have covered the basics of what a Trust Account is and is not, and the reasons law firms must have a separate Trust Account, let us look at how to work with them to ensure accuracy and compliance with your law firm’s State Bar requirements.

First and foremost, it is important to know what the money being paid to the law firm is for: trust funds replenishment, settlement funds, cost advances or A/R invoice balance? You also need to know where the money is being deposited – Trust Account or General Account?

Often the accounting staff must seek out the retaining attorney when unidentified checks or electronic payments are made on a case in order to ensure where to deposit the funds. It is important that client trust funds do not get deposited into the General Account and commingled with the firm’s money.

When client trust money inadvertently gets deposited into the law firm’s General Account, this gives the law firm a false sense of financial security. Usually the error is found and resolved at the time of billing time or later, often leading to major financial problems. The client money that should have been in the Trust Account to pay legal invoices or costs-advanced for services related to the case has been spent elsewhere, most likely on law firm operating expenses.

In addition, getting a notice from the Federal Bar Association that your Trust (IOLTA) Account must be audited due to a complaint of mishandling can cause fear and lead to an attorney losing  the privilege of practicing law.

There are ways of making sure your law firm does not fall victim to Trust (IOLTA) Account fund mishandling.  Check out some of the simple steps you can take below.

One way is to consistently monitor work-in-process (WIP) and upcoming costs-advanced when clients have trust funds and are moving into either the discovery or trial phase. These phases of the case can easily lead to excessive fees and cause costs-advanced to become out of control. This is especially true when multiple attorneys are working on the case and no one is monitoring.

By reviewing WIP, outstanding fees, costs, and balances in Client Trust Accounts on a regular basis using  modern dashboards, your law firm is less likely to deplete client trust funds and/or go over budget on a case, which means invoices will be paid and A/R will be current. Here are some ways you can stay on top of your firm’s business:

Monitor Work-in-Progress for Fees and Costs

  • Discovery and/or trial phases require more client trust funds to move forward 
  • Advise client if additional resources will be needed for optimal case representation
  • Prepare a case budget and document anticipated fees and costs 
  • BQE CORE LEGAL's dashboards display WIP and Trust Account balances 

Request Replenishment of Client Trust Funds Immediately When Balance is Low

  • Do not wait to send a Retainer Replenishment invoice at month-end
  • Send invoices with LawPay. Electronic payments deposit directly into the Trust Account 
  • Pay case costs to vendors directly from Client Trust Account funds
  • BQE CORE LEGAL's Retainer Replenishment invoices simplify getting paid quickly

As your firm begins to transform business operations and move to the new trend of alternative fee agreements and requiring client deposits that must be held in trust, below are some closing tips and tricks to avoid Trust (IOLTA) Account mishandling:

What not to do with your Client Trust Account

  • DO NOT borrow from client trust funds to help cash flow, until earned
  • DO NOT deposit money in the General Account and transfer to Trust Account
  • DO NOT deposit A/R payments in Trust Account and transfer to General Account
  • DO NOT forget to deduct the State Bar’s earned interest at month-end
  • DO NOT use antiquated software to reconcile your firm’s Client Trust Account

What to do with your trust account

  • Have a signed Client Fee/Retainer Agreement for services rendered 
  • Have a Retainer Replenishment amount “when balance falls below”
  • Have LawPay's electronic payment link on invoices 
  • Have detailed client/case Trust Account records
  • Have  knowledge of your State Bar’s requirements and follow them
  • Have BQE CORE LEGAL's Three-Way Trust Account Reconciliation

Thing to Remember

  • Monitor fees and costs
  • Monitor client/case Trust Account balances
  • Balance Trust Account and General Account monthly
  • Keep accurate client trust funds records to avoid mishandling or an Audit


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