What You Need to Know About IOLTA Accounts in Texas

If you’re a lawyer in Texas who handles client money, you need to know and understand Interest on Lawyers’ Trust Account (IOLTA) rules. While IOLTA accounts aren’t applicable to all lawyers, it’s important to know whether you must use such accounts and how to manage them.

Read on to learn the ins and outs of IOLTA accounts, including how to open an IOLTA account, why they’re so important, and how lawyers and clients benefit from them.

Understanding IOLTA Accounts

Every state has some form of IOLTA program. Private practice attorneys who handle clients’ money in small amounts or for a short time will deposit that money into an IOLTA account. The interest earned on those trust accounts is sent by the financial institution to the Texas Access to Justice Foundation where it is pooled and is used to pay for civil legal services for financially vulnerable Texans.

Essentially, an IOLTA account is used for client funds that, if they had their own account, wouldn’t generate enough interest to cover the costs of opening and maintaining that account. By pooling the money with other client funds, enough interest is generated to fund public service programs. If the amounts are large enough that the interest generated would be greater than the cost of the accounts, then the money goes into a separate client trust account and the client receives the interest.

The program is managed by the Texas Access to Justice Foundation, which is a non-profit corporation that collects and administers Texas IOLTA funds to nonprofit organizations that help low-income Texans.

How do I know if I need an IOLTA account?

If you handle client funds that do not need a trust account of their own because they are in small amounts or for a short term, you are required to have an IOLTA account. Reasons you might hold client funds include:

• Holding small retainer fees: the money isn’t earned until the work is done, so it must be held separately from your operating funds.
• Safekeeping settlement funds: You may receive funds from a lawsuit that must be safeguarded until it can be distributed to your client.
• Handling escrow funds: In real estate transactions, you might hold money in escrow until the sale is closed and the money is transferred to the seller.

If you do not handle client funds in Texas or if you are not in private practice, you do not need an IOLTA account.

If you have questions about managing client accounts, Clio’s guide “How to Manage your Trust Accounting With Clio” has answers. Read it to learn about trust accounting best practices and rules and regulations. 

Benefits of using IOLTA Accounts for lawyers in Texas

Texas IOLTAs offer many important benefits for clients, lawyers, and the public.

For clients, there is peace of mind knowing that the money they pay in escrow or in a retainer isn’t mixed with the law firm’s operating expenses. Their money is safe and secure in a separate account, protected from misuse. Additionally, lawyers must carefully and thoroughly track all transactions that involve client money in an IOLTA account. Clients and regulators can see how the money is used and where it goes.

For lawyers, the accounts foster compliance and reduce the time and effort spent on managing different individual accounts. The legal industry overall benefits from the public’s confidence that their funds are handled ethically.

Meanwhile, the legal system and society benefit from obtaining interest from accounts that then fund public service programs, ensuring legal aid programs, law school scholarships, and other access to justice programs are funded.

Requirements for opening an IOLTA Account in Texas

Once you have determined you need an IOLTA account, you must open an account with an eligible financial institution. If your chosen financial institution does not participate in IOLTA, they can email the Texas Access to Justice Foundation to obtain a bank code and instructions on becoming eligible.

The interest-bearing account must be opened in your name or your law firm’s name, with the Texas Access to Justice Foundation’s tax identification number. The Foundation pays reasonable services charges on the account, but will not pay for

• Checks
• Wire transfers
• Other associated business expenses

You can open one IOLTA account for all your clients whose money you reasonably expect to hold for a short time only, but you must keep detailed records of the transactions related to each client, which can be tricky. For example, if one client has paid you a retainer of $1,500 but their legal expenses are $1,700, you cannot use funds from another client’s retainer to pay that $200.

If you have clients whose funds you expect to hold longer and the interest earned is expected to be in excess of the cost of a separate account, those must be placed in a separate non-IOLTA trust account.

Read Trust Accounting 101 for Law Firms to learn more about trust accounting and your legal obligations. 

Within 30 days of opening the account you must send a completed copy of the IOLTA Notice to Financial Institution and Foundation form to the Foundation. You must also notify the Foundation annually if your account remains open. This means confirming your information online is correct and up-to-date.

Avoiding Common Mistakes with IOLTA Accounts

As with any legal issue, there are risks of malpractice associated with IOLTA accounts, which is why you must be diligent in managing the account and recording transactions.

Among the issues you could face are:

• Commingling funds, such as mixing your business funds with client funds in the IOLTA account.
• Misappropriation of funds, such as using client money from the account for anything other than its intended legal purpose.
• Improper recordkeeping, such as not keeping detailed and accurate records of the IOLTA accounts.
• Failure to instruct staff properly to ensure anyone handling IOLTA accounts understands the regulations.

Clio can help you avoid legal malpractice claims linked to administrative errors or client relations issues—schedule a demo to see how.  

Tips for maintaining compliance with IOLTA regulations

Every year, when you pay your annual bar dues, you must confirm with the Foundation that your IOLTA information is correct and valid. If your information changes, such as you change firms or open or close a new IOLTA account, you must fill out the proper paperwork and notify the Foundation.

Even if you do not handle client funds or are not in private practice, you must verify your information and that there is no IOLTA associated with your Texas Bar card.

Best practices for record-keeping and reporting for IOLTA Accounts

When you open your IOLTA account, you must direct the financial institution to carry out a few activities.

• At least quarterly, the interest earned on the average daily balance in the account, minus reasonable service charges, must be sent to the Foundation.
• Provide the Foundation with your firm’s information, the interest rate on the bank account, and the service charges that were deducted.
• Provide you with a copy of all information sent to the foundation.

If there are any changes to your account, including account closure, you must notify the Foundation within 30 days.

Opening an IOLTA Account in Texas

You must open a Texas IOLTA if:

• You are in the private practice of law, and
• You receive or handle client funds.

Any client funds that are nominal in amount or are short-term must be put in the IOLTA.

Choosing the right financial institution for your IOLTA account

To open an IOLTA, you must use an eligible financial institution that pays interest rates on IOLTA comparable to the interest paid on similar accounts. If you want to open an account at an institution that is not yet eligible, the institution must email the Foundation for a bank code and instructions to apply for eligibility.

Step-by-step guide to opening an IOLTA account in Texas

Once you’ve identified the right bank for your account:

1. Open an interest-bearing IOLTA account in your name or your law firm’s name. Use the Texas Access to Justice Foundation’s tax identification number.
2. You and the financial institution must complete the IOLTA Notice to Financial Institution form at the bank. The form must then be returned to the Foundation via text or mail.
3. Confirm with the Foundation annually that your information has not changed or notify the Foundation of a change within 30 days.

IOLTA Account Compliance in Texas

Failure to remain compliant can result in disciplinary action or even disbarment, so it’s important to understand the rules about handling client money.

Money that you handle for your clients must be put into an account that is designated as a “trust” or “escrow” account at an eligible financial institution. If the amounts are small or short-term, they must be deposited in a Texas IOLTA.

Your clients’ funds must be kept separate from your operating funds. You cannot use these trust funds for operational expenses, no matter how small the amount or how quickly you expect to repay the money.  Any money that is received as a retainer can only be withdrawn once you have “earned” that money.

You must also create and maintain appropriate records of your clients’ funds. At least quarterly–and ideally monthly–you must conduct a three-way reconciliation of the account to ensure the IOLTA bank balance matches both the checkbook trust balance and the total of all client ledger balances.

Final Notes on IOLTA Accounts in Texas

The purpose of an IOLTA is to provide legal aid to people who do not have the financial resources to afford legal help on their own. Because lawyers frequently hold small amounts of money for a short time for their clients, the interest earned in individual bank accounts would be less than the cost of opening the account. By pooling the funds into a larger account, the interest earned can be forwarded to the Foundation and used for public good.

There are many rules about managing and handling client funds, and compliance is vital. The rules can be complex, which is why legal trust accounting management software can make managing IOLTA accounts less stressful. Book a demo today to see how it works.