A lawyer or a law firm which receives any advance fee or settlements on behalf of clients will need to hold those funds in an interest bearing trust account. The amount is generally held in a trust account for a short period of time. A law firm or attorney can only use those funds to pay costs associated with the cleint’s representation and may only draft funds for the firm/attorney’s use once earned. There is no trust document for a trust account. Most banks do not charge service fees on trust accounts, so costs are negligible.
A law firm may create multiple trust accounts. Since a single trust account holds funds on behalf of many clients care must be taken to avoid mistakes. For operating multiple trust accounts additional record keeping responsibilities are required. All trust accounts of a law firm have the same tax ID number. This way all the interest earned on trust accounts is reported to the IRS as having been paid directly to the state specific trust account board. At least one lawyer must sign a trust account check. If the law firm requires two signatures on checks as an internal requirement, the second signatory may be a non lawyer. This rule is true for all trust account checks, regardless of amount. Lawyers are not allowed to use trust account funds for personal use.
“Interest on Lawyers’ Trust Accounts,” or IOLTA, is a mandatory program. State bar associations use the interest earned from IOLTA account to fund community based access to justice programs. These trust accounts provide an innovative way to enhance access to justice for those living in poverty.