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What is an IOLTA and how does it work?

November 18, 2024

Managing client funds is a critical responsibility for law firms, and at Redwood Credit Union, we offer IOLTAs (Interest on Lawyers’ Trust Accounts) to help law firms securely hold these funds while complying with legal requirements. IOLTA accounts are a type of trust account that hold small amounts of short-term client funds. While these funds are in the account, they earn dividends, but instead of benefiting the law firm or client, dividends are directed to state-run programs that provide free legal aid to underserved communities.

How Do IOLTAs Work?

An IOLTA allows law practices to separate client funds from the firm’s operational accounts, maintaining clear boundaries between the law firm’s money and the client’s. The California Bar’s strict guidelines mandate this separation, ensuring ethical handling of client assets. Law practices must ensure that any funds belonging to clients, such as settlement amounts or retainer fees, are kept in trust and not used for the firm’s personal or business purposes.

Law firms are required to open an IOLTA when they manage client funds that are too small or will be held for too short a time to generate significant interest for the client. In this case, the interest generated in the IOLTA goes to the California IOLTA program, which is administered by the State Bar of California. This program uses the pooled earnings from many IOLTAs to support non-profit legal services, including housing aid, civil rights advocacy, and representation for victims of domestic violence.

Compliance with CTAPP

In California, the Client Trust Account Protection Program (CTAPP) plays a crucial role in ensuring attorneys maintain compliance with client trust account rules. Introduced by the State Bar of California, CTAPP requires all practicing attorneys to report their client trust accounts annually. This mandatory reporting increases transparency and accountability, ensuring that client funds are managed appropriately. By working with financial institutions like Redwood Credit Union, attorneys can meet CTAPP requirements while maintaining an organized approach to client fund management.

Law firms should comply with these trust accounting rules and properly maintain an IOLTA to avoid disciplinary actions, including fines or even suspension from practicing law. This is why it’s vital to choose a financial partner who understands the complexities of IOLTAs and can provide the necessary support to ensure full compliance.

Why Choose Redwood Credit Union for Your IOLTA?

At Redwood Credit Union, we’re committed to helping law practices manage their client funds securely, conveniently, and affordably. Our IOLTAs offer 24/7 digital banking, and all fees and restrictions are waived so your firm can focus on delivering outstanding legal services while making a positive impact on our community.

Learn more about IOLTAs with Redwood Credit Union.