Mary McPadden 0000-00-00 00:00:00
Frequently Asked Questions About IOLTA Rules How do I know if I need to have a trust account? If you are presently or potentially in the future going to be in possession of client or third party funds then you should set up a trust account. You also need to look at how you handle client costs. If the client advances payment of his/her costs then you would need to place those funds into your trust account. Even if the client pays you a flat fee with an advanced cost in one check, the check would need to be deposited into your trust account and then the flat fee portion would be transferred to your operating account once the check has cleared. Then you could pay the cost(s) from your trust account or reimburse yourself for costs you pay. An example of this type of transaction would be if you charge a flat $590 to do a corporation formation, $500 of the $590 is an earned upon receipt fee and the other $90 is for the filing fees. The entire $590 would be deposited into your trust account and then the $500 would be transferred to your operating account, once the check clears, and then you would issue a $90 trust account check to corporation commission for the filing of the corporation or a check to reimburse yourself for the filing fee in the event that you already paid it. See ER 1.15 and Rule 43. It’s a Fact! Money held on behalf of another party must be deposited to and held in Trust until earned. Which tax identification number is used for the trust account? The tax identification number for any IOLTA account should be that of the Arizona Foundation for Legal Services & Education (AFLSE) , 95- 3351710, unless you fall under the exceptions to the rule. See Rule 43(f) (2) and (3). Your financial institution should be instructed to use the tax identification number of the foundation, not the tax identification number of the lawyer or law firm. As such, the lawyer or law firm should never receive IRS Form 1099 for trust account interest. This method of account identification allows the earned interest to be recorded annually in the name of the foundation and not in the name of the lawyer/law firm. The name on the account, however, is to be that of the lawyer or law firm. It’s a Fact! Interest earned on lawyer’s trust accounts are electronically transferred to the AFLSE and are used in part to fund programs designed to assist in the delivery of legal services to the poor. What is a client ledger card? Each client shall have their own [individual] ledger card which includes: • Date of transaction • Check Number • Payee (who received the check) • Description (fees earned, reimbursed costs advanced such as filing fee, medical records costs) • Deposit Amount (if applicable) • Payer (where the funds are coming from, e.g. the client, an insurance company, etc.) • Withdrawal Amount (if applicable) the amount of the deposit and disbursement is always needed. The rule prohibits withdrawals unless by pre-numbered check or electronic transfer. • Running Balance (balance remaining in the client’s trust account) It’s a Fact! Detailed client ledger cards are the backbone of good record keeping. I want to advance a cost, a filing fee for example, for my client, should I advance it from my trust account? You may do that but best practices dictates that you should advance client costs (where you are paying on behalf of the client and then will be reimbursed by the client) from your operating account and then reimburse operating from trust. See ER 1.15(c). Assuming that the firm produces client invoices once monthly, when those client invoices are generated, calculate the amount each client owes the firm for costs advanced and reimburse operating from trust. Recommended Best Practice: The most important factor is to be consistent. If the firm’s preference is to pay costs advanced on behalf of clients from trust, always pay these costs from trust. Decide which method works best for your firm and stick with it. When reimbursing the operating account from trust for fees earned and costs advanced each month, can I write one lump-sum check for all clients with trust fund activity or must we write a separate check for each individual client’s trust account activity? One lump sum check that covers all activity is the preferred method of funds transfer. If clients Smith, Jones and Johnson each owe the firm $500, write one check (or an electronic transfer) from trust to the operating account for $1,500. You must, of course, breakdown in detail the distribution in each client’s ledger card. It’s a Fact! Detailed client ledger cards showing every transaction into and out from the trust account must be maintained for each and every client for whom trust funds are being held. Settlement funds were received and part of the funds belong to the firm, part belongs to the client and another portion belongs to a third party. Must the entire amount be deposited to the trust account? Yes. Funds belonging in part to a client or third person and in part presently or potentially to the lawyer or law firm must be deposited therein [trust account], but the portion belonging to the lawyer or law firm must be withdrawn when due and legally available from the financial institution, or within a reasonable time thereafter, unless the right of the lawyer or law firm to receive it is disputed by the client or third person, in which event the lawyer shall comply with ER 1.15(e). Recommended Best Practice: When in doubt, deposit to trust, allow sufficient time for the check(s) to clear the payer’s bank, then disburse from trust to operating to pay the client and the third party. What are three red-flags that will let me know if the firm’s books are not in compliance? 1. Monthly bank reconciliations are not completed. 2. Any client ledger card shows a negative balance. 3. The 3-way reconciliation is out of balance. It’s a Fact! A reconciliation of the account must be performed no less frequently than monthly. What is a pre-audit audit? The goal of a pre-audit is to determine potential deficiencies within a firm’s trust accounting process. It is recommended to have a knowledgeable third-party review current practices and suggest remedial action to bring the firm into compliance if necessary. Recommended Best Practice: It is recommended to have a knowledgeable third-party review current practices and, if necessary, suggest remedial action to bring the firm into compliance. Visit Balanced Billing’s website for more information about a pre-audit audit. http://balancedbilling.com/pre-audit.php
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