Quick answer: Virginia law firms must keep client funds in a trust account separate from firm money, maintain a ledger for every client, and reconcile the bank balance, trust register and client ledgers regularly with a lawyer reviewing and approving the work. Nominal or short term client funds go into an IOLTA account, whose interest funds civil legal aid.
Handling client money is one of the highest risk parts of running a law firm. Mistakes in a trust account can lead to bar complaints even when no money is lost. Here is how Virginia firms keep their IOLTA accounts in order.
What an IOLTA account is
An IOLTA account holds client funds that are too small or held too briefly to earn meaningful interest for the client. In Virginia, the interest goes to the Legal Services Corporation of Virginia to fund civil legal aid. Larger or longer held client funds may belong in a separate interest bearing account for that client.
The basics of Rule 1.15
- Keep client money separate from firm money, with no commingling
- Never use one client’s funds for another client
- Keep a ledger for each client showing every deposit and payment
- Move earned fees out of trust promptly, and only once they are earned
- Keep trust records for at least five years after the representation ends
- Certify IOLTA compliance with the Virginia State Bar each year
Three way reconciliation
A three way reconciliation confirms that three numbers agree:
- The bank statement balance, adjusted for outstanding items
- Your trust account register balance
- The total of all individual client ledger balances
Virginia requires regular reconciliations that are reviewed and approved by a lawyer in the firm. Doing them monthly is the safest standard and makes problems easy to catch.
Tip: If the three numbers do not match, stop and find the difference before the next disbursement. Small gaps tend to grow.
Common trust account mistakes
- Paying firm expenses from the trust account
- Leaving earned fees in trust too long
- Disbursing before a client’s deposit has cleared
- Negative balances on an individual client ledger
- Skipping reconciliations during busy months
Keep trust and operating books separate
Your operating books track firm income and expenses. Your trust records track client money. Good law firm bookkeeping keeps both accurate and makes sure transfers between them are documented.
→Related guideCash vs Accrual Accounting: Which Method Is Right for Your Small Business?Trust and operating books often use different methods, and this guide explains how cash and accrual accounting compare.IOLTA Trust Accounting FAQs
Can a law firm keep its own money in the trust account?
Only enough to cover bank service charges. Any other firm money in the trust account, including earned fees left there, is commingling.
Which banks can hold a Virginia IOLTA account?
The account must be at a financial institution approved by the Virginia State Bar, which agrees to report overdrafts on trust accounts to the Bar.
Can a bookkeeper do trust account reconciliations?
Yes, a bookkeeper can prepare them, but a lawyer in the firm must review and approve the reconciliations and remains responsible for the account.
What happens to client money that is never claimed?
If you cannot locate the client after reasonable efforts, the funds may need to be reported as unclaimed property to the Virginia Department of the Treasury rather than kept by the firm.
How should credit card payments for retainers be handled?
Unearned retainers paid by card should be deposited into trust, and processing fees should be paid from the operating account so client funds are not reduced.
Trust accounting support
We handle monthly reconciliations and bookkeeping for law firms across Northern Virginia, DC and Maryland, so your trust account is always ready for review.
This article is general information and not tax advice for your situation. Tax rules change, so talk with a qualified professional before making decisions.
