What is an IOLTA account? A plain-English guide for lawyers

Why lawyers need trust accounts at all

Lawyers regularly hold money that is not theirs. A client pays an advance fee retainer before work begins. An insurer sends a settlement check that must be divided between the client, medical providers and the firm. A buyer deposits funds in escrow for a real estate closing. Until fees are earned or the money is disbursed, it belongs to the client or a third party.

Rules of professional conduct in every US jurisdiction require lawyers to keep such funds separate from the firm's own money. The model rule most states follow is ABA Model Rule 1.15, Safekeeping Property, although each state adopts its own version with its own details. The separate account used for this purpose is a client trust account. An IOLTA account is the most common kind.

How an IOLTA trust account works

An IOLTA account is a single pooled trust account that holds money for many clients at once. It is used for funds that are nominal in amount or will be held for a short time, so the interest any one client could earn would be less than the cost of tracking and paying it out.

The bank pays interest on the pooled account, but neither the lawyer nor the clients receive it. Instead, the bank sends the interest to the state's IOLTA program, usually administered by the state bar or a bar foundation, which uses it to fund legal services for people who cannot afford a lawyer. In most states, participation in IOLTA is mandatory for lawyers who hold qualifying client funds.

Because the account is pooled, the bank only sees one balance. The lawyer is responsible for knowing exactly how much of that balance belongs to each client at all times. That is the purpose of client ledgers.

IOLTA vs. a separate interest-bearing trust account

Not all client money belongs in IOLTA. When a client's funds are large enough or will be held long enough to earn interest for the client after costs, many jurisdictions expect the lawyer to place them in a separate interest-bearing trust account for that client, with the interest going to the client. Deciding which account to use requires judgment about the amount, the expected holding period and the costs involved. State rules often list factors to consider, so check your jurisdiction's guidance.

Common IOLTA rules to follow

While the details vary by state, most trust account rules share the same principles:

• No commingling. Do not mix firm money with client money, except for a small amount many states allow to cover bank charges.
• No conversion. Never use one client's money for another client or for firm expenses.
• Withdraw fees only when earned. Transfer money from trust to operating only after the fee is earned, typically after invoicing the client.
• Keep a ledger for each client. Each client (often each matter) needs a running record of deposits, disbursements and balance.
• Keep a trust journal. Record every transaction in the account chronologically.
• Reconcile regularly. Many states require monthly or quarterly reconciliation.
• Never let a client ledger go negative. A negative balance means you have used another client's money.
• Retain records. Keep trust records for the period your state requires.
• Notify and deliver promptly. Tell clients when you receive their funds and promptly deliver what they are owed.

What is three-way reconciliation?

Three-way reconciliation is the standard check that trust records are correct. You compare three numbers for the same date:

1. The adjusted bank balance: the statement balance, adjusted for deposits in transit and outstanding checks.
2. The trust journal balance: the balance in your own chronological record of the account.
3. The total of all client ledgers: the sum of every client's individual balance.

All three must agree. If the bank balance and journal agree but the client ledgers do not, money has probably been recorded against the wrong client. If the journal and bank differ, a transaction is missing or recorded incorrectly. Investigate and correct any difference immediately; unexplained shortfalls are serious compliance issues.

An IOLTA example

Suppose a client pays a $3,000 advance retainer for a family law matter. You deposit it into your IOLTA account and record it on the client's ledger and in the journal. During the month you perform work and at month end send an invoice for $1,200 of earned fees. After sending the invoice, you transfer $1,200 from IOLTA to your operating account, recording the transfer on the ledger and journal and showing the payment on the invoice. The client's ledger now shows $1,800 remaining in trust. If the matter ends with funds left over, you refund the balance to the client.

Common IOLTA mistakes

• Depositing an advance retainer into the operating account.
• Paying a firm expense from trust "temporarily".
• Transferring fees before they are earned or billed.
• Disbursing settlement funds before the deposit has cleared.
• Recording a transaction against the wrong client.
• Skipping reconciliation for several months.
• Leaving unclaimed client funds sitting in trust indefinitely instead of following your state's unclaimed property procedure.

How software helps with IOLTA compliance

Spreadsheets can track a trust account, but they rely on manual entry and do not connect to billing. Legal trust accounting software keeps a ledger per client and matter, records every deposit, transfer and disbursement once, and produces the reports needed for reconciliation. When trust is linked to billing, applying a retainer to an invoice creates the ledger entry and the invoice payment together.

EvidenceDesk trust accounting links trust balances to each matter, so an attorney can see available funds before billing, and every transfer to operating is recorded. Combined with time tracking and billing, it reduces the manual steps where trust errors start.

This article is general information, not legal or accounting advice. Check your state bar's trust account rules and consult an accountant familiar with law firm trust accounting.