What is an IOLTA account?

An IOLTA account is a pooled, interest-bearing trust account in which a lawyer or law firm in the United States holds client funds that are too small, or held too briefly, to earn net income for the client, and whose interest the bank sends to a state program that funds civil legal aid. The letters stand for Interest on Lawyers' Trust Accounts. The principal stays the clients' money at every moment; only the interest goes to the program.

This article covers the rules that apply in the United States. It is general information, not legal or tax advice, and each state, the District of Columbia and each territory runs its own program under its own rules, so the rule that binds you is the one written by your own licensing jurisdiction.

The mechanism answers a practical problem. A lawyer who holds a settlement check for four days, or a small filing-fee advance for a few weeks, may not earn anything on money that belongs to someone else, and a separate interest-bearing account for each such client would cost more than it paid. Pooled together, those balances add up to a large sum. IOLTA puts the pool in an interest-bearing account and directs the interest to a public purpose, without taking anything a client could have had.

How does an IOLTA account work?

An IOLTA account works like an ordinary business checking account titled as a trust account, with one difference: the bank calculates interest on the pooled balance and remits it periodically directly to the state's IOLTA program rather than to the firm or to any client. The lawyer deposits and disburses client money as usual and never touches the interest.

The American Bar Association describes the idea in plain terms: client funds that are small in amount or held for a short time cannot earn net interest for the client, so lawyers place them together in one interest-bearing trust account, and banks forward the interest to the state program. According to the same source, the device became possible when federal banking law changed in 1980 to allow some checking accounts to bear interest, and IOLTA revenue in the United States dates from 1981.

Three parties each do one job. The firm keeps the records that show, client by client, whose money is in the pool. The bank holds the deposit, pays the rate its jurisdiction's rules require, and reports and remits the interest to the program. The program, which may be a bar foundation, a state bar or a separate body created by the state's highest court or legislature, receives the money and makes grants.

The American Bar Association reports that IOLTA programs had generated over $4 billion since 1981, counted in 2020, and that grants in 2020 totaled over $175 million, of which about $168 million went to legal aid and pro bono programs. Revenue rises and falls with interest rates.

Which client funds go into an IOLTA account?

Client funds go into an IOLTA account when they could not earn net income for the client, meaning the interest the money would produce in a separate account is smaller than the cost of setting up and running that account. Funds that could earn net income for the client belong in a separate interest-bearing account for that client instead.

The State Bar of California states the test this way in its guidelines for attorneys: client funds that can earn income for the client above the cost of holding the account must be placed in a separate interest-bearing trust account for that client's benefit, while nominal amounts, or funds held too briefly to earn net income, go into the pooled IOLTA. The Supreme Court described Washington's rule in the same terms: funds that cannot earn net interest for the client are the only ones that go into IOLTA accounts.

The test is not a dollar threshold. It weighs four things together: the amount, the expected holding period, the rate available on a separate account, and the full cost of that separate account, which includes bank charges, the firm's time to open, track and close it, and the tax reporting that follows when interest is paid to a client. A large sum held for a week and a small sum held for a year can land on the same side of the line.

The judgment is the lawyer's to make, when the funds arrive and again if circumstances change. A deposit expected to leave in ten days that is still there four months later because the matter stalled deserves a second look. The State Bar of California says it will not bring disciplinary charges over a determination made in good faith, and adds that the bank can help estimate whether a given client's funds could earn enough to be practical.

How do you work out whether funds could earn net income for the client?

Funds could earn net income for the client when the interest at the rate available on a separate account, over the expected holding period, exceeds the bank charges and administrative cost of that account. The calculation is principal multiplied by the annual rate, multiplied by the days held and divided by 365, less the cost.

Here is a worked example with illustrative figures, not market rates or any bank's prices. Assume a separate client account pays 2.00% a year, the bank charges $15 for each month or part of a month that the account is open, and the firm's cost of opening, tracking, tax reporting and closing the account is $60 per account. A separate account open for up to one month therefore costs $75.

The second and third rows are the same sum: time alone moves it across the line, because six months of interest outruns six months of charges. The fourth row shows the other route, a very large amount held briefly. The last row shows that a long holding period does not rescue a small balance, since twelve months of charges plus the firm's cost far exceed a year of interest.

The same assumptions give a break-even amount for each holding period, which is a more useful working tool than any single case.

The break-even falls steeply as the holding period lengthens, then flattens, because monthly charges keep accruing alongside the interest. Rates matter just as much: halve the rate and every break-even amount doubles. That is why a firm cannot fix a house threshold once and keep it for years. Record the assumptions the firm uses, review them when rates move, and note on the file why a large or long-held deposit went where it did.

Who owns the principal, and who is entitled to the interest?

The principal in an IOLTA account belongs to the clients and third parties for whom it is held, and the interest is, in law, the private property of the owner of that principal, even though the program lawfully receives it. Those two statements come from two Supreme Court decisions, read here in the syllabus published by the Legal Information Institute at Cornell Law School.

In Phillips v. Washington Legal Foundation, decided in 1998 in a challenge to the Texas program, the Court held that interest earned on client funds in an IOLTA account is the private property of the owner of the principal. That decision left open whether sending the interest to a program was a taking of property that required compensation under the Fifth Amendment.

Brown v. Legal Foundation of Washington, decided on 26 March 2003 by five votes to four with Justice Stevens writing for the Court, answered that question. The case concerned funds deposited in IOLTA accounts by Limited Practice Officers, non-lawyers licensed in Washington to act as escrowees in real estate closings. The Court assumed that the transfer of interest could be treated as a per se taking, found that funding legal services for people in need is a public use, and then turned to compensation. Just compensation, the Court said, is measured by the property owner's loss rather than the government's gain. Because Washington's rules require a separate account whenever a client's funds could earn net interest, the owner's pecuniary loss is zero whenever the law is obeyed, and so the compensation due is nil.

The reasoning ties the constitutional answer directly to the net-income test. A program takes nothing from a client precisely because only money that could not have earned anything for that client goes into the pool. The Court added that if a deposit that could have earned net interest was placed in an IOLTA by mistake, the loss follows from the depositor's incorrect private decision rather than from state action. The person exposed to a claim over a misjudged deposit is therefore the professional who made the call.

Is an IOLTA account mandatory, opt-out or voluntary?

Whether a lawyer must use an IOLTA account depends on the jurisdiction, and the American Bar Association sorts programs into three types: mandatory, opt-out and voluntary. The great majority are mandatory.

The definitions are the American Bar Association's own. Its status list also shows the direction of travel: many programs began as voluntary or opt-out and later converted to mandatory, and the list marks the conversion year next to each. The same source notes that a program is created either by order of the jurisdiction's highest court or by state statute, with a few states in the second group.

Mandatory participation attaches to lawyers who maintain client trust accounts, so a lawyer who never holds client or third-party funds should check how the local rule treats that case. A lawyer licensed in several jurisdictions follows each one's rule for the funds connected with that jurisdiction, and the American Bar Association warns that rules and accounting requirements differ from one program to the next.

Which banks can hold an IOLTA account, and what rate must they pay?

An IOLTA account can be held only at a financial institution that the jurisdiction's program treats as eligible, and in jurisdictions with a comparability rule the institution must pay IOLTA accounts the highest rate it generally offers its other customers on similar balances. Participation is the institution's choice; the rate follows once it takes part.

The North Carolina State Bar's rule is a clear example of comparability. An eligible bank must pay the highest interest rate generally available from the bank to non-IOLTA accounts when the IOLTA account meets the same minimum balance or other qualifications. The bank can comply in three ways: place the account in a product that carries the comparable rate, pay the comparable rate on the existing account, or pay a benchmark set by the program. Under that rule the benchmark is the greater of 0.65% or 65% of the Federal Funds Target Rate, net of allowable reasonable service charges. The rule also lists the products that qualify, from an interest-bearing checking account to a sweep arrangement invested in overnight repurchase agreements fully collateralized by United States government securities or in a government money market fund, and it leaves banks free to pay more or to waive charges.

To see what the formula produces, take an illustrative target rate of 2.00%, chosen only for the arithmetic. Sixty-five percent of it is 1.30%, which exceeds the 0.65% floor, so 1.30% is the benchmark. An IOLTA account with an average pooled balance of $180,000 over a 30-day month would produce $192.33 for the program. No client receives a cent of it, and the $180,000 stays exactly where it was. Other jurisdictions set their own formulas and floors, or none.

In California, the State Bar publishes a list of eligible institutions under the Business and Professions Code, and tells attorneys that they have no duty to monitor a bank's eligibility or its interest payments, since the program does that.

Charges are split by purpose. The State Bar of California says a bank may set charges such as monthly fees, per-check and per-deposit charges and sweep fees against the interest, while ordinary business expenses, including check printing, wire fees and insufficient-funds charges, are paid by the attorney.

Does deposit insurance cover each client's money in an IOLTA account?

Federal deposit insurance can cover each client's share of an IOLTA account separately, up to the standard limit, because the Federal Deposit Insurance Corporation treats properly documented fiduciary deposits as belonging to the underlying owners. The Corporation calls this pass-through coverage and names lawyers and law firms holding client funds in an IOLTA among the third parties that can create it.

The standard limit is $250,000 per depositor, per insured bank, for each account ownership category. For that limit to pass through to each client, the Corporation sets three requirements, all of which must be met. The bank's deposit records must expressly disclose the relationship, which account titling usually does. The identity and ownership interest of each underlying owner must be ascertainable from the bank's records or from the records of the third party, here the law firm. And the underlying owners, not the third party, must actually own the funds. The Corporation checks these conditions at the time a bank fails, so the firm's client ledgers are what make the coverage work.

Pass-through has a consequence that is easy to miss. The Corporation adds a client's pass-through deposit to any other deposits that the same person holds at the same bank in the same ownership category. Suppose, as an illustration, that a client has $90,000 in a firm's IOLTA account and also keeps $200,000 in a personal account in their sole name at the same bank. The two are combined: $290,000, of which $250,000 is insured and $40,000 is not. A client with $300,000 of their own money in the pool and no other account at that bank would have $50,000 above the limit.

The firm rarely knows where its clients bank, so when a single client's funds are large, tell the client which institution holds the trust account. Funds that large will often have crossed the net-income line anyway, and the same insurance question follows them into a separate account.

How do you set up an IOLTA account?

Setting up an IOLTA account means choosing an eligible institution, opening a trust account titled and coded as an IOLTA so that the interest is reported under the program's tax identification number, and registering the account with your jurisdiction. The exact forms differ by jurisdiction; the sequence does not.

California shows how specific the steps can be. The State Bar's guidelines have the attorney complete a notice to the financial institution and serve it on the bank, then record the account through the attorney's online State Bar profile, and report any change within 30 days. The same guidelines explain the tax position: the account carries the State Bar's federal taxpayer identification number for the interest only, not for the principal, there are no tax consequences to the attorney or the client for that interest, and the bank does not need to issue an information return for it. For a firm, the guidelines require a designated licensee who is a primary holder or signatory on the account and who oversees the monthly reconciliation.

What must never go into an IOLTA account?

A lawyer's own money must never go into an IOLTA account, with one narrow exception for bank service charges, and neither must client funds that could earn net income for the client. The first rule is about commingling; the second is the net-income test seen from the other side.

The American Bar Association's Model Rule 1.15, on which most jurisdictions base their own rule, requires a lawyer to hold the property of clients and third persons separately from the lawyer's own. It allows the lawyer to deposit their own funds in a client trust account for the sole purpose of paying bank service charges on that account, and only in the amount necessary for that purpose. Everything else of the firm's stays out:

• Earned fees. Once a fee is earned, it is the firm's money and must be withdrawn; leaving it in the pool as a cushion is commingling.
• Firm revenue and personal funds, including a deposit made to cover a shortfall while an error is being traced.
• Payroll, rent, taxes and other firm expenses, which are never paid from the trust account directly.
• A client's funds that are large enough, or will be held long enough, to earn net income for that client.

The reverse error is just as serious. Under the Model Rule, legal fees and expenses paid in advance must be deposited in a client trust account and withdrawn only as the fees are earned or the expenses incurred. Unearned advances and money held for third parties do belong in trust, and placing them in the operating account is the mirror image of the same violation.

How does an IOLTA account fit into trust accounting and reconciliation?

An IOLTA account is one of the accounts that trust accounting governs: it changes where the interest goes, and it changes nothing about the records a lawyer must keep. Trust accounting is the broader set of duties, which covers a separate ledger for every client, a journal for every account, prompt notice and delivery of funds, and retention of complete records for the period the jurisdiction sets. The Model Rule suggests five years after the end of the representation and leaves the number to each jurisdiction.

Reconciliation is the control that proves those records are right. In a three-way reconciliation, the bank statement balance adjusted for items in transit, the account journal balance and the sum of all client ledger balances are compared, typically every month, and they must agree. Each of those subjects deserves its own treatment; for an IOLTA account the point to keep is that the pool makes this control more important, not less, because a bank statement for a pooled account shows one total and says nothing about whose money it is.

The pooled design has one more consequence. Because the bank remits the interest straight to the program, interest should not appear as a balance belonging to anyone in the client ledgers. If the statement shows an interest credit and a matching remittance, both are recorded in the journal and net to nothing. What no program, bank or court can do for the firm is the part that stays in its hands: deciding correctly which funds belong in the pool, keeping its own money out, and knowing at any hour how much of the balance belongs to each client.