IOLTA Accounts and Trust Accounting Explained

An IOLTA account is a pooled client trust account that holds client money too small, or held too briefly, to earn net interest for the client. The bank sends the interest to the state’s IOLTA program, which funds civil legal aid, mainly for people on low incomes ABA Overview, 'What Is IOLTA?' [1]ABA Overview, 'How Does IOLTA Work?' [1].

Trust accounting is the record-keeping around that account: a journal of every deposit and payment, a ledger for each client, and a regular reconciliation. Rules differ by state. The examples below come from the ABA’s model rules and from California, Florida, Illinois, New Jersey, New York and Texas.

What IOLTA means and how an IOLTA account works

IOLTA stands for Interest on Lawyers’ Trust Accounts. The ABA counts IOLTA programs in each of the 50 states, the District of Columbia, Puerto Rico and the US Virgin Islands ABA Overview, 'What Is IOLTA?' [1]. The ABA notes that the client loses nothing, because the money pooled in IOLTA could not have earned the client net interest anyway ABA Overview, 'How Does IOLTA Work?' [1].

Money that can earn net interest for the client goes elsewhere. California places it in an individual interest-bearing account for the client California, IOLTA FAQ, 'What is IOLTA?' [2]. Illinois’s rule sends such funds to a separate interest-bearing account and does not allow non-interest-bearing trust accounts at all Ill. RPC 1.15B(a) [3]. In Texas, the Texas Access to Justice Foundation says only nominal or short-term client funds may go into IOLTA Texas, TAJF 'What is IOLTA?' [4].

Who receives the interest

The ABA describes banks forwarding the interest to the state IOLTA program ABA Overview, 'How Does IOLTA Work?' [1]. Where it goes:

• California: to the State Bar, which funds nonprofit civil legal aid organizations California, IOLTA FAQ, 'What is IOLTA?' [2].
• Texas: to the Texas Access to Justice Foundation, for grants to civil legal aid Texas, TAJF 'What is IOLTA?' [4].
• New York: directly to the IOLA Fund New York, IOLA Fund, 'IOLA Requirements' [5].
• Florida: to The Florida Bar Foundation R. Regulating Fla. Bar 5-1.1(g)(1)(B)-(C) [6].
• New Jersey: the Office of Attorney Ethics says only clients or the IOLTA Fund of the Bar of New Jersey may receive the interest, and the attorney never does New Jersey, OAE outline Part II.A.7(a), p. 7 (PDF p. 10) [7].

IOLTA rules by state

The ABA sorts state IOLTA programs into three types: mandatory, opt-out and voluntary ABA Status of IOLTA Programs (definitions) [8]. California, Florida, Illinois, New Jersey, New York and Texas all appear in its mandatory group ABA Status of IOLTA Programs, Mandatory column [8]. The names and the paperwork differ.

• New York calls its program IOLA. The IOLA Fund says every New York lawyer who handles qualified funds must keep and use an IOLA account. The lawyer opens it at a participating bank and files an online enrollment form New York, IOLA Fund, 'IOLA Requirements' [5].
• Florida calls its program IOTA. Nominal or short-term funds go into IOTA accounts, and members certify compliance or an exemption every year R. Regulating Fla. Bar 5-1.1(g)(2) [6].
• California: the State Bar says that by law every lawyer who handles small or short-term client funds must take part California, IOLTA FAQ, 'What do lawyers need to do to participate in IOLTA?' [2]. Licensees also register each trust account they are responsible for every year California, State Bar Rule 2.5(A)(1)-(3) [9].
• New Jersey requires one or more of a practitioner’s trust accounts to be an IOLTA account R. 1:21-6(a) (as reproduced in OAE outline, App. B) [10], and the Office of Attorney Ethics says attorneys must register with the IOLTA Fund New Jersey, OAE outline Part II.A.7(b), p. 7 (PDF p. 10) [7].
• Texas: the Texas Access to Justice Foundation says participation became mandatory for Texas lawyers in 1989 Texas, TAJF 'What is IOLTA?' [4].
• Illinois sends all client funds to an IOLTA account unless they can earn net income for the client Ill. RPC 1.15B(a) [3].

What trust accounting means for a law firm

Trust accounting starts with a separate account. The ABA’s model rule, binding only where a state adopts it, keeps client funds apart from the lawyer’s own property, in a separate account ABA Model Rule 1.15(a) [11]. Some states set the account’s name by rule. New York uses “Attorney Special Account”, “Attorney Trust Account” or “Attorney Escrow Account” New York, 22 NYCRR 1200.0 Rule 1.15(b)(2) [12]. Texas uses “trust” or “escrow” Tex. Disciplinary R. Prof'l Conduct 1.15(a) [1.14(a)] [13]. California requires “Trust Account” or words of similar import Cal. RPC 1.15(a) [14]. Florida requires it to be clearly labeled as a trust account R. Regulating Fla. Bar 5-1.1(a)(1) [6]. New Jersey uses “Attorney Trust Account” R. 1:21-6(a) (as reproduced in OAE outline, App. B) [10].

No mixing of firm money and client money

The firm’s own money may sit in trust only to cover bank charges under the ABA’s model rule ABA Model Rule 1.15(b) [11]. Illinois also allows enough to meet a minimum balance Ill. RPC 1.15(c) [15], and Florida allows the lawyer’s money to replenish a shortage, which must be reported to the bar at once R. Regulating Fla. Bar 5-1.1(a)(1)(A)-(B) [6].

Retainers and advance fees

Under the ABA’s model rule, fees and expenses paid in advance go into trust and come out only as fees are earned or expenses incurred ABA Model Rule 1.15(c) [11]. States treat some payments differently. California lets a flat fee paid in advance go to the operating account if the client gets written disclosures, and above a set amount signs a written agreement Cal. RPC 1.15(b) [14]. Illinois sends fixed fees and engagement or special purpose retainers to the lawyer’s own account Ill. RPC 1.15(d) [15].

Journals, client ledgers and reconciliation

The ABA’s model records rules list a receipts and disbursements journal ABA Model Trust Account Records Rule 1(a) [16] and a ledger for each trust client ABA Model Trust Account Records Rule 1(b) [16]. The bank shows one balance for the whole account. Only the client ledgers show whose money it is.

The journal, the ledgers and the bank statement are then checked against each other. How often differs: monthly in California Cal. RPC 1.15, Standards (1)(d) [14], Florida R. Regulating Fla. Bar 5-1.2(d)(1)(B) [17] and New Jersey R. 1:21-6(c)(1)(H) (as reproduced in OAE outline, App. B) [10], and at least quarterly in Illinois Ill. RPC 1.15A(b)(7) [18].

Paying money out of an IOLTA account

In Florida, money entrusted for a specific purpose may be used only for that purpose R. Regulating Fla. Bar 5-1.1(b) [6]. Where the lawyer and someone else both claim funds, the ABA’s model rule keeps the disputed part separate until the dispute is resolved ABA Model Rule 1.15(e) [11].

How money leaves the account is also set by rule:

• The ABA’s model allows only a check to a named payee, not cash, or an authorized electronic transfer ABA Model Trust Account Records Rule 2(c) [19].
• Illinois bars cash and ATM withdrawals Ill. RPC 1.15(g) [15].
• New York allows a bank transfer only with the prior written approval of the person entitled to the money, and only a lawyer admitted in New York may sign on the account New York, 22 NYCRR 1200.0 Rule 1.15(e) [12].
• New Jersey requires signed written instructions from the attorney for each electronic transfer out of trust R. 1:21-6(c)(1)(A) (as reproduced in OAE outline, App. B) [10].

Overdrafts and electronic payments

New York New York, 22 NYCRR 1200.0 Rule 1.15(b)(1) (last sentence) [12], Florida R. Regulating Fla. Bar 5-1.1(k) [6] and New Jersey R. 1:21-6(c)(2)-(3) (as reproduced in OAE outline, App. B) [10] prohibit overdraft protection on trust accounts. In Illinois the bank must agree to notify the Attorney Registration and Disciplinary Commission when a trust check is presented against insufficient funds Ill. RPC 1.15B(e)(1) [3], and Florida lawyers authorize the bank to notify the bar of an overdraft R. Regulating Fla. Bar 5-1.2(d)(4) [17].

Illinois expects client funds paid electronically to reach the trust account immediately Ill. RPC 1.15 cmt. [5] [15]. For web-based payment-processing services, an advisory Florida Bar ethics opinion says transaction fees are paid by the lawyer, not from client trust funds, unless lawyer and client agree otherwise Fla. Bar Ethics Op. 21-2, Conclusion 3 [20].

Where trust accounting software fits

Software does not change these rules. It keeps the records they describe: a ledger for each client, a journal for each trust account, and a reconciliation report. PracticePanther’s Business Pro plan [21], for example, stops trust overdrafts and warns when a client’s trust balance runs low [22].

LeanLaw includes IOLTA trust accounting on every plan [23] and posts the entries to QuickBooks Online [24]. Clio Accounting runs a three-way reconciliation of bank records, client trust ledgers and the firm’s trust ledger [25]. Payment processors handle the card side: LawPay shows trust activity by client but leaves reconciliation to the firm [26].

The trust accounting software comparison sets out which plans include three-way reconciliation and what each costs. Who pays processing fees on trust deposits is compared in law firm payment processing, and firms keeping their books in Intuit’s product can see QuickBooks for law firms. Vendor detail is on the LeanLaw pricing, Clio pricing and LawPay pricing pages.