As a trusted legal professional, it’s important to understand Interest on Lawyer Trust Accounts (IOLTA) accounts and how they work.
Law firms need to follow very specific rules on how client funds are handled, and maintaining an IOLTA account ensures you are compliant with ethical and legal obligations.
Understanding what IOLTA is and how it works ensures you are maintaining compliance. Read on to learn about the inner workings, why society and the legal industry at large benefit from IOLTA accounts, and many other trust accounting tidbits.
What is an IOLTA account?
IOLTA stands for Interest on Lawyers' Trust Accounts. This type of trust account is used by lawyers to responsibly hold client funds.
What is an IOLTA account used for?
Lawyers may need to hold funds for retainers, settlement proceeds, court-awarded damages, among other reasons. Using an IOLTA account ensures any interest earned is remitted to state bar associations, which are donated to support legal aid programs and other public service initiatives.
Additionally, interest from earnings in these accounts help fund improvements in legal representation and social justice initiatives that strengthen communities across the country.
The history of IOLTA accounts
Today, the National Association of IOLTA (NAIP) shares that “there are IOLTA programs throughout the United States, including all fifty states, the District of Columbia, Puerto Rico, and the Virgin Islands.”
However, this wasn’t always the case.
In fact, bar associations had to petition vigorously to establish the first IOLTA program in the United States. See the below points to learn about the roots and growth of IOLTA in the country, sourced from the ABA’s overview of IOLTA:
- Beginning in 1978, the American Bar Association (ABA) provided information on the development of American and foreign IOLTA programs to interested bar associations, legal services providers, and states.
- Federal banking laws, passed by US Congress in the 1980s, allowed some checking accounts to bear interest.
- In 1981, the ABA formed the Advisory Board and Task Force on Interest on Lawyer Trust Accounts, which reported to the ABA Board of Governors in 1982.
- In 1982, the ABA Standing Committee on Ethics and Professional Responsibility issued an opinion that examined the ethical implications of a lawyer’s participation in an IOLTA program. The opinion concluded that it is ethically permissible for a lawyer to participate in an IOLTA program authorized by a state. See ABA Formal Opinion 348 (July 23, 1982).
- To support the initiation and operation of IOLTA programs, the ABA created the Commission on IOLTA in 1986.
- Since 1981, IOLTA has generated over $4 billion in revenue throughout the United States. In 2020, IOLTA grants nationwide totaled over $175 million. IOLTA is a significant source of funding for programs that provide civil legal services to those in need, with over 90 percent of grants awarded by IOLTA programs (~$168 million in 2020) supporting legal aid offices and pro bono programs.
Does my state have an IOLTA program?
While IOLTA isn’t mandatory in all states, as mentioned above, all 50 states do have an IOLTA program. Take a look at the ABA Directory of IOLTA Programs to find your state’s information.
It’s important to understand that different states will have different requirements. We recommend checking in with your bar association and state program to understand geographic-specific compliance.
You may like these posts
Getting started with IOLTA accounting
Working with an accountant and the right legal practice management software will help ensure you have accurate record-keeping, and avoid the nightmare situation of malpractice.
As with general trust accounting, IOLTA presents malpractice traps which often impact even the most organized, diligent lawyers. Afterall, as the attorney, you’re the one on the hook for misusing funds from an IOLTA, even if the mistake is made by a bookkeeper or paralegal. Furthermore, many malpractice claims arise from minor human errors such as missed deadlines, small accounting errors, and miscommunication.
The good news is this can be alleviated by using a sophisticated legal practice management software. Clio’s legal trust accounting management software makes IOLTA easy for lawyers. You get peace of mind knowing you’re compliant and your clients get the best version of you working on their case. Everyone wins.
Already a Clio user? This is how to use the trust accounting features for IOLTA.
IOLTA accounting and Clio
While IOLTA is widely recognized and practiced across the US, and other countries, there are differences at the state level. Make sure you verify what rules apply to your law firm with your state bar association for rules that apply to your law firm.
With that said, most jurisdictions require law firms to address three primary areas when managing client funds:
- Account identification: Law firms must deposit funds into an account specifically labeled as a trust/client account.
- Segregation of accounts: Law firms must keep client funds separate from a lawyer’s own funds.
- Accounting records: Law firms must create and maintain appropriate records of funds belonging to their clients.
“Clio Payments removed any hesitancy I had around accepting online payments, especially surrounding IOLTA accounts.” – Casey J. Lee, CJL Law
While it may seem simple on paper, the reality is that maintaining a compliant and ethical IOLTA account can be incredibly complex and time consuming, especially without the proper tech stack. The strict state-specific rules and accounting intricacies can be a malpractice trip wire for the most experienced lawyers. After all, even big law firms with dedicated accounting teams have specific processes to maintain IOLTA compliance.
Smaller law firms and solo attorneys have more pressure to be diligent—just the slightest mistake can have career-limiting consequences.
Thankfully, with legal trust accounting management software, lawyers can avoid malpractice nightmares and sleep soundly knowing they’re compliant and can confidently continue to help their clients.
Legal practice management software, such as Clio, helps you meet the above requirements with trust accounting features and workflows.
Final notes on IOLTA accounts
The IOLTA system can have tremendous benefits for society at large. Think of all the good you can help support by way of simply doing your job and helping clients.
With that said, taking on the IOLTA principles on your own can be stressful and risky. Be sure to work with a trusted accountant with experience working with lawyers, and do yourself and your firm a favor: Invest in legal trust accounting management software.
We published this blog post in April 2023. Last updated: .
Categorized in: Accounting