An IOLTA account, short for Interest on Lawyers’ Trust Account, is a pooled bank account where a lawyer deposits client money that is too small in amount or held too briefly to earn meaningful interest for any single client. The bank pays interest on the combined balance, and that interest goes to a state IOLTA program that funds civil legal aid for people who cannot afford a lawyer. The client’s principal stays fully intact and available; the lawyer never keeps any of the interest. Every state and the District of Columbia operates an IOLTA program, and participation is mandatory for lawyers in almost all of them.
How an IOLTA Account Works
Ethical rules require a lawyer to keep client money separate from the firm’s own funds. When the money will sit for long enough, or is large enough, to earn real interest after bank fees, the lawyer opens a separate interest-bearing trust account for that client and the client keeps the interest. When the funds are small or will only be held for a few days or weeks, a dedicated account would cost more in fees than it would ever earn. Those funds go into the IOLTA account instead.
The IOLTA account is a single interest-bearing checking account holding pooled deposits from many clients at once. The bank calculates interest on the combined balance and remits it directly to the state’s IOLTA foundation or program.1American Bar Association. Overview – Section: What Is IOLTA? The lawyer never touches that interest. Each client can still withdraw the full amount of their own deposit at any time.
What Money Belongs in an IOLTA Account
The test is practical: if the funds could not earn net interest for the individual client after bank fees and administrative costs, they go in the IOLTA. That covers a lot of everyday legal work:
- Small retainers for an initial consultation or limited-scope work.
- Real estate closing funds held for a few days between a wire arriving and disbursement at closing.
- Minor settlement payments the lawyer holds briefly before issuing the client a check.
- Court filing fees deposited to cover costs the lawyer will pay out within days.
Larger or longer-held sums are different. A $200,000 personal injury settlement that may sit in trust for months while liens are resolved should go into its own interest-bearing account so the client earns the interest.1American Bar Association. Overview – Section: What Is IOLTA? The lawyer makes the call on each deposit. Both the IOLTA and any individual trust account must stay completely separate from the firm’s operating funds. Mixing client money with firm money, called commingling, is one of the fastest ways to lose a law license.
Why Nearly Every Lawyer Has One
IOLTA is not optional for most lawyers. According to the ABA Commission on IOLTA, 47 U.S. jurisdictions run mandatory programs, meaning any lawyer who handles client funds must participate. Five jurisdictions allow lawyers to opt out in limited circumstances, and only one program is fully voluntary.2American Bar Association. Status of IOLTA Programs In practice, any lawyer in private practice who touches client money will have an IOLTA account.
The underlying rules are set by each state’s highest court, typically modeled on ABA Model Rule of Professional Conduct 1.15, which requires lawyers to hold client property separately from their own and to keep complete records of every client’s funds.3American Bar Association. Rule 1.15 Safekeeping Property
Where the Interest Goes
State IOLTA programs collect the interest from participating banks and distribute it as grants, mostly to organizations providing free civil legal help to low-income people. Since 1981, IOLTA programs nationwide have generated more than $4 billion in revenue. In 2020, grants exceeded $175 million, with more than 90 percent going directly to legal aid offices and pro bono programs.1American Bar Association. Overview – Section: What Is IOLTA? Grant totals rise and fall with prevailing interest rates; when the Federal Reserve raised rates in 2022 and 2023, IOLTA revenue surged in many states.
Some grants also support pro bono training, court improvement, and legal education. Recipients generally cannot use IOLTA money for political contributions, candidate campaigns, or lobbying. The specifics vary by state, but the funds stay directed at access to justice rather than political work.
What Protects the Money in the Account
Because an IOLTA pools many clients’ money in one account, the natural worry is what happens if the bank fails. FDIC insurance covers IOLTA accounts on a pass-through basis: each client whose funds are in the pool is insured individually up to $250,000, not the account as a whole.4FDIC.gov. Pass-through Deposit Insurance Coverage If the IOLTA holds $50,000 for Client A and $75,000 for Client B, each client’s share is separately insured. Credit unions provide equivalent coverage through the NCUA under similar rules.5eCFR. 12 CFR Part 745 Subpart A – Clarification and Definition of Account Insurance Coverage
Pass-through coverage depends on the paperwork. The bank’s records must show the account is held in a fiduciary capacity, and the lawyer’s records must identify each client and their share. If the account isn’t properly titled or the lawyer’s records are incomplete, the whole balance could be treated as a single deposit belonging to the lawyer, capping coverage at $250,000 regardless of how many clients have money inside.
Recordkeeping protects the clients a second way. The lawyer must track every dollar attributable to each client, maintaining both a trust ledger covering the whole account and individual client ledgers. Most state bars expect monthly three-way reconciliation: the adjusted bank statement, the trust ledger, and the sum of all client ledgers should all agree. Banks are part of the enforcement system too. Under the ABA’s Model Rules for Trust Account Overdraft Notification, a financial institution must report any overdraft on a lawyer trust account to the state’s disciplinary authority, whether or not the bank honors the check.6American Bar Association. Model Rules for Trust Account Overdraft Notification – Rule 2 A single bounced check can trigger an investigation.
Taxes on IOLTA Interest
Neither the client nor the lawyer owes tax on IOLTA interest. The IRS held in Revenue Ruling 87-2 that because neither party has control over or any right to the interest generated in an IOLTA, it is not includible in anyone’s gross income.7IRS. Rev. Rul. 87-2, 1987-1 C.B. 18 Banks generally do not issue a Form 1099-INT for IOLTA accounts, and the lawyer’s taxpayer identification number is not used on the account. Where a bank cannot suppress the 1099, the state bar’s tax identification number is typically substituted.
Is the Program Even Legal?
IOLTA faced a serious constitutional challenge from property owners who argued that routing their deposits’ interest to a state foundation was a taking of private property without just compensation under the Fifth Amendment. In 1998, in Phillips v. Washington Legal Foundation, the Supreme Court held that interest earned on IOLTA deposits is, technically, the property of the client. That seemed to put the whole system at risk.
Five years later the Court finished the analysis in Brown v. Legal Foundation of Washington. It assumed the transfer of interest to the state foundation was a taking for public use, but it held that just compensation is measured by the owner’s actual loss, not the government’s gain. Because IOLTA rules only apply to funds that could never have earned net interest for the client in a separate account, the client’s financial loss is zero, and just compensation for a zero-dollar loss is zero dollars.8Library of Congress. Brown v. Legal Foundation of Wash., 538 U.S. 216 (2003) The Court also pointed to the program’s record of serving millions of Americans who need legal help as easily satisfying the public use requirement. The constitutional question has been settled since.