Why law firms and lawyers need an IOLTA account

If you’re a lawyer handling client funds, you’ve likely heard of Interest on Lawyers’ Trust Accounts (IOLTA). But if you haven’t set one up yet (or you’re not sure why they matter) you might be risking ethical violations and financial mismanagement.

Understanding IOLTA accounts is crucial, not just to comply with regulations but also to benefit clients and access key legal funding initiatives. Let’s discuss all you need to know about it.

What is an IOLTA account?

An Interest on Lawyers’ Trust Account (IOLTA) is where lawyers hold client funds that are small in amount or will be held for a short period. Instead of the lawyer or firm keeping the interest earned on these funds, the interest is pooled and used to support public legal aid programs.

The purpose of IOLTA is to help fund legal services for low-income individuals while ensuring client funds remain secure.

Lawyers often receive client money before earning it — such as retainers, settlement funds, or advanced court fees. IOLTA accounts make sure these funds are held separately from the firm’s operating accounts, preventing financial mismanagement or ethical breaches.

History of IOLTA accounts

IOLTA programs originated in the 1960s in Australia and Canada as a way to fund legal aid services. The United States adopted the concept in the early 1980s, with Florida being the first state to establish a mandatory IOLTA program in 1981.

Today, every U.S. state, along with the District of Columbia, Puerto Rico, and the Virgin Islands operates an IOLTA program as per the National Association of IOLTA (NAIP).

Initially, these programs were voluntary, but many states transitioned to mandatory participation over time. They have since generated billions of dollars for legal aid services, helping to fund pro bono representation, domestic violence assistance, and other essential legal resources for underserved populations.

5 IOLTA account benefits for law firms and clients

IOLTA accounts do more than keep law firms in line with regulations. They provide financial protection, ethical accountability, and real-world benefits for both lawyers and their clients.

1. IOLTA protects client funds

Keeping client money separate from firm finances is an ethical necessity. IOLTA helps law firms make sure client funds remain untouched until they are rightfully earned or disbursed. This prevents both accidental and intentional misuse.

2. IOLTA maintains ethical compliance

Many states require lawyers to use these accounts to follow professional conduct rules. Proper management of these accounts helps firms avoid disciplinary actions that could jeopardize their reputations and careers.

3. IOLTA supports access to justice

One of the unique benefits of IOLTA accounts is their contribution to public legal aid programs. 

The interest generated helps fund legal services for individuals who might otherwise struggle to afford representation, strengthening the justice system.

4. IOLTA prevents commingling of funds

We’ve implied that mixing client money with a firm’s operating funds can lead to serious legal consequences.

An IOLTA clears the boundary between firm finances and client-held funds, protecting both parties from potential financial or ethical disputes.

5. IOLTA simplifies financial management

When properly maintained, an IOLTA account improves financial organization. It makes audits easier, streamlines reconciliation, and provides transparent records that safeguard against accounting discrepancies or regulatory violations.

Does my state have an IOLTA program?

The short answer? Yes. Every state in the U.S. has an IOLTA program, but the requirements vary. Some states mandate participation for all lawyers who handle client funds, while others offer exemptions based on factors such as account size and firm structure.

To check your state’s specific requirements, visit your state bar association’s website or consult your jurisdiction’s IOLTA program office.

Many programs outline which banks are approved for IOLTA accounts and provide guidelines on reporting and compliance.

Get started with IOLTA accounting

Setting up an IOLTA account involves a few key steps:

1. Choose an approved bank. Not all banks handle IOLTA accounts, so select one from your state’s approved list.

2. Register the account. Your state bar association may require you to register the account with its IOLTA program.

3. Use proper accounting practices. Keep meticulous records, track transactions, and regularly reconcile the account.

4. Avoid unauthorized withdrawals. Never use client funds for firm expenses, even temporarily.

5. Comply with reporting requirements. Some states require periodic reports or audits of IOLTA activity.

6 mistakes to avoid with an IOLTA account

Managing an IOLTA account isn’t difficult, but mistakes can have serious consequences. Take note to avoid these common missteps:

1. Commingling funds. Mixing client money with firm finances is a violation of legal ethics and can lead to disbarment.

2. Failing to track transactions. Poor record-keeping can result in errors, missing funds, and regulatory trouble.

3. Improperly withdrawing funds. Withdrawing client money before earning it violates ethical rules.

4. Not reconciling the account. Regular checking and comparing of records helps prevent errors and establishes compliance.

5. Using the wrong type of account. A standard business account is not a substitute for an IOLTA.

6. Ignoring state-specific rules. Each jurisdiction has different regulations, and failure to comply can lead to penalties.

What to do if you’ve mismanaged an IOLTA account

Mistakes happen, but when they involve an IOLTA account, swift action is necessary. The first step is to identify the issue by reviewing your records thoroughly.

If required by your state, self-reporting the error to your state bar association can demonstrate good faith and a commitment to correcting the problem.

Next, take immediate steps to resolve the issue. Whether that means replacing missing funds or adjusting internal accounting procedures.

If the situation is complex or severe, consulting a legal ethics attorney or an accountant experienced in IOLTA management can help navigate the next steps.

To prevent future mistakes, law firms should implement stronger internal controls. This could be in the form of clear accounting procedures, regular reconciliations, and ongoing staff training.