What is an IOLTA account?
An IOLTA account is the pooled, interest-bearing trust account where a law firm holds money that belongs to clients or third parties when the amount is small or the holding period is short: settlement checks until they are paid out, cost advances, funds owed to a lienholder. The firm never earns the interest and neither does the client; the bank sends it to the state's IOLTA program, which funds civil legal aid. Every state and the District of Columbia run one, and most require lawyers who hold client funds to use it.
IOLTA, defined
IOLTA stands for Interest on Lawyers' Trust Accounts. It is a program first, an account second. The program is a state body (often the bar foundation) that collects the interest from thousands of law-firm trust accounts and grants it to legal-aid organizations. The account is an ordinary business checking account at a bank the state has approved for the program, titled as a client trust account, with the firm as the account holder and one or more lawyers as signatories. Three things make it an IOLTA account rather than a plain trust account:
- The money in it belongs to clients and third parties, never to the firm.
- The bank calculates interest on the pooled balance and remits it to the state program, net of allowable service charges, instead of to the account holder.
- The state's trust-account rule (the state's version of ABA Model Rule 1.15) governs every deposit, every payment and the records kept.
An IOLTA trust account is for funds that cannot earn net interest for the individual client. Funds that could, because they are large or will be held long, go into a separate interest-bearing trust account for that client (see IOLTA vs. a separate client trust account below).
Who has to have an IOLTA account
Any lawyer or firm that receives money belonging to someone else in the course of practice: a settlement check, an advance fee the firm has not yet earned, a cost deposit, escrow funds, money due to a medical provider or lienholder. Specifically:
- Every U.S. state and the District of Columbia operate an IOLTA program. In most states participation is mandatory for lawyers who hold eligible client funds; a few states run opt-out or voluntary programs. Your state's rule, bank-eligibility list and enrollment form are linked from the state pages.
- Solo practitioners are covered the same way as large firms. A one-lawyer employment practice that receives a settlement check needs an IOLTA account before it deposits it.
- Firms that never hold client money (flat-fee practices paid after the work, some defense work billed to carriers) may not need one; the test is whether you ever hold funds that are not yet yours.
- Out-of-state money follows the lawyer: a firm licensed in two states keeps its account under the rules of the state where it practices, and the state pages note where rules differ.
What goes in, and what never does
Two lists most firms pin to the wall.
Goes in
- Settlement and judgment proceeds, until each payee has been paid and the firm's fee has been earned and moved out.
- Advance fees and retainers that are not yet earned (states differ on flat fees paid in advance; check yours).
- Cost deposits a client gives the firm to spend on the case.
- Money due to third parties: medical providers, lienholders, Medicare, co-counsel, a prior attorney.
- Escrow and earnest money the firm holds for a transaction.
- Disputed funds, until the dispute is resolved.
Never goes in
- Firm money: operating funds, payroll, rent, the firm's share of a fee once it is earned. (Many states allow a nominal amount of the firm's own money to cover bank charges, and nothing more.)
- Earned fees. Once earned and the client notified, the fee comes out promptly; leaving it in is commingling in the other direction.
- Case costs the firm pays on a case. They are paid from operating and recovered from the settlement at disbursement; they are not paid from the trust account directly. Case costs in Disbo follow that rule.
- Personal money of any lawyer or staff member.
- Software fees, including Disbo's. Disbo bills the firm's operating account; nothing is ever deducted from trust.
IOLTA vs. a separate client trust account
The state rule asks one question of every deposit: could this money earn net interest for its owner, after bank charges and the cost of the accounting? If not — because the amount is nominal or the time it will be held is short — it goes into the pooled IOLTA account. If it could, the firm opens a separate interest-bearing trust account for that client or matter, and the client receives the interest. The lawyer makes the judgment in good faith; states publish guidance on the amounts and durations that usually tip the answer.
Where personal injury firms hit this: a large settlement held for months while a Medicare final demand or a hospital lien is resolved. Firms handle it two ways: open a separate account for that client, or document the reason the funds stayed in IOLTA (an expected short hold that ran long). Either way, the client's ledger shows the money and the reason.
Where the interest goes
The bank pays the interest on the pooled balance to the state IOLTA program, not to the firm and not to any client. The program uses it to fund civil legal aid, and in some states court improvement and law-student loan assistance. Consequences for the firm:
- The firm does not report IOLTA interest as income and receives no 1099 for it.
- The bank must be an eligible institution under the state program; most states publish the list and require the bank to pay a rate comparable to what it pays similar business customers.
- Allowable service charges (monthly maintenance, per-check fees) may be netted against the interest; charges beyond that (wire fees, check printing, overdraft fees) are the firm's and are paid from operating.
How to open one
- Pick a bank on the state program's eligible-institution list. Ask for an IOLTA account by name; the bank enrolls it with the program and signs the overdraft-notification agreement most states require (the bank reports a bounced or overdrawn trust check to the bar, not just to you).
- Title it as the state requires, typically with the firm name and the words IOLTA or Client Trust Account on the account and on the checks.
- File the state's enrollment or notice form, and list the account on the annual bar statement where the state asks for it.
- Limit signatories to lawyers (some states allow a non-lawyer with controls); set the bank's dual-control or positive-pay options if it offers them.
- No debit cards, no ATM withdrawals, no cash. Payments leave by check, ACH or wire, each tied to a client ledger.
- Set up the records on day one (next section). The account is only as compliant as its ledgers.
The records the bar expects
Every state's rule lists records to keep for every trust account; the ABA's model record-keeping rules and most states converge on this set:
| Record | What it is | How Disbo keeps it |
|---|---|---|
| Receipts and disbursements journal | Every deposit and every payment, in date order, with payee, purpose and client | Each payment posted to the case and to the firm's books as it is issued |
| Individual client ledgers | One running balance per client or matter; never negative | Per-case trust balance on screen for every open case (case tracking) |
| Bank statements, deposit slips, check images | The bank's record of the same activity | Check image and documents stored on each payment |
| Monthly reconciliation | Bank balance, journal and client-ledger total brought to agreement | Three-way reconciliation export, in beta with a small group of firms (the guide) |
| Signed settlement statements | The client's authorization for each disbursement | Read from your case system; every payment must match it (template) |
| Retention | Typically five to seven years after the matter closes, longer in some states | Records stay on the case |
Three-way reconciliation, in one paragraph
At one cutoff date each month, three numbers must agree to the penny: the adjusted bank balance (statement balance plus deposits in transit minus outstanding checks), the trust journal balance in the firm's books, and the sum of every client ledger. A match proves the pool is whole; it does not prove each client's share is right, which is why the individual ledgers matter. The three-way reconciliation guide walks through the workflow and the state rules that set the cadence.
The mistakes that trigger audits
Bar auditors see the same handful of errors, and the bank's overdraft notice is the usual trigger.
- Paying out before the deposit clears. The settlement check is deposited Monday and the client is paid Tuesday; the deposit is returned Thursday. Every other client's money just covered that payment.
- A negative client ledger. A payee is paid more than that client's balance, often because a lien reduction was assumed rather than confirmed. The pool may still be positive; the client's ledger is not.
- Commingling. Firm money parked in trust "to be safe," or an earned fee left in trust for months. Both are violations in most states.
- Fees or costs paid from trust. The firm's fee comes out only when earned and documented; costs are paid from operating.
- Stale, uncashed checks. A provider check from two years ago is still outstanding; the money is still the client's, and some states have unclaimed-property steps. Payment tracking ages every open check at 30, 60 and 90 days.
- No reconciliation, or no proof of one. The firm "balances" but cannot produce the three numbers for a given month.
- Records that do not match. The client ledger says one thing, the case file another, the bank a third.
State variations that matter
The structure is national; the details are not. Use the state pages for the rule text and dates.
| Requirement | What varies | Example |
|---|---|---|
| Reconciliation cadence | Monthly in a growing number of states; quarterly or "regularly" in others | California requires monthly three-way reconciliation and an annual report under its Client Trust Account Protection Program (California page) |
| Overdraft notification | Which events the bank reports and how fast | Alabama: five business days to notify the state bar (Alabama page) |
| Record retention | Five, six or seven years after the matter closes; some states longer | See each state page |
| Participation | Mandatory, opt-out or voluntary | Check the state's IOLTA program page |
| Annual certification | Whether the lawyer certifies compliance on the dues statement or in a separate filing | California's annual CTAPP reporting (CTAPP audits) |
How Disbo fits around your IOLTA account
Disbo does not replace the account or hold any money in it. The firm keeps its own IOLTA account at its own bank; Disbo is the system that prepares each disbursement from the signed settlement statement, routes it to the firm's signer for approval, pays each payee from that account (a check printed and mailed with the documents, or an electronic payment to a bank the payee linked once), posts every payment to the case and the firm's books, and shows the trust balance by case. The reconciliation export is in beta. How a disbursement runs.
FAQ
Is an IOLTA account the same as a trust account?
An IOLTA account is one kind of trust account: the pooled one whose interest goes to the state program. A separate interest-bearing trust account for a single client is also a trust account, under the same rule, with the interest going to that client.
Do I need an IOLTA account if I never hold client money?
No. The obligation starts the first time you receive funds that belong to someone else: a settlement check, an unearned retainer, a cost deposit. Most litigation firms need one before their first case resolves.
Can I keep some of my own money in the IOLTA account for bank fees?
Most states allow a nominal amount, enough to cover the bank's service charges, and nothing more. Anything above that is commingling. Check the state page for your limit.
Who pays tax on the interest?
No one at the firm. The bank remits it to the state program, which is the taxpayer of record where any tax applies; the firm receives no 1099 for IOLTA interest.
Can I pay my fee out of the IOLTA account?
Only once it is earned and the client has been told, and then promptly; in a settlement that is the moment the signed statement authorizes it. The fee is paid from trust to operating as one of the payments in the disbursement.
What happens when a trust check bounces?
In most states the bank must notify the bar, and the bar opens an inquiry. The usual cause is paying before a deposit cleared or a client ledger that went negative. Fix the cause the same day and keep the records.
Can the IOLTA account have a debit card, or use Venmo or Zelle?
No debit card, no cash, no personal payment apps. Payments leave by check, ACH or wire, each tied to a client ledger, so the bank record and your ledger describe the same transaction.
How long do I keep the records?
Most states say five years from the end of the representation; several say six or seven. Keep the bank statements, check images, ledgers, reconciliations and signed statements together per matter.