About IOLTA Accounts
A strange acronym with which every attorney who starts his or her practice becomes familiar is IOLTA. This stands for Interest on Lawyers’ Trust Accounts. And this interest raises money to provide civil legal services to indigent individuals. Any lawyer who handles client funds that are too small in amount or held too briefly to earn interest for the client must participate in the Interest on Lawyers’ Trust Accounts program. Such IOLTA accounts may only be kept at approved financial institutions.
Attorneys routinely receive client funds that must be held in trust for future use. If there is a large sum of money involved, or it will be held for a long time, an attorney can hold the client’s funds in an individual account, designated as a Client Trust Account, and the interest earned belongs to the client.
However, for those more common cases where the amount of funds are small or only need to be held for a short time, it is impractical for attorneys to establish separate accounts for each client, especially since the cost of establishing and administering the account would likely exceed any interest generated by such account, even resulting in a net loss for the client. An IOLTA account for each individual attorney rather than each individual client provides the solution.
California Rule of Professional Conduct 4-100 requires that attorneys who handle money belonging to their clients, including settlement checks, fees advanced for services not yet performed, or money to pay court fees, deposit the funds in one or more clearly identifiable trust accounts.
“All funds received or held for the benefit of clients by a member or law firm, including advances for costs and expenses, shall be deposited in one or more identifiable bank accounts labeled, ‘Trust Account,’ ‘Client’s Funds Account’ or word of similar import…”
Before IOLTA was implemented, these nominal and short-term funds were combined and placed into a pooled, non-interest-bearing checking account. At the time, prior to 1981, commercial banks were prohibited by federal law from paying interest on demand deposits, and lawyers were prohibited from earning interest on such accounts for ethical concerns.
The interest earned from pooled IOLTA accounts benefits nearly 100 nonprofit legal service organizations throughout California. By increasing access to justice for individuals and families living in poverty, the IOLTA program improves the California justice system.
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