Interest On Lawyer Trust Accounts - How IT Works

How It Works

Attorneys routinely receive client funds to be held in trust for future use. If the amount is large or the funds are to be held for a long period of time, the attorney customarily places these funds in an interest-bearing account for the benefit of the client. However, in the case of amounts that are small or are to be held for a short time, it is impractical for the attorney to establish a separate account for each client since the cost of establishing and administering the account would exceed any interest generated, and result in a net loss for the client. Prior to IOLTA, these nominal and short-term funds were combined and placed into a pooled, non-interest-bearing checking account. The reason the accounts were non-interest-bearing is because prior to 1981, commercial banks were prohibited by federal law from paying interest on demand deposits (e.g. checking accounts). In addition, the lawyer could not earn interest on the account because it is unethical for attorneys to derive any financial benefit from funds that belong to their clients.

With the inception of IOLTA, lawyers who handle nominal or short-term client funds that cannot earn net interest for the client place these funds in pooled, interest-bearing accounts, and the interest earned on these accounts is remitted to the state IOLTA program for charitable purposes. Virtually all IOLTA programs in the United States use IOLTA revenue to provide grants to organizations for the purpose of providing legal aid in civil matters to low-income residents; many also use IOLTA revenue for grants to help improve the administration of justice in their states.

Proper management of a lawyer's IOLTA (also commonly referred to as a "Trust Account") is highly regulated by each respective State Bar. As a practical matter proper management of a lawyer's IOLTA or Trust Account is a key management skill in the operation of a law office which is based on principles of double-entry bookkeeping, with certain additional safeguards designed to enhance the audit trail in the event a lawyer becomes unable or otherwise unwilling to cooperate with Bar auditors or an inventory attorney to account for handling of client property. It is incumbent on the owner of a law firm to undertake adequate training for the responsibilities of managing an IOLTA client property trust account. Effective management of client property trust account is required for compliance with Bar Rules and the efficient and profitable operation of the law firm. States typically require MCLE providers to be accredited by the state's court system.