An IOLTA account holds client money that is not yours, pooled with other clients’ money, in an account whose interest funds legal services for people who cannot pay. Every rule that follows comes from that one fact.
This article is educational and is not tax, legal, or investment advice. Consult your CPA, attorney, or licensed adviser about your specific situation.
IOLTA stands for Interest on Lawyers’ Trust Accounts, and the name describes what happens to the interest rather than the account itself. That is where most people trip. The available material tends the same way, toward the interest and away from the records: banks describe the account they would like to sell you, software vendors describe the problem their product solves, and bar foundations describe where the interest goes. The part that falls to you is a set of records that has to prove, on any given day, that every dollar in the account belongs to someone you can name.
What IOLTA stands for, and what makes it different
The account itself is a client trust account, and the requirement to have one comes from rule 1.15(a) of the California Rules of Professional Conduct. That rule states that all funds received or held for the benefit of a client, or of another person to whom the lawyer owes a contractual, statutory, or other legal duty, “including advances for fees, costs and expenses, shall be deposited in one or more identifiable bank accounts labeled ‘Trust Account’ or words of similar import, maintained in the State of California, or, with written consent of the client, in any other jurisdiction where there is a substantial relationship between the client or the client’s business and the other jurisdiction.” The label is not decorative. It is part of the rule.
What makes a trust account an IOLTA account is what happens to the interest. Under Business and Professions Code section 6211(a), client funds “that are nominal in amount or are on deposit or invested for a short period of time” may all be “deposited or invested in a single unsegregated account,” and the interest and dividends earned on those accounts “shall be paid to the State Bar of California to be used for the purposes set forth in this article.”
So the structure is two layers. Trust account is the category. IOLTA is the pooled version of it, and the pooling is what makes the interest impersonal enough to be assigned somewhere other than to individual clients.
Whose money is in the account
None of it is the firm’s. That sentence does more work than any other in this article, because almost every mistake firms make with these accounts is a version of forgetting it.
A retainer that has not been earned is the client’s money sitting in your custody. A cost advance is the client’s money. A settlement received on a client’s behalf is the client’s money, and so is the portion of it that will eventually become your fee, right up until the moment it is actually earned and properly transferred out. The account is a holding place for other people’s property that happens to have your firm’s name on the signature card.
The one place California draws a deliberate line is the flat fee. Rule 1.15(b) allows a flat fee paid in advance to be deposited in the firm’s operating account instead, on two conditions rather than one. Under rule 1.15(b)(1), the firm discloses to the client in writing that the client has a right to require the fee be held in a trust account until it is earned, and that the client is entitled to a refund of any unearned amount. Under rule 1.15(b)(2), if the flat fee exceeds $1,000, the client’s agreement to the operating account deposit and those same disclosures must additionally be “set forth in a writing signed by the client.” Above that threshold, written disclosure by itself is not enough. Comment [3] to the rule states the default plainly: absent the written disclosure and the client’s signed agreement, a flat fee paid in advance belongs in the trust account.
Everything downstream in the bookkeeping follows from ownership. Netting one client’s balance against another’s treats two people’s money as a single pool. A negative balance on a client’s ledger means that client’s funds were drawn below what was being held for them, which is to say other clients’ money covered the difference. Moving a fee out before it is earned moves money that is not yet the firm’s. What any of those situations means under the rules, and what to do if one has already happened, is a question for your attorney or the State Bar.
Pooled or separate: how the choice gets made
The pooling test in section 6211(a) asks about the funds, not about the client. Money that is nominal in amount, or that will be held only briefly, goes into the pooled IOLTA account. Money that does not fit that description falls under section 6211(b), which contemplates separate interest-bearing accounts with the interest payable to the client whose money it is.
The practical logic is that a large sum held for a long time could earn meaningful interest for its owner, so it should. A small sum held for two weeks would earn almost nothing individually, and the administrative cost of tracking that interest per client would exceed the interest itself. Pooled, those same small balances earn something collectively, and that collective interest is what the statute directs to the State Bar.
Where exactly the line falls for a specific matter is a judgment about the funds and the engagement, and it belongs to the attorney, with the State Bar as the authority on the rule. It is not a bookkeeping decision and we do not make it. What the books have to do is reflect the decision accurately once it is made, which means a separate account gets its own ledger and its own reconciliation rather than being folded into the pooled account’s records.
What the account looks like in your books
This is the part banks and software vendors leave out, and it is the part the State Bar actually examines.
Rule 1.15(d)(3) requires a lawyer to “maintain complete records of all funds, securities, and other property of a client or other person coming into the possession of the lawyer or law firm,” and rule 1.15(e) gives the Board of Trustees authority to define what those records are. The Standards adopted under it are specific. For every client whose funds you hold, you keep a written ledger showing the client’s name, the date, amount and source of everything received, the date, amount, payee and purpose of every disbursement, and the current balance. For every bank account, you keep a written journal showing the account name, the date, amount and client affected by each debit and credit, and the current balance. You keep all bank statements and cancelled checks. And then, in the Standards’ own words, you keep “each monthly reconciliation (balancing) of (a), (b), and (c).”
That final requirement is the three-way reconciliation, written into the rule rather than invented by accountants. The three things being balanced are the sum of the individual client ledgers, the account journal, and the reconciled bank statement. All three have to agree, every month. We cover the mechanics of that in what a three-way trust reconciliation is.
Two consequences of this structure are worth stating plainly. The bank balance by itself proves nothing, because it says how much money is in the account without saying whose it is. And the records outlive the matter: rule 1.15(d)(5) requires them to be preserved “for a period of no less than five years after final appropriate distribution” of the funds.
Checking or savings, and other mechanics people get wrong
An IOLTA account is an interest-bearing account held at an eligible institution, and the permitted forms are set by statute rather than by banking custom. Section 6213(j) defines an IOLTA account as an interest-bearing checking account, an investment sweep product that is a daily repurchase agreement or an open-end money market fund, or an investment product authorized by California Supreme Court rule or order. A plain savings account is not among them. The checking form also suits the purpose, because client money has to move on client business and an account with withdrawal restrictions would be unusable for it. Specific product terms still vary between institutions and are worth confirming rather than assuming.
What the statute does specify is the economics. Section 6212 requires that the rate paid on an IOLTA account “shall not be less than the interest rate or dividends generally paid by the eligible institution to nonattorney customers on accounts of the same type meeting the same minimum balance and other eligibility requirements as the IOLTA account.” A bank cannot quietly pay less on trust money than on ordinary money. Reasonable fees may be deducted from the interest, but only at the institution’s customary rates for non-IOLTA customers.
The institution, not the firm, handles the interest. It remits to the State Bar at least quarterly, along with a statement showing the name of the attorney or law firm, the rate applied, the fees deducted, and the average balance for each account. Nothing about that flow runs through your books as income, because the interest was never the firm’s to begin with.
What California asks of you every year
Holding the account correctly and reporting it are two different obligations.
Through the State Bar’s Client Trust Account Protection Program, licensees annually register their IOLTA and non-IOLTA accounts with the State Bar, complete a self-assessment of client trust account management practices, and certify that they understand and comply with the safekeeping requirements in rule 1.15. Registration reports the year-end balance on December 31, using the bank balance on that date, which means cleared transactions only.
The program also selects licensees for a compliance review of their trust records, which the State Bar describes as an annual requirement for up to 800 attorneys drawn from a cross-section of the legal community. We wrote separately about what a CTAPP compliance review examines.
What any of this means for a particular firm’s situation is a question for the State Bar or the firm’s own ethics counsel. Our part is narrower and comes earlier: the records that make the annual certification a description of something true rather than a hope.
The short version, if you are setting one up
- Label the account exactly as the rule describes, and keep it at an institution that offers IOLTA accounts.
- Never let firm money sit in it, beyond the funds “reasonably sufficient to pay bank charges” that rule 1.15(c)(1) permits, and never let client money sit outside it.
- Open a ledger per client, not per matter type, and record source, payee and purpose on every line rather than a bare description.
- Reconcile all three records monthly and keep the written reconciliation, because the Standards require the document, not just the act.
- Keep the records five years past final distribution.
- Take the pooling question, and any question about what a rule means, to your attorney or the State Bar. Take the recordkeeping to whoever handles your law firm bookkeeping.
Firms rarely get into trouble here through dishonesty. They get into trouble because the records drifted, quietly, until the month the balance had to be explained. You can reach us at (818) 485-2669.
Where the line falls: we keep the books, the client ledgers and the monthly reconciliations that a trust account requires. Interpretation of the Rules of Professional Conduct belongs to your attorney or the State Bar, discipline questions to the State Bar, and the choice of banking institution to your firm.
Booxmax is an accounting, consulting, and reporting firm, not a CPA firm, and does not prepare income tax returns, represent clients before the IRS, or provide tax, legal, or investment advice.
FAQ
What does IOLTA stand for?
Interest on Lawyers’ Trust Accounts. The name describes what happens to the interest rather than the account itself. The account is an ordinary client trust account; what makes it an IOLTA account is that eligible client funds are pooled and the interest earned is paid to the State Bar of California.
Who owns the funds in an IOLTA account?
The clients do, and third parties in some cases. Client money is not the firm’s, including unearned retainers and cost advances. Rule 1.15(c) allows two narrow exceptions: funds reasonably sufficient to pay bank charges, and any portion in which the firm’s own interest has become fixed, which must then be withdrawn at the earliest reasonable time. A disputed portion stays in the account until the dispute is resolved.
Is an IOLTA account the same as an escrow account?
They serve a similar custodial purpose but are not the same thing. An IOLTA account is a client trust account governed by the Rules of Professional Conduct and section 6211, with pooled interest directed to the State Bar. Escrow arrangements arise from contract and are governed separately. Ask your attorney which applies.
Is an IOLTA account checking or savings?
Checking. Section 6213(j) defines an IOLTA account as an interest-bearing checking account, an investment sweep product, or an investment product authorized by California Supreme Court rule or order, and a plain savings account is not among them. The checking form also suits the purpose, because client funds have to move on client business. Specific product terms still vary by institution.
Can you withdraw from an IOLTA account?
Yes, for the client whose funds they are, and for fees once they are earned and documented. A disbursement larger than that client’s ledger balance would draw on funds held for other clients, which is why the per-client ledger exists. What a specific withdrawal requires is a question for your attorney or the State Bar.