How Does IOLTA Work?
Lawyers often handle money that belongs to clients, such as settlement checks, fees advanced for services not yet performed, or money to pay various court fees. Sometimes the amount of money that an attorney handles for a single client is quite large. In such cases, lawyers deposit the funds into trust accounts, where the funds can earn interest for the client.
Often, however, the amount of money that a lawyer handles for a single client is quite small or held for only a short period of time, and cannot earn interest for the client in excess of the costs incurred to collect that interest. Traditionally, lawyers have placed these deposits into combined, or pooled, trust accounts that contained other nominal or short-term client funds.
Before state laws and Supreme Court rules created IOLTA programs, trust funds pooled in this manner earned no interest. This is because trust accounts typically are checking accounts (to allow easy access to the funds) and, until the early 1980s, checking accounts did not earn interest. In addition, these trust funds earned no interest because it is unethical for attorneys to derive any financial benefit from funds that belong to their clients.
Since the inception of IOLTA, however, attorneys who handle nominal or short-term client funds that cannot earn net income for the client place these funds in a single, pooled, interest-bearing trust account. Banks in turn forward the interest earned on these accounts to the state IOLTA program, which uses the money to fund a variety of charitable causes.
Although IOLTA creates income, nothing else is changed: lawyers satisfy their ethical and fiduciary duty to place client funds in a secure account; there is on-demand access to the client's money; and, as in the past, the client realizes no interest income because the nominal or short-term client funds that are pooled in IOLTA accounts are funds that cannot earn net interest for the client.
Most banks treat IOLTA accounts as Negotiable Order of Withdrawal ("NOW") or other Business Interest Checking accounts. Banking regulations hold that attorneys can set up the accounts as NOW accounts even though the attorney-depositor may be a for-profit corporation, because the interest goes to a not-for-profit charitable entity.