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After the Bar

Practice Management

What Is IOLTA?

Stephanie Pauly

What Is IOLTA?

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Chances are you’ve heard of the term “IOLTA account,” likely in reference to your or your firm’s client trust account. Still, you might not precisely know what makes an IOLTA account different from a regular checking account or how it operates. IOLTA stands for Interest on Lawyers’ Trust Accounts, and IOLTA programs exist in every US jurisdiction. In 45 states, the District of Columbia and Puerto Rico, participation in IOLTA is mandatory for all lawyers who hold client funds. Lawyers in Alaska, Kansas, Nebraska, Wyoming, and Virginia also participate in IOLTA unless they’ve chosen to opt-out. It is important to note that each jurisdiction’s IOLTA program operates on an independent basis, and the rules, accounting requirements, and operating procedures can vary from jurisdiction to jurisdiction. Lawyers who are licensed to practice in multiple jurisdictions should make sure they are familiar with and understand the rules pertaining to IOLTA accounts in each jurisdiction they are licensed. 

At its basis, IOLTA is a method of raising money for charitable causes, primarily legal aid programs that provide services to persons with low or no income. IOLTA came about after federal banking laws were changed to allow some client trust accounts to bear interest. When a lawyer holds a nominal amount of money for a client on a short-term basis, the money is traditionally deposited into a trust account that consists of the pooled or combined funds of the lawyer’s clients. Before IOLTA, these trust accounts earned no interest, as ethics rules prohibit a lawyer from deriving any benefit from funds belonging to their clients. With the creation of IOLTA programs, these accounts are permitted to earn interest, which the bank forwards to the jurisdiction’s IOLTA program, who then uses the money to fund charitable causes. IOLTA accounts allow the lawyer to fulfill their ethical and fiduciary duty to place client funds in a secure account that is accessible on-demand while generating an income for legal aid services. Because the income is derived from short-term or nominal client funds that cannot earn net interest for the client and cannot be ethically retained by the lawyer, the income derived is of no cost or loss to the client or lawyer. Additionally, due to the charitable nature of IOLTA accounts, some banks offer a higher-than-average interest rate and have agreed to waive or reduce fees on IOLTA accounts.

The impact of IOLTA has been far-reaching; since 1981, IOLTA has generated over $4 billion in revenue throughout the United States, with grants in 2018 totaling more than $112 million. In 2018, 89 percent of IOLTA grants were awarded to legal aid offices and pro bono programs that provide civil legal services to persons living below the poverty line. . In many states, IOLTA programs also fund legal information websites and hotlines, alternative dispute resolution programs, young lawyer public service projects, court-appointed advocate programs, and law school scholarships.

Because IOLTA is tied to interest rates, IOLTA income fluctuates as rates change in response to the Federal Reserve and other economic factors. Even though some banks offer a higher-than-average rate for IOLTA accounts, when the average rate drops, so does the rate for these accounts. Unfortunately, in the wake of the COVID-19 pandemic, IOLTA programs will be faced with the challenges of decreased revenues at a time when legal aid and other access to justice programs will likely see an increased need. The ABA Commission on IOLTA, along with the ABA Task Force on Legal Needs Arising Out of the 2020 Pandemic, continues to pursue a variety of strategies and offer resources to assist programs in dealing with the upcoming challenges. Some of these strategies entail encouraging continued negotiations with banks for favorable interest rates, working with Congress and state legislatures to increase and create new sources of funding, and developing campaigns aimed at increasing private donations.

For more information about a particular IOLTA program, please refer to the IOLTA program directory on the ABA website for contact information for each jurisdiction’s program.