In short
IOLTA trust account rules require a lawyer to keep client money in a separate trust account, never mixed with the firm's own money. Small or short-term client funds go into a pooled interest-bearing IOLTA account whose interest funds legal aid. ABA Model Rule 1.15 and the ABA recordkeeping rules require receipt and disbursement journals, a ledger for each client, regular reconciliation and five years of records.
Key takeaways
- ABA Model Rule 1.15 requires a lawyer to hold client and third-party money separately from the lawyer's own money, in a separate account, and to keep complete records for five years after the representation ends.
- An IOLTA account is a pooled, interest-bearing trust account for client money that is too small or held too briefly to earn net interest for the client; the bank sends the interest to the state IOLTA program.
- The ABA Model Rules on Client Trust Account Records list the records a lawyer must keep, including receipt and disbursement journals, a ledger for each client and bank records.
- The ABA recordkeeping rule calls for monthly trial balances and quarterly reconciliations as a minimum, and its commentary says monthly reconciliation is the preferred practice.
- Each state adopts its own version, so reconciliation frequency and record retention differ: California, Florida and New Jersey require monthly reconciliation, and New York and New Jersey require seven years of records.
What an IOLTA account is
IOLTA stands for Interest on Lawyers' Trust Accounts. It is a way of pooling small amounts of client money so that the interest they earn together can fund civil legal services for people on low incomes. When a lawyer holds client money that is small, or that will be held only briefly, it cannot earn interest for that client after bank charges. That money goes into a single pooled trust account, and the bank sends the interest to the state IOLTA program. According to the American Bar Association, IOLTA programs operate in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.
Larger sums, or money held long enough to earn meaningful interest for the client, belong in a separate interest-bearing trust account for that client, with the interest paid to the client. Deciding which account to use is a judgment the lawyer makes when the money arrives. Either way the money remains client money held on trust, and the same rules on records and reconciliation apply. New York calls its program IOLA, which is covered in our guide to New York attorney escrow account rules.
| Money received | Where it goes | Who receives the interest |
|---|---|---|
| A $2,500 advance for court filing costs, spent within weeks | Pooled IOLTA account | State IOLTA program |
| A $15,000 advance fee drawn down as work is billed | Pooled IOLTA account, unless large enough or held long enough to earn net interest for the client | State IOLTA program, or the client if held separately |
| A $650,000 settlement held for six months pending a lien dispute | Separate interest-bearing trust account for that client | The client |
| Fees already earned and billed | Firm operating account, not trust | The firm |
What ABA Model Rule 1.15 requires
ABA Model Rule 1.15 is the national template that most states use as the starting point for their own trust account rule. It says a lawyer must hold property of clients or third persons separately from the lawyer's own property. Money must be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person. The lawyer must keep complete records of the account and preserve them for five years after the representation ends; the rule shows that period in brackets so each state can set its own.
The rule then sets four practical limits. A lawyer may put the lawyer's own money into the trust account only to pay bank service charges, and only as much as is needed. Fees and expenses paid in advance go into the trust account and may be withdrawn only as fees are earned or expenses incurred. When money arrives in which a client or third person has an interest, the lawyer must promptly tell them, promptly deliver what they are entitled to and, on request, give a full accounting. If two or more people claim the same money, the disputed part stays in trust until the dispute is resolved, and the undisputed part is paid out promptly.
The records the ABA recordkeeping rule requires
The ABA Model Rules on Client Trust Account Records turn Rule 1.15's general duty to keep complete records into a list. Rule 1 requires a lawyer to keep the records below for five years after the representation ends, again shown in brackets for states to adopt or change. The records may be kept on paper or electronically, and the commentary makes the lawyer responsible for downloading and keeping the check images that banks now provide online.
Rule 2 adds safeguards for the account itself. Only a lawyer admitted in the jurisdiction, or a person under that lawyer's direct supervision, may sign on the account or authorize transfers from it. Receipts must be deposited intact, with deposit records detailed enough to identify each item. Withdrawals must be made by check payable to a named payee, never to cash, or by authorized electronic transfer.
| Record | What it shows |
|---|---|
| Receipts and disbursements journals | Every deposit and withdrawal, with dates, sources, payees and purposes |
| Client ledger for each client | Each client's money in, money out and running balance |
| Engagement and fee agreements | The terms on which money is held and fees are charged |
| Accountings to clients and third parties | What was paid out and to whom |
| Bills sent to clients | The basis for each fee withdrawal |
| Bank records | Statements, deposit records and cancelled or substitute checks, on paper or electronic |
| Electronic transfer records | Who authorized each transfer, when, and to which account |
| Monthly trial balances and quarterly reconciliations | That the journals, the client ledgers and the bank agree |
Monthly trial balances and quarterly reconciliation
Rule 1(i) of the ABA recordkeeping rules requires copies of monthly trial balances and quarterly reconciliations of each client trust account. A trial balance is the total of every client ledger balance. Its value comes from comparing it each month with a control balance: last month's balance, plus receipts from the receipts journal, minus payments from the disbursements journal. Once the two agree, the lawyer adds checks not yet cleared by the bank, subtracts deposits the bank has not yet credited, and the result should match the bank statement. This three-part comparison is the three-way reconciliation of a trust account.
The commentary to the rule says quarterly reconciliation is only a minimum, and that monthly reconciliation is the preferred practice because an error is hard to find among three months of transactions. Many states have gone further and made monthly reconciliation mandatory, as the state table below shows.
Commingling and misappropriation
Commingling means mixing the firm's own money with client money in the trust account, or holding client money in the firm's operating account. It is a breach even if no client loses anything, because it hides whose money is whose. The usual causes are earned fees left in trust long after billing, firm money deposited to cover a shortfall without a record of why, and client money paid into the operating account by mistake. Rule 1.15 allows only one kind of firm money in trust: an amount reasonably needed to pay bank charges.
Misappropriation means using client money for any purpose other than the one it is held for, whether deliberately or through careless records. Paying one client's settlement with another client's money is misappropriation even if it is put right the next day. It typically shows up as a client ledger with a negative balance. A negative ledger means the firm has paid out more for that client than it holds for that client, so the shortfall has been covered with other clients' money.
Worked example: an advance fee from receipt to withdrawal
A 15-lawyer commercial litigation firm receives a $20,000 advance fee from a new client on March 3. Because the money is a fee paid in advance, Rule 1.15(c) requires it to go into the trust account, and the firm deposits it intact into its IOLTA account the same day. The firm records it in the receipts journal and opens a client ledger for the matter showing a $20,000 balance.
On March 18 the firm pays a $1,240 court reporter invoice for the matter from trust. On March 31 it sends a bill for $7,450 of work done in March. The fee is now earned, so the firm transfers $7,450 to its operating account, which brings the client ledger to $11,310. If the firm left the earned $7,450 in trust for months, that would be commingling. If it had transferred $8,000 by keying the wrong figure, $550 of the client's unearned money would be sitting in the firm's account. That would be a misappropriation the monthly reconciliation should catch and the firm must put back at once.
| Date | Entry | Trust receipts journal | Trust disbursements journal | Client ledger balance |
|---|---|---|---|---|
| March 3 | Advance fee deposited intact | $20,000.00 | $20,000.00 | |
| March 18 | Court reporter invoice paid from trust | $1,240.00 | $18,760.00 | |
| March 31 | Bill sent: $7,450.00 earned fees | $18,760.00 | ||
| March 31 | Earned fees transferred to operating account | $7,450.00 | $11,310.00 | |
| March 31 | Monthly trial balance for this client | $11,310.00 |
How the states differ
The ABA rules are a model, not law. Each state's highest court adopts its own version, and the differences that matter most to a firm administrator are how often the account must be reconciled and how long records must be kept. The table below covers states whose rules we have checked against the state's own published text or bar guidance. Firms with offices in several states need to meet the strictest rule that applies to each account.
California has gone furthest on reporting: every licensed lawyer must report annually under the Client Trust Account Protection Program (CTAPP). Firms with Canadian or Australian offices face similar monthly duties under Ontario's By-Law 9 and the Australian Uniform General Rules.
| Jurisdiction | Reconciliation | Record retention |
|---|---|---|
| ABA Model Rules | Monthly trial balance and quarterly reconciliation as a minimum; monthly preferred | Five years after the representation ends (bracketed) |
| California | Monthly reconciliation of client ledgers, account journal and bank records (rule 1.15 standards) | At least five years after final distribution |
| Florida | Monthly reconciliation and monthly comparison with client ledgers, plus an annual listing by client (Rule 5-1.2(d)) | Six years |
| New Jersey | At least monthly (R. 1:21-6(c)) | Seven years |
| New York | No interval set in Rule 1.15 | Seven years after the events recorded |
| Texas | State Bar of Texas guidance: reconcile every month | Five years after the representation ends |
Controls that keep a firm inside the rules
Most trust account problems found by bar auditors begin with records that fall behind. A firm that posts every receipt and payment to the client ledger on the day it happens, reconciles every month even where the state allows a quarter, and investigates every difference to its cause is rarely in serious trouble. Each difference found, whether a bank fee, a deposit posted to the wrong client or a check entered at the wrong amount, should be recorded with its cause and the correction made, as described in our guide to reconciliation break management.
Three further controls are worth stating. Move earned fees out of trust promptly after billing. Never let a client ledger go below zero. Review the signatory list whenever a lawyer joins or leaves. Safeheld reconciles client money every day for regulated firms, works every difference to its cause and keeps the record auditors ask for, and is extending that work to law firm trust accounting in the United States. If your firm holds client money in IOLTA or other client trust accounts, talk to us about law firm trust accounting.
Frequently asked questions
What are the rules for an IOLTA account?
Client money must be kept separate from the firm's money, recorded in journals and a ledger for each client, reconciled regularly, and used only for the purpose it is held for. Each state sets the detail in its own version of ABA Model Rule 1.15.
What money goes into an IOLTA account?
Client money that is small in amount or held for a short time, so that it could not earn net interest for the client. Larger or longer-held sums go into a separate interest-bearing trust account for that client.
Can a lawyer keep their own money in an IOLTA account?
Only enough to pay the account's bank service charges. Any other firm money in the account, including earned fees left in trust, is commingling.
How often must an IOLTA account be reconciled?
The ABA recordkeeping rule sets quarterly reconciliation as a minimum and calls monthly the preferred practice. California, Florida and New Jersey require monthly reconciliation.
How long must trust account records be kept?
Five years under the ABA Model Rules, but states vary: California requires at least five years after final distribution, Florida six years, and New York and New Jersey seven years.
Do advance fees go into the trust account?
Yes. Under ABA Model Rule 1.15(c), fees and expenses paid in advance go into the client trust account and may be withdrawn only as the fees are earned or the expenses are incurred.
References
- American Bar Association, Model Rule 1.15: Safekeeping Property
- American Bar Association, Model Rules on Client Trust Account Records, Rule 1
- American Bar Association, Model Rules on Client Trust Account Records, Rule 1 Comment
- American Bar Association, Model Rules on Client Trust Account Records, Rule 2
- American Bar Association, IOLTA Overview
- The Florida Bar, Rules Regulating The Florida Bar, Chapter 5: Rules Regulating Trust Accounts
About Safeheld
Safeheld reconciles client money every day, resolves every difference and prepares every regulatory return for sign-off, for regulated firms in the United States, the United Kingdom, the European Union, Canada, Australia, Singapore and Hong Kong. To discuss your operations, contact us at safeheld.com/contact.
This article is for general information and does not constitute legal or regulatory advice.