Legal Definitions - Interest on Lawyers' Trust Accounts

IOLTA, which stands for Interest on Lawyers' Trust Accounts, is a program designed to generate funding for public interest legal services and other law-related charitable causes. When lawyers or law firms hold client money in trust – for example, retainers, settlement funds, or escrow deposits – these funds are typically placed in special bank accounts. For amounts that are individually too small, or held for too short a period, to earn net interest for the individual client after accounting for bank fees and administrative costs, the funds are pooled into an IOLTA account. The interest generated on these pooled funds is then directed to non-profit organizations that provide free legal aid to low-income individuals, support legal education, or work to improve the justice system.

Here are a few examples of how IOLTA works:

• Example 1: Small Retainer for Document Review

  A client hires an attorney to review a short contract and pays a $500 retainer. The attorney holds this money in their trust account for two weeks while completing the review. The interest that $500 would earn over two weeks is negligible, perhaps only a few cents, and the administrative cost of calculating and distributing such a small amount to the client would exceed the interest itself. Under IOLTA rules, this small amount of interest, when pooled with similar small interest amounts from many other clients' funds, is collected and sent to the state's IOLTA program to fund legal aid organizations.

• Example 2: Earnest Money Deposit in a Real Estate Transaction

  During a property sale, a buyer's attorney holds a $2,000 earnest money deposit in their trust account for three weeks until the closing date. If this money were held in a separate interest-bearing account for the client, the interest earned would be minimal and likely offset by bank fees. Instead, the interest generated on this $2,000, along with interest from countless other earnest money deposits held by other law firms, contributes to the IOLTA fund. This collective interest then helps support initiatives like pro bono legal services for victims of domestic violence or assistance for veterans.

• Example 3: Minor Settlement Funds Awaiting Distribution

  A lawyer receives a $1,500 settlement check for a client involved in a minor dispute. Before the funds can be disbursed to the client, the lawyer needs to confirm a small medical lien and process some administrative paperwork, which takes about a month. The interest earned on $1,500 over a month would be very small. Rather than attempting to track and distribute this tiny amount to the client, the interest accrues to the IOLTA program. This ensures that even the smallest amounts of interest on client funds are put to good use, collectively supporting programs that provide legal representation to vulnerable populations.