Legal Definitions - IOLTA

IOLTA stands for Interest on Lawyers' Trust Accounts.

IOLTA refers to a program where lawyers place client funds that are either too small in amount or held for too short a period to generate net interest for the individual client. Instead of being held in separate, individual interest-bearing accounts for each client, these funds are pooled together into a single, commingled, interest-bearing trust account. The interest generated from this pooled account is then directed to state-run programs, typically to fund legal aid services for low-income individuals, improve the administration of justice, or support legal education initiatives.

Here are a few examples to illustrate how IOLTA works:

• Real Estate Earnest Money Deposit: Imagine a client is purchasing a home and provides their attorney with a $3,000 earnest money deposit. This money needs to be held by the attorney for a few weeks until the closing date. Because the amount is not exceptionally large and the holding period is relatively short, the interest it would earn for the individual client would be negligible, likely less than the administrative cost of setting up and managing a separate interest-bearing account for that specific client. Therefore, the attorney places this $3,000 into an IOLTA account, pooling it with similar small, short-term funds from other clients. The interest generated by this collective pool of funds over those few weeks contributes to the state's IOLTA program, which in turn supports vital legal services for those in need.

• Small Personal Injury Settlement: A lawyer successfully negotiates a $2,500 settlement for a client involved in a minor car accident. Upon receiving the settlement check, the lawyer deposits it into their trust account. After deducting their agreed-upon fees and costs, the remaining funds are disbursed to the client within a few days. During the brief period the $2,500 (or the client's portion of it) is held in trust, it is placed in an IOLTA account. The interest earned on such a small sum for just a few days would be insignificant for the client. However, when combined with interest from countless other small, short-term client funds across the state, the collective interest from IOLTA accounts provides substantial funding for legal aid organizations that assist low-income individuals with critical legal issues.

• Retainer for a Quick Legal Review: A small business owner hires an attorney to review a new vendor contract, paying a $1,000 retainer. The attorney completes the review within a week, and after billing for their services, returns the remaining $300 balance to the client. The initial $1,000 retainer, and specifically the unearned portion ($300) that is held before being returned, is considered client money. Given the relatively small amount and the short duration it's held, the attorney places these funds into an IOLTA account. The minimal interest generated on this amount for a week would not benefit the individual client. Instead, this interest contributes to the larger IOLTA fund, which is then used to support programs that enhance access to justice, such as providing free legal clinics or educational resources.