IOLTA Overview
What is IOLTA?
IOLTA – Interest on Lawyers’ Trust Accounts – is a method of raising money for charitable purposes, primarily the provision of civil legal services to indigent persons. The establishment of IOLTA in the United States followed changes to federal banking laws passed by Congress in 1980, which allowed some checking accounts to bear interest. IOLTA programs currently operate in 50 states, the District of Columbia, and the U.S. Virgin Islands.
How does it 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.
The impact of IOLTA
In 2007, IOLTA grants nationwide totaled $240 million. IOLTA is among the most significant sources of funding for programs that provide civil legal services to the poor, with close to 90 percent of grants awarded by IOLTA programs ($212.2 million in 2007) supporting legal aid offices and pro bono programs.
IOLTA programs have taken a leading role in funding a number of innovative programs that have had a positive impact on the delivery of legal services to the poor. These include loan repayment assistance programs, state-based legal information Web sites and legal assistance hotlines. IOLTA programs also fund a variety of other activities including: alternative dispute resolution programs, young lawyer special public service projects, victim services programs, court-appointed special advocate (CASA) programs, pro se assistance resources, minority lawyer recruitment initiatives, and law school scholarship programs.
