IOLTA Deposits: What Goes In, What Doesn't, and the Deposit That Causes Trouble

The mail comes in on a Tuesday, and three things on the administrator’s desk need a decision before lunch: a new client’s retainer check, a payment from a long-standing client covering an invoice for work finished last month, and a refund check from a vendor, made out to the firm, that someone already walked to the bank and deposited into the trust account.

Every one of those is a question about IOLTA deposits. Only one of them belongs in the account.

The rules are set state by state. Each state adopts its own version of ABA Model Rule 1.15, Safekeeping Property, and the details differ, so your jurisdiction’s version is the one that binds you (and this post is general guidance, not legal advice for your jurisdiction). Trust trouble also tends to start smaller than people expect. Commingling (firm money and client money in the same account) is a common problem, and it tends to happen by accident, with good intentions, on a busy morning like this one.

What goes in an IOLTA account?

An IOLTA (Interest on Lawyers’ Trust Accounts) account is a pooled trust account for client funds. The ABA’s IOLTA overview describes it as the place lawyers put client funds that are nominal in amount or held for a short time, funds that cannot earn net income for the client. The bank sends the interest to the state’s IOLTA program, which uses it for charitable purposes, primarily civil legal services for people who can’t afford them. (For the fuller background, see our explainer on what IOLTA is and how it works.)

The test is practical. If the amount is large or you’ll hold it for a long time, it usually belongs in a separate interest-bearing trust account for that client’s benefit. California’s State Bar puts it plainly in its IOLTA FAQ: funds go into IOLTA when they are not capable of earning interest for the client in excess of the cost of maintaining a separate account. That judgment belongs to the lawyer, under the state’s rule, and it’s worth writing down when you make it.

Typical IOLTA deposits:

• Advance fees that haven’t been earned yet (the retainer check)
• Advances for costs the firm will pay on the client’s behalf, such as filing fees
• Short-term funds held for a client or third party, like a modest settlement amount awaiting disbursement

Unearned advance fees go in; earned fees go to operating

Model Rule 1.15(c) is short: a lawyer “shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.”

So the retainer check from the new client goes into trust. It’s still the client’s money until the work is done and billed. The firm earns it in pieces, and each piece moves out to operating when it’s earned (more on that sequence in our guide to advance fees versus retainers, since the terms get used loosely and the distinction matters).

The payment on last month’s invoice is the opposite case. That work is done, and the fee is earned. Depositing it into trust would put firm money in the client account, which is the definition of commingling.

Two wrinkles to check against your state’s rule:

• Mixed payments. Some states address a single check that’s partly earned and partly advance. Washington’s RPC 1.15A(h)(1), for example, requires funds belonging in part to a client and in part to the lawyer to be deposited in trust, with the lawyer’s portion withdrawn “at the earliest reasonable time.”
• Flat fees paid up front. Whether any part of an advance flat fee can be treated as earned on receipt depends on your state and your engagement agreement. Don’t assume; check before the first deposit.

What never goes into an IOLTA account

Firm operating money stays out. That includes the vendor refund, a partner’s capital contribution, a “cushion” to cover a timing gap, and earned fees.

There is one narrow exception. Model Rule 1.15(b) lets a lawyer deposit the lawyer’s own funds in a client trust account “for the sole purpose of paying bank service charges on that account, but only in an amount necessary for that purpose.” Washington’s version uses similar language: funds to pay bank charges, “but only in an amount reasonably sufficient for that purpose.” That’s the whole allowance. It doesn’t stretch to covering a client’s shortfall or keeping a buffer against bounced checks.

Commingling matters even when no client loses a cent. Rule 1.15(a) requires client property to be held “separate from the lawyer’s own property,” so the separation itself is the obligation. A firm deposit sitting in trust also muddies every balance around it: the bank total no longer equals the sum of client balances, and the next reconciliation won’t tie out until someone finds the reason.

The deposit that went in by mistake

Back to the vendor refund. It’s already in trust. The goal now is to correct it quickly and leave a record that explains itself to anyone reading the file later, including an auditor.

1. Record it as firm money, not client money. Don’t post it to any client’s ledger. Book it on its own line so no client’s balance is overstated.
2. Move it out promptly. Transfer the exact amount from trust to operating, and reference the original deposit in the memo.
3. Document what happened. A short note with dates, amounts, and who made the correction is enough.
4. Check your state’s expectations. Some jurisdictions expect more than the correction itself, so confirm before you close it out.

We walk through this in detail in what to do if you accidentally deposit firm money into your IOLTA.

How to record IOLTA deposits so the ledger ties out

Every deposit needs to land in two places: the account-level record and the ledger for the specific client it belongs to. The ABA Model Rules for Client Trust Account Records call for receipt and disbursement journals showing the date, source, and description of each deposit, plus a ledger for each client or beneficiary. Your state’s version may set different retention periods and reconciliation intervals; the model rule leaves those in brackets for each state to fill in.

In practice, each deposit entry should carry:

• The date and the amount
• The source (who paid, and how)
• The client and matter it belongs to
• What it’s for: advance fee, cost advance, or funds held for a third party

When those fields are complete, the sum of every client ledger equals the trust account’s book balance, which equals the adjusted bank balance. When one deposit is posted to the wrong client, or to no client at all, that equality breaks, and someone spends an afternoon finding out why.

This is also where software earns its keep or doesn’t. LeanLaw keeps a trust sub-ledger for each client, and because it’s built on QuickBooks Online (a requirement for using LeanLaw’s accounting), trust transfers land in QuickBooks Online without re-entry. Reconciliation itself, including three-way reconciliation, happens in QuickBooks Online. Here’s how LeanLaw’s trust and IOLTA records sync with QuickBooks Online, and more on LeanLaw’s approach to trust accounting.

Why the managing partner should care about a Tuesday deposit

The person making deposit decisions is usually an administrator or bookkeeper. The name on the bar license, and on the response to any trust account inquiry, belongs to a lawyer. A record that is bar-audit defensible (every deposit traceable to a client, every withdrawal traceable to earned work or an incurred cost) is how a partner answers that inquiry without reconstructing months of activity.

It also affects cash. When advance fees are recorded cleanly against the right client and matter, earned amounts can move to operating as soon as they’re billed and earned, without a hold while someone untangles the ledger. On retainer matters, that shows up in days to collect. Clean IOLTA deposits shorten the gap between work performed and cash in the operating account, and they keep the firm from carrying a trust problem it didn’t know it had.