Accounting

Who Gets the Interest on an Escrow Account for Law Firms? The IOLTA Truth

Key Takeaways:

  • Interest earned on IOLTA accounts goes to state bar foundations to fund legal aid for low-income individuals—not to the law firm or clients
  • In 2020 alone, IOLTA programs nationwide generated over $175 million for civil legal services, helping close the justice gap
  • Law firms can use non-IOLTA trust accounts for large sums or long-term holdings where clients receive the interest directly

You just received a $10,000 retainer from a new client. As you deposit it into your trust account, a thought crosses your mind: “Wait, who actually gets the interest on this money?”

If you’re like most attorneys, you might assume the client gets it. Or maybe your firm? After all, you’re managing the account, right?

Wrong. And this confusion isn’t just common—it’s almost universal among lawyers who haven’t dug into the peculiar world of IOLTA accounting.

Here’s the counterintuitive truth: That interest doesn’t go to you OR your client. Instead, it funds legal aid for people who can’t afford lawyers. Yes, really. Your client’s retainer is helping fund access to justice across your state, and there’s nothing optional about it (in most states).

Since 1981, IOLTA programs have generated over $4 billion nationwide. In California alone, IOLTA grants will total $252 million in 2025. That’s a lot of zeros funding civil legal services from what seems like pocket change.

But here’s where it gets interesting: not ALL trust account interest works this way. There are exceptions, alternatives, and a whole regulatory framework that determines who gets what. Let’s untangle this web and figure out exactly where that interest goes—and when you might actually owe it to your client.

The IOLTA Revolution: How Spare Change Became Millions

Before we dive into who gets the interest, let’s understand what we’re talking about. IOLTA stands for “Interest on Lawyers Trust Accounts,” though New York likes to be different and calls it IOLA (Interest on Lawyer Accounts).

The Pre-IOLTA Dark Ages

Picture this: It’s 1980, and law firms across America are sitting on millions of dollars in non-interest-bearing checking accounts. Why? Because federal banking regulations prohibited interest on checking accounts, and lawyers couldn’t ethically profit from client funds.

This meant that small retainers, short-term settlement funds, and nominal client deposits just… sat there. Doing nothing. Helping no one.

Then came the game-changer: Congress modified banking laws in 1980 to allow interest-bearing checking accounts. Florida jumped on this opportunity in 1981, creating the first IOLTA program. The concept was brilliantly simple:

  1. Pool small client funds into interest-bearing accounts
  2. Send the interest to the state bar foundation
  3. Use that interest to fund legal aid

Today, all 50 states, D.C., Puerto Rico, and the U.S. Virgin Islands have IOLTA programs. Since 1981, IOLTA has generated over $4 billion in revenue throughout the United States. In 2020, IOLTA grants nationwide totaled over $175 million.

Who Gets the Interest? The Three-Way Split

Let’s break down the three possible destinations for trust account interest:

1. The State Bar Foundation (IOLTA Accounts) – The Default

When you deposit client funds into an IOLTA account, the interest automatically goes to your state’s designated charitable entity. You don’t get a choice, and neither does your client.

Who benefits from this interest?

  • Legal aid organizations: Providing free civil legal services to low-income individuals
  • Pro bono programs: Supporting volunteer lawyer initiatives
  • Court improvement projects: Funding access to justice innovations
  • Law school scholarships: Supporting future public interest lawyers

In Massachusetts, IOLTA funds are distributed among three charitable entities: The Boston Bar Foundation, The Massachusetts Bar Foundation, and The Massachusetts Legal Assistance Corporation. These organizations then make grants to local programs that help people facing eviction, domestic violence, consumer debt, and other civil legal issues.

The impact is substantial. Legal aid organizations in Massachusetts are forced to turn away nearly 60% of eligible people seeking help due to insufficient funding. IOLTA interest helps close this justice gap.

2. The Client (Non-IOLTA Trust Accounts) – The Exception

Here’s where it gets interesting. Not ALL trust accounts are IOLTA accounts. When can clients actually receive the interest?

Large Balance Accounts: If a client’s funds are substantial enough to earn net interest (after bank fees and administrative costs) that exceeds the cost of establishing a separate account

Long-Term Holdings: When funds will be held for an extended period, making individual account management worthwhile

Client-Specific Accounts: Some jurisdictions allow separate interest-bearing accounts for individual clients

In these cases, the interest belongs to the client, not the law firm. Interest earned in non-IOLTA trust accounts belongs to the client. Before opening a non-IOLTA trust account, check your local jurisdiction’s laws and the local Bar Association’s requirements to confirm this is allowed.

3. Nobody (The Firm Never Gets It)

Let’s be crystal clear: Law firms NEVER get to keep trust account interest. Ever. This is non-negotiable.

Whether it’s an IOLTA account sending interest to legal aid or a client-specific account where the client receives interest, the law firm has zero claim to these funds. Remember, the interest earned on a firm’s IOLTA account is not the firm’s money. This interest was generated by client funds and must be transferred to the state’s IOLTA program in the ways set forth by that particular state’s bar association.

The Mandatory vs. Voluntary Debate: Your State, Your Rules

Not all IOLTA programs are created equal. States fall into three categories:

Mandatory Participation States (The Majority)

As of 2024, Thirty-seven states now have mandatory programs, and that number is expected to increase. In these states, if you hold client funds, you MUST use IOLTA accounts for qualifying funds.

Recent converts to mandatory IOLTA include:

  • Virginia: Virginia will be the 46th state to require lawyers with pooled client trust accounts to agree that the interest on those accounts will go support legal aid programs as of July 1, 2022
  • Missouri: Converted from opt-out to mandatory in 2008

Opt-Out States (The Middle Ground)

In opt-out jurisdictions, you’re automatically enrolled in IOLTA unless you affirmatively choose not to participate. This creates a default participation model while allowing flexibility.

Voluntary States (The Minority)

A shrinking number of states still maintain voluntary IOLTA programs where lawyers must actively choose to participate. However, even in these states, professional pressure and ethical considerations often drive high participation rates.

When Your Money is “Too Small” for Its Own Account

The million-dollar question (or more likely, the thousand-dollar question): What makes funds “IOLTA-eligible”?

The Nominal or Short-Term Test

IOLTA accounts are designed for funds that are:

  1. Nominal in amount: Too small to earn net interest for the client after accounting for:
    • Bank service charges
    • Accounting costs
    • Tax reporting requirements
    • Administrative expenses
  2. Short-term in nature: Held for such a brief period that setting up a separate account isn’t practical

Real-World Examples

IOLTA-Appropriate Funds:

  • A $2,000 retainer for a simple divorce
  • Settlement funds held for 30 days pending distribution
  • Court costs advanced by multiple clients
  • Real estate earnest money for a quick closing

Non-IOLTA Candidates:

  • $100,000 personal injury settlement held for a minor until age 18
  • $50,000 retainer for complex litigation expected to last years
  • Large real estate transaction funds held for several months

The key test: Will the interest earned exceed the cost of maintaining a separate account? If not, it’s IOLTA territory.

The Compliance Minefield: What You Must Know

Getting IOLTA wrong isn’t just an accounting error—it’s an ethics violation. Here’s your compliance checklist:

Setting Up Your IOLTA Account

  1. Choose an approved bank: The rules also define institutions “eligible” to hold IOLTAs as only those banks which have IOLTA programs approved by the applicable state bar.
  2. Use the correct tax ID: The Tax Identification Number (“TIN”) 43-1355525 should be the number attached to every IOLTA account. Never use your firm’s TIN—that implies you’re earning the interest.
  3. Label it properly: Accounts must be clearly designated as “IOLTA” or “Trust Account”
  4. Register with your state program: Most states require registration within 30 days of opening an account

Record-Keeping Requirements

Your trust accounting system must maintain:

  • Individual client ledgers showing all deposits and withdrawals
  • Monthly reconciliation records
  • Bank statements and canceled checks
  • Documentation for every transaction

Remember: There is absolute liability for being even a penny out of balance, and good faith is not a defense. That’s right—even a well-intentioned mistake can lead to discipline.

Tax Implications (The Good News)

Here’s one of the few simple parts of IOLTA: No one pays any taxes on the interest earned on IOLTA accounts. The IRS has ruled that the interest generated on these accounts is not taxable to the lawyer, law firm, or client.

If you receive a 1099 for IOLTA interest, don’t panic—just contact your state IOLTA program to correct the reporting.

Common Myths About Trust Account Interest

Let’s bust some persistent misconceptions:

Myth #1: “I Can Temporarily Borrow the Interest”

Reality: Never. Not even for five minutes. Not even if you promise to pay it back. This is one of the fastest routes to disbarment.

Myth #2: “Large Firms Don’t Need IOLTA Accounts”

Reality: Firm size is irrelevant. If you handle client funds that are nominal or short-term, you need an IOLTA account. Period.

Myth #3: “The Interest is Too Small to Matter”

Reality: Idaho’s IOLTA program has distributed over $8 million in grants in its almost 40-year history. For 2025, IOLTA granted a record amount for one year, $600,000 to organizations serving Idaho students, individuals, and families. Every penny counts when pooled together.

Myth #4: “Clients Can Demand Their IOLTA Interest”

Reality: Clients have no claim to IOLTA interest because by definition, these are funds that cannot earn net interest for the individual client. The interest only exists because of pooling.

Myth #5: “IOLTA is Optional if My State is Voluntary”

Reality: Even in voluntary states, declining to participate requires a conscious decision and may raise questions about your commitment to access to justice. Many malpractice insurers look favorably on IOLTA participation.

The Real-World Impact: Where Your Interest Dollars Go

Let’s put faces to these numbers. IOLTA interest funds:

Direct Legal Services

  • Domestic violence advocacy: Helping abuse survivors obtain protective orders
  • Housing stability: Preventing wrongful evictions and securing safe housing
  • Family law assistance: Ensuring fair custody arrangements and child support
  • Consumer protection: Fighting predatory lending and debt collection abuse

System Improvements

  • Self-help centers: Creating resources for pro se litigants
  • Court technology: Improving access through online filing systems
  • Language access: Funding interpreters and translated materials
  • Rural legal services: Bringing lawyers to legal deserts

The Numbers Tell the Story

The Iowa Supreme Court approved $870,244 in grants to non-profit programs that provide legal assistance to low-income Iowans with civil legal problems. This funded thirteen different organizations across the state, from rural legal aid to specialized immigration services.

In Massachusetts, interest on IOLTA accounts totaled more than $7 million in fiscal year 2021. That’s $7 million for civil legal services from interest that would have otherwise gone uncollected.

Best Practices for Managing Interest-Bearing Trust Accounts

Whether you’re dealing with IOLTA or client-specific trust accounts, follow these guidelines:

For IOLTA Accounts

  1. Consolidate when possible: Maintain one IOLTA account rather than multiple accounts
  2. Choose high-yield banks: Some IOLTA accounts earn better rates—every basis point helps legal aid
  3. Automate compliance: Use legal billing software that handles IOLTA tracking automatically
  4. Regular reconciliation: Monthly at minimum, weekly if you have high volume

For Non-IOLTA Client Accounts

  1. Document the decision: Keep records showing why funds qualified for separate accounts
  2. Clear client communication: Explain interest allocation in your retainer agreement
  3. Accurate interest tracking: Maintain detailed records of interest earned and distributed
  4. Timely distribution: Don’t let client interest accumulate unnecessarily

For All Trust Accounts

  1. Never commingle funds: Keep trust money completely separate from operating funds
  2. Real-time recording: Enter transactions immediately, not at month-end
  3. Three-way reconciliation: Ensure bank statements, QuickBooks records, and client ledgers match
  4. Regular audits: Self-audit quarterly to catch issues early

The Future of IOLTA: Challenges and Opportunities

The IOLTA landscape is evolving, facing both headwinds and tailwinds:

Current Challenges

Low Interest Rates: When rates hover near zero, IOLTA revenue plummets. Programs that generated millions during high-rate environments struggle to fund basic services when rates drop.

Changing Legal Services Delivery: With regulatory changes emerging in the legal profession allowing nonlawyers to provide some legal services, this could challenge state IOLTA officials. States like Arizona and Utah are pioneering new models that may affect traditional IOLTA structures.

Voluntary to Mandatory Conversions: While more states are making IOLTA mandatory, transitions can be complex and face resistance from some quarters of the bar.

Emerging Opportunities

Rising Interest Rates: Recent Federal Reserve actions have increased IOLTA revenue substantially in many states

Technology Integration: Modern trust accounting software makes compliance easier than ever

Increased Awareness: Younger lawyers entering the profession are often more committed to access to justice initiatives

Your Action Plan: Getting Interest Allocation Right

Here’s your step-by-step guide to handling trust account interest correctly:

Step 1: Audit Your Current Accounts

  • List all trust accounts your firm maintains
  • Verify each is properly designated (IOLTA vs. non-IOLTA)
  • Confirm you’re using approved financial institutions

Step 2: Review Your Client Intake Process

  • Update retainer agreements to explain interest allocation
  • Create clear policies for determining IOLTA eligibility
  • Train staff on proper account selection

Step 3: Implement Proper Systems

  • Set up automated IOLTA reporting if available in your state
  • Use trust accounting software that tracks interest correctly
  • Create reconciliation schedules and stick to them

Step 4: Stay Informed

  • Monitor your state bar’s IOLTA rule changes
  • Attend trust accounting CLEs annually
  • Join your state’s IOLTA program mailing list

The Bottom Line: It’s Not Your Interest

The question “Who gets the interest on an escrow account?” has a surprisingly complex answer, but here’s the simple version:

  • Small amounts and short-term funds: Interest goes to legal aid via IOLTA
  • Large amounts and long-term funds: Interest CAN go to clients in separate accounts
  • Your firm: Never gets trust account interest. Ever.

This system has created billions in funding for civil legal services while maintaining lawyers’ ethical obligations. Sure, it’s complicated. Yes, compliance can be challenging. But when you consider that your routine trust account management helps provide lawyers for domestic violence survivors, prevents wrongful evictions, and ensures access to justice for society’s most vulnerable, those reconciliation headaches seem worth it.

Your client’s retainer interest might seem like pennies, but pooled with thousands of other lawyers’ accounts, it becomes millions in justice funding. That’s the magic of IOLTA—turning spare change into changed lives.

Want to ensure your trust accounting is bulletproof? LeanLaw’s trust accounting features automate IOLTA compliance while giving you real-time visibility into every penny of client funds. Because the best way to handle trust account interest is to have systems that make compliance automatic.


Frequently Asked Questions

Can clients ever refuse to have their funds in an IOLTA account?

No, clients cannot refuse IOLTA participation for qualifying funds. If funds are nominal or short-term, they must go into an IOLTA account in mandatory states. However, clients with large or long-term deposits may request separate interest-bearing accounts where they receive the interest directly. The determination is based on objective criteria, not client preference.

What happens to IOLTA interest if I practice in multiple states?

Many attorneys and/or firms are establishing IOLTA accounts for each jurisdiction in which they practice to ensure compliance with the rules of each state. You’ll need to follow each state’s rules for funds related to that jurisdiction. Some firms maintain separate IOLTA accounts for each state where they practice to ensure compliance.

How much interest does a typical IOLTA account generate?

Individual IOLTA accounts generate modest interest—perhaps a few dollars to a few hundred dollars annually, depending on balance and rates. However, when pooled statewide, the impact is substantial. In 2020, IOLTA grants nationwide totaled over $175 million. Your small contribution joins thousands of others to create significant funding.

Are there penalties for putting funds in the wrong type of account?

Yes, and they can be severe. Improperly handling trust funds can result in discipline ranging from reprimand to disbarment. Failure to comply with the rules set forth can result in a lawyer or law firm being faced with fines or even disbarment, depending on the severity of the situation. Always err on the side of caution and consult your state bar if unsure.

Do IOLTA rules apply to advance fee payments and flat fees?

It depends on your jurisdiction. Advance fees that remain unearned must typically go into trust accounts (usually IOLTA). However, some jurisdictions allow “true retainers” or “flat fees” to be deposited directly into operating accounts if properly structured and disclosed. Always check your local rules, as this is a frequent source of discipline.

Can I use a regular business checking account if it doesn’t earn interest?

No. Even if an account doesn’t earn interest, client funds must still be kept in a designated trust account, separate from your firm’s operating funds. The segregation of client funds is mandatory regardless of interest considerations. Using your business account for client funds is commingling and grounds for discipline.


Sources and References

  1. American Bar Association – IOLTA Overview
  2. National Association of IOLTA Programs
  3. State Bar IOLTA Program Directories
  4. IRS Ruling on IOLTA Taxation
  5. Legal Services Corporation Annual Reports
  6. ABA Model Rules of Professional Conduct – Rule 1.15

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