Interest on Lawyer Trust Accounts

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Interest on Lawyer Trust Accounts ('IOLTA') is a type of program in which the insignificant amounts interest earned from money held in lawyer trust accounts is aggregated for a public purpose.

In many jurisdictions, when a client gives money to a lawyer (e.g. an advance on fees, or money to hold for a transaction such as a real estate sale) the lawyer must place those funds in a separate trust account; the rules governing the practice of law do not let the lawyer claim the money until it is earned. However, the interest earned on those moneys is often less than the amount the bank charges to administer the interest. Before IOLTA, either the bank or the lawyers would hold on to the aggregate interest.

IOLTA programs were developed to convert the unearned aggregate interest to a purpose serving the same legal system that mandates the trust funds in the first place. IOLTA programs were first established in Australia and Canada in the late 1960s to generate funds for legal services to the poor. The Florida Bar Foundation launched the first American IOLTA program in 1981.

IOLTA applies only to funds that are "nominal in amount or held for a short period of time" so larger amounts of money held for single clients are exempt.

[edit] Specifics by state

Each state maintains its own IOLTA program, the District of Columbia, and the U.S. Virgin Islands operate IOLTA programs, each under its own rules and regulations. Thirty-one jurisdictions require lawyers to participate in IOLTA participation; it is otherwise optional.

Typically, the aggregate is administered by a state bar association and used to fund legal programs. Generally, the money collected is used to fund indigent defense, pro bono projects, and legal education programs.

In every state, the client receives the interest if the funds are large enough or will be held for a long enough period of time to generate net interest that is sufficient to allocate directly to the client.

[edit] Controversy

A number of court cases have arisen in which parties argued that IOLTA programs are unconstitutional. The Supreme Court of the United States upheld the constitutionality of IOLTA in Brown v. Legal Foundation of Washington, 538 U.S. 216 (2003), reasoning that there is no "taking" of client money because IOLTA does not apply to amounts of money that could ever be paid to a client.