IOLTA Trust Account Compliance for Law Firms | 2025 Guide
Most law firms treat IOLTA like a bank balance.
But trust accounting isn’t just about making sure the numbers match - it’s about regulatory compliance, ethical responsibility, and protecting your law license.
IOLTA programs have been established across all U.S. states and are governed by professional conduct rules that regulate how attorneys hold their clients’ money.
In 2025, the bar is higher than ever. Here’s how to set up your IOLTA trust accounting the right way - and what’s at stake if you don’t.
Introduction to IOLTA Accounts
IOLTA accounts, or Interest on Lawyer Trust Accounts, are specialized trust accounts used by law firms to hold client funds separate from their business and operating accounts. These accounts are designed to earn net interest, which is then directed to support legal aid offices, civil legal services, and other charitable foundation initiatives.
By using an IOLTA account, law firms maintain compliance with professional conduct rules while supporting the greater good. Most law firms rely on IOLTA accounts to manage short-term retainers and settlements ethically. Without properly maintained IOLTA accounts, even minor errors can lead to trust violations.
These accounts typically hold short-term or nominal trust deposits - such as settlement proceeds, retainer fees, or filing fees - and remain essential for managing a client trust account responsibly. According to the ABA, law firms that maintain compliant IOLTA trust accounting practices are less likely to face audits, disciplinary action, or client complaints.
Benefits of an Interest-Bearing Trust Account for Law Firms
Trust accounts, including IOLTA accounts, offer numerous advantages for law firms and their clients. One of the main benefits is the ability to maintain a clear separation between trust deposits and the firm’s business account, minimizing the risk of commingling and protecting the client’s money. These accounts also provide a transparent, compliant method for holding retainers and third-party payments, supported by detailed accounting records and monthly bank statements.
By utilizing a trust account, law firms demonstrate their commitment to ethical financial management in line with professional conduct standards. IOLTA accounts, in particular, help fund legal aid and civil legal services through interest generated - expanding access to justice and benefiting the broader community.
What Is IOLTA Trust Accounting (And How Does It Protect Client Funds?)
AAn IOLTA (Interest on Lawyer Trust Account) is a specialized type of bank account designed for temporarily holding client funds. These IOLTA trust accounts are essential for managing short-term or nominal funds that do not generate enough interest earned to benefit the individual client directly. While the law firm does not receive the interest, the funds must be meticulously tracked, reconciled, and managed with complete accuracy.
As a fiduciary, you are responsible for someone else’s money. Even small accounting errors aren’t just mistakes - they’re breaches of professional duty that can lead to violations of state bar association rules.
What IOLTA Compliance Actually Requires in 2025
This Isn’t “Close Enough” Accounting
Compliance with bar regulations is not a matter of approximation. You either adhere to them completely - or you don’t.
This is why managing IOLTA trust accounts carries such significant importance. Mismanagement, mishandling, or misuse of a client’s money can result in disciplinary action from the state bar association, financial penalties, or even disbarment. That’s why accurate record-keeping, IOLTA reconciliation, and strict compliance measures are non-negotiable to protect your firm from malpractice claims.
What True IOLTA Compliance Entails:
Client funds must be stored in a separate interest on lawyer trust account or accurately tracked through individual client ledgers within your legal accounting software.
Conduct monthly three-way reconciliations between the trust ledger, client ledger, and bank statement to maintain audit-ready records and prevent disciplinary action.
Trust money must never be mixed with your firm’s business account. This type of commingling is a violation of professional conduct rules and may trigger penalties from your state bar association.
Earned and unearned income must be properly allocated, with all transactions - including reimbursements, court fees, and third-party disbursements - logged in detail.
While quarterly reconciliation may be the minimum requirement in some states, monthly trust account reconciliation is the gold standard for IOLTA compliance and risk mitigation.
Finally, manage payment processing fees with care. Improper handling of transaction fees on electronic payments can lead to misappropriation of client funds - even if unintentional.
If your system can’t meet these standards, your records are non-compliant. The bar association won’t care how busy you are - they’ll care that your trust records weren’t accurate.
IOLTA Compliance Requirements for 2025
To stay compliant with IOLTA trust accounting standards in 2025, your firm must follow these requirements precisely:
Maintain individual client ledgers for each matter using legal accounting software that supports trust account management.
Conduct monthly three-way reconciliations between the trust ledger, client ledger, and bank statement - without exception.
Prevent any commingling of trust and operating account funds.
Only transfer funds when they’re earned to meet proper timing standards and avoid unintentional violations.
Keep audit-ready records of all transactions, including reimbursements, court filing fees, third-party disbursements, and settlements.
In some jurisdictions, file a quarterly compliance certification with your state bar association.
Evaluate whether net interest earned justifies placing third-party or trust deposits in an IOLTA account or a separate interest-bearing account.
Failing to meet even one of these obligations can result in ethics complaints, license suspension, or a full-scope trust account audit.
How to Set Up a Compliant Client Trust Account (IOLTA)
Whether you're just starting out or looking to revamp your trust accounting system, here’s how to proceed:
Open a dedicated IOLTA account at a financial institution approved by your state bar association. Always choose a financial institution that understands bar regulations and offers monthly trust statements. If funds can earn net interest for the client, they may need to be held in a separate interest-bearing trust account, not an IOLTA account.
Develop a chart of accounts to separate trust funds from operating activities clearly.
Set up individual client trust ledgers within QuickBooks or your legal accounting software to ensure accuracy and audit-readiness.
Implement monthly three-way reconciliation processes - no exceptions.
Appoint a bookkeeper or compliance officer to monitor, reconcile, and document all trust account activity.
Automate trust fund tracking, alerts, and payment processing notifications using legal-specific tools (we recommend LeanLaw or Clio paired with QuickBooks).
Familiarize yourself with your state’s IOLTA program - each jurisdiction sets unique rules, and staying compliant is essential to support civil legal aid services and uphold professional conduct standards.
If your firm hasn’t completed a full three-way trust account reconciliation in the past 30 days, your records are out of compliance.
Where Law Firms Get Trust Account Setup Wrong (And How to Fix It)
Most trust accounting issues start before you even deposit a single dollar.
Here’s what a compliant IOLTA setup actually requires:
Choosing a Financial Institution for Your IOLTA Program
Not every financial institution understands trust accounts - and choosing the wrong one can compromise your entire system. Look for banks that regularly manage IOLTA accounts and provide detailed monthly bank statements with secure online access.
Opening a Designated Interest on Lawyer Trust Account (IOLTA)
This isn’t a placeholder or temporary solution. It’s an interest on lawyer trust account specifically used to hold retainers and settlement proceeds - where net interest supports your state’s IOLTA program and civil legal services.
Client Trust Accounting: Why Separate Records Matter
You don’t need a separate bank account for every client, but you do need accurate client trust ledgers that tie back to individual client balances. Every dollar must be traceable - no assumptions, no shortcuts.
Trust Accounting Software for Managing Client Funds
Manual entry is a ticking time bomb. Legal accounting software reduces errors and automates reconciliation of trust money, earned income, and client payments.
Monthly Trust Account Reconciliation Process
Your IOLTA account must reconcile to the penny - across your trust ledger, bank records, and client ledger balances. This is the foundation of compliant trust accounting.
Getting any of this wrong isn’t a bookkeeping error - it’s an ethics violation. Set it up properly, and you’ll never panic when the bar requests a trust account audit.
Common IOLTA Mistakes Law Firms Make
Transferring funds before legal services are completed
Depositing retainers or settlement funds into an operating account
Failing to record third-party disbursements like court filing fees or vendor payments
Commingling client funds across unrelated cases or ledgers
Using generic accounting software without legal compliance features
Drawing operating expenses directly from IOLTA trust accounts - which are reserved strictly for client’s money
These aren’t just clerical errors. They’re trust accounting red flags - and they trigger trust account audits, disciplinary action, or even license suspension.
Detailed Examination of Common IOLTA Errors
Mismanagement of IOLTA accounts can damage a law firm’s reputation and trigger serious legal consequences. Here’s where most firms go wrong:
Early Fund Transfers
Moving funds from an IOLTA account before services are completed can lead to ethical breaches. Transfer only when income is earned.Incorrect Handling of Retainers
Retainers must stay in an IOLTA account until earned. Depositing them into an operating account creates commingling issues.Overlooking Third-Party Payments
Failing to record court filing fees or vendor disbursements can cause compliance gaps. Maintain accurate, audit-ready records.Mixing Funds Across Cases
Combining funds from different clients creates financial confusion. Keep each client’s funds clearly separated.Using Inappropriate Software
Generic accounting tools often lack legal compliance controls. Use legal-specific software to support IOLTA tracking.Mismanagement of Expenses
IOLTA accounts are for client funds only. Drawing business expenses from them is a major violation.
By avoiding these common errors, firms can improve trust accounting accuracy, protect their clients’ money, and reduce the risk of audits or disciplinary action.
Why IOLTA Trust Account Compliance Matters
IOLTA accounts are essential for law firms to manage retainers, settlements, and other short-term funds while staying compliant with state bar regulations. Bar associations are ramping up trust account audits - and AI tools now make it easier for regulators to flag discrepancies instantly.
If your firm holds over $50K in trust retainers at any point, you’re carrying serious liability.
Being named in a disciplinary action for poor trust account management is the last thing you want.
Client funds - including retainers and settlement proceeds - must be handled through an IOLTA trust account. That makes precise legal bookkeeping and compliance procedures essential to protect your license and deliver accountable legal services.
Your IOLTA Compliance Checklist
Use this checklist monthly to maintain compliance with IOLTA trust accounting standards:
Reconcile the trust bank account with your general ledger.
Match each individual client ledger to the trust bank balance.
Conduct and document a complete three-way reconciliation.
Record all deposits, disbursements, and interest earned accurately.
Ensure no client ledger shows a negative balance.
Confirm trust funds are not commingled with your operating or savings account.
Clearly document third-party payments such as legal fees, court costs, or settlements.
Review and close out trust balances tied to inactive or dormant matters.
Assign a legal-focused bookkeeper or compliance officer to audit monthly activity.
Preserve supporting documentation for all IOLTA transactions.
Deposit client or third-party funds only into designated trust accounts to avoid misuse.
This isn’t busywork - it’s your firewall against audits, grievances, and disciplinary action.
Best Practices for Managing a Client Trust Account
To manage trust accounts effectively and stay compliant, law firms must follow proven best practices. This includes using a separate trust account or client trust account for each matter, promptly depositing funds, and maintaining clear, audit-ready accounting records.
Regular trust account reconciliation is essential to ensure balances are accurate and current. Firms should also implement internal controls with written procedures covering fund deposits, withdrawals, interest earned, and how to resolve errors or discrepancies.
Following these practices helps minimize the risk of non-compliance and protects client funds in accordance with professional conduct rules. Ongoing training in IOLTA compliance ensures all staff understand their legal responsibilities in handling client funds and maintaining separate trust accounts.
When to Reassess Your IOLTA Trust Account Setup
Every IOLTA trust account must be managed in accordance with state bar rules and reconciled monthly - no exceptions. If your current IOLTA trust account setup feels risky or unreliable, it’s time to upgrade. At Accounting Atelier, we specialize in legal bookkeeping for law firms - helping you safeguard your license, stay compliant with professional conduct rules, and maintain audit-ready trust accounting records for every client trust account you manage.
