What Happens to the Interest in a Trust Account?
What happens to the interest in a trust account? In short, it depends on the amount, how long the money stays in the account, and the rules in your state.
Summary
Interest on client trust funds usually belongs to the client when the balance is large enough to earn and collect. Lawyers cannot keep that interest for themselves. When the funds are too small or held for too short a time to produce useful interest, IOLTA accounts direct the money to charitable legal services. Because IOLTA accounts are tightly regulated, firms need clear bookkeeping and strong safeguards to stay compliant.
Do trust funds gain interest?
Yes, trust funds can earn interest. But the client only gets that interest when the amount is large enough, or held long enough, to make collecting it worth the cost.1
If the balance is small or the money is held for only a short time, the client usually will not receive the interest. In that case, the lawyer or firm must not benefit from it. That would be unethical.
When should I use an IOLTA account?
If the funds are large enough and will stay in the account long enough, your firm should use a Client Trust Account (CTA) that earns interest for the client.2
If the interest would be too small to return to the client, an IOLTA account may be the better choice. Some states make IOLTA optional. Others make it required. The interest from these accounts helps fund charitable legal work.
Is bookkeeping different for IOLTA accounts?
Yes. IOLTA accounts often hold pooled funds from more than one client, so the bookkeeping rules are stricter.
The rules can also vary by state. They may cover the bank you use and who may sign on the account.
No matter where you practice, you must not mix client funds in an IOLTA account. If you accept credit cards, the processing fee cannot come out of the IOLTA account. It must be paid from the firm’s operating account.
Legal software can help by adding safeguards and sending fees to the right account. That makes it easier for your firm to stay compliant.
IOLTA accounts support important legal aid work, and the right tech can help you follow the rules.
FAQ
When does interest from a trust account belong to the client?
It belongs to the client when the amount is large enough, or held long enough, to create real interest that is worth collecting. In that case, the firm should use a Client Trust Account (CTA) that earns interest for the client.
Why can’t an attorney or firm keep the interest from client trust funds?
The money in a trust account belongs to the client, so the interest from that money belongs to the client too. If the firm kept it, that would create an ethical problem.
What is the purpose of an IOLTA account?
An IOLTA account is used when client funds are too small or held too briefly to earn meaningful interest. Instead of going to the lawyer or firm, the pooled interest supports legal aid and other charitable legal work.
Are IOLTA requirements the same in every state?
No. IOLTA rules differ by state. They can cover whether IOLTA is optional or required, which banks can be used, and who can sign on the account. Firms should check local rules to stay compliant.
Can credit card processing fees be taken from an IOLTA account?
No. If your firm accepts credit cards, the processing fee must come from the firm’s operating account, not the IOLTA account. That keeps client funds protected.
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