An IOLTA is a pooled trust account for client money that is too small, or held too briefly, to earn interest for the client. Instead of earning nothing, the account earns interest that the bank sends to your state's IOLTA program, which funds civil legal aid. According to the ABA, IOLTA programs operate in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.
For a small firm, the account itself is the easy part. Keeping it right every month is where the work is: knowing what belongs in it, keeping the firm's own money out, and proving that the bank, your records and each client's balance agree. This guide covers all three, using the ABA Model Rules and California's rule as a worked example. Your state's version is the one you answer to, so read it alongside this.
What an IOLTA is for
ABA Model Rule 1.15(a) requires a lawyer to keep property of clients and third persons that comes in through a representation separate from the lawyer's own property, in a separate account. The IOLTA is that account for nominal or short-term funds.
Where the money for one client is large or will sit for a while, the ABA's overview says it can earn interest for that client, and it goes in its own interest-bearing trust account instead. Deciding which funds are nominal or short-term is your judgment under your state's rule.
The money in the IOLTA is not the firm's money. It belongs to clients and third persons until it's earned, owed or paid out. That's the idea everything else follows from.
What goes in it
Under the model rule, these belong in a client trust account:
- Legal fees and expenses paid in advance. Rule 1.15(c) says they're deposited in trust and withdrawn only as fees are earned or expenses incurred.
- Money you receive for a client or a third person, such as settlement funds, or money a client gives you to pay court fees.
- Funds two people both claim. Under Rule 1.15(e), when two or more persons claim an interest, including you, the disputed part stays separate until the dispute is resolved. Anything not in dispute goes out promptly.
States differ at the edges. California, for example, lets a flat fee paid in advance go into the operating account, but only if the client is told in writing that they can require it to be held in trust and that unearned amounts are refundable. If the flat fee is over $1,000, that agreement and those disclosures must be in a writing the client signs.
What stays out
Your own money. Rule 1.15(b) allows the lawyer's own funds in the trust account only to pay bank service charges on that account, and only as much as that purpose needs. California's version similarly allows funds reasonably sufficient to pay bank charges.
Earned fees, once they're earned. Where a deposit is partly the client's and partly yours, California requires your share to be withdrawn at the earliest reasonable time after your interest becomes fixed. Leaving earned fees in trust as a cushion is still commingling.
Firm expenses. Rent, payroll, software and the firm card are paid from the operating account. Paying a firm bill from trust uses client money, however briefly.
The records the rules expect
The ABA Model Rules on Client Trust Account Records list what to keep. The ones that matter for monthly bookkeeping:
- A receipts and disbursements journal, recording each deposit's date, source and description, and each payment's date, payee and purpose.
- A ledger for each client or beneficiary, showing what came in for them, what went out and to whom.
- Bank statements, deposit records, canceled checks and records of every electronic transfer out of the account.
- Copies of trial balances and reconciliations of the trust account.
The model rule puts "[monthly]" before trial balances and "[quarterly]" before reconciliations, in brackets, because each state picks its own frequency. California's standards require a written ledger for each client, a written journal for each bank account, all bank statements and canceled checks, and each monthly reconciliation of the three.
Reconciling monthly is the safer habit even where your state allows quarterly. An error found one month after it happened is a lot easier to trace than one found three months later.
The three-way reconciliation
A three-way reconciliation compares three numbers as of the same date, usually the bank statement's end date. All three should be the same.
| Number | Where it comes from |
|---|---|
| Adjusted bank balance | The statement's ending balance, plus deposits in transit, minus checks and transfers that haven't cleared |
| Account journal balance | The running balance in your trust journal, or your trust account register in your accounting or practice management software |
| Total of client ledgers | Every client's trust balance added up |
Here's a simple example for the end of a month.
| Amount | |
|---|---|
| Bank statement ending balance | $18,400 |
| Plus deposit in transit | $2,500 |
| Less outstanding check to a court | ($900) |
| Adjusted bank balance | $20,000 |
| Journal balance | $20,000 |
| Client A ledger | $12,000 |
| Client B ledger | $5,500 |
| Client C ledger | $2,500 |
| Total of client ledgers | $20,000 |
The two-way version, bank against journal, is a normal bank reconciliation. The third leg is what's particular to trust accounting. The journal can match the bank perfectly while one client's ledger is negative and another's is overstated by the same amount. In that case, one client's money has paid for another client's matter, and only the client-by-client check catches it.
When the numbers don't agree, look for these:
- A negative client ledger. It means money went out for a client who had nothing in trust. Find the cause, and put the shortfall back as well as correcting the ledger.
- A deposit recorded to the wrong client. The total still ties, but two ledgers are wrong.
- Bank charges or interest posted by the bank but not in your journal. Record them, and keep in mind the bank-charge limit on your own money above.
- An earned fee moved to operating but not recorded against the client's ledger.
Keep each month's reconciliation, signed and dated, with the statement it ties to. That is the record California and the model rules both list, and it's the first thing to have ready if your bar asks.
Where trust accounting meets the firm's books
Most small firms keep trust records in practice management software and the firm's books in an accounting system. The two meet at one point: when an earned fee leaves trust and lands in the operating account. Recorded the same way on both sides, the trust ledger goes down for that client and the firm's books pick up the fee. If one side records it and the other doesn't, both sets of records drift.
The firm's own books then cover everything on the operating side: fees received, payroll, rent, case costs the firm pays and recovers later, and the owner's draws. Keeping those books current is what lets you see what running the firm costs and what it earns.
Median keeps the operating books for solo and small law firms. Trust account work is reviewed separately before we agree a scope, so bring it up on the call. See bookkeeping for law firms, and if your operating books are behind, start with catching up on small business bookkeeping.
Sources, read November 2, 2026: ABA Model Rule 1.15, Safekeeping Property, ABA Model Rules on Client Trust Account Records, Rule 1, ABA Commission on IOLTA overview, California Rule of Professional Conduct 1.15 and Standards.