A plain English guide to client trust accounts, pooled interest, settlement funds, and the protections that apply before money is paid out
By Marc Pamatian, Founder, Chief Bookkeeping Officer | Updated September 2026
A note on scope: this article uses California’s rules as a detailed, worked example, since they’re well documented and illustrate the concept clearly. Every U.S. state requires lawyers to keep client funds in a trust account and has its own version of an IOLTA program, but the specific rule number, the agency that administers it, and some procedural details vary by state. If you’re outside California, treat the mechanics described here as illustrative and ask your own lawyer which rule governs your funds.
Your Money Is Kept Separate From the Law Firm
A lawyer may receive money that belongs to you or must be used for your benefit. Common examples include settlement proceeds, an advance for court costs, or funds that must be paid to a medical provider or another person connected with your matter. In many situations, the lawyer must place that money in a client trust account rather than the law firm’s operating account.
The separation matters. An operating account contains the firm’s own money and pays expenses such as rent, payroll, and software. A client trust account holds money the firm does not yet own. Keeping the accounts separate helps prevent client funds from being used to pay the law firm’s bills or another client’s obligations. In California, Rule of Professional Conduct 1.15 governs the safekeeping of funds and property held for clients and other persons. The rule requires qualifying funds to be deposited in an identifiable trust account and imposes duties concerning notice, recordkeeping, and delivery.
What IOLTA Means
IOLTA stands for Interest on Lawyers’ Trust Accounts. It is a pooled trust account used for client or third-party funds that are too small in amount or expected to be held too briefly to earn net interest for one person after bank and administrative costs.
The word pooled means that one bank account can hold funds connected with many clients. Pooling does not make the funds interchangeable. The law firm must maintain a separate ledger showing the receipts, payments, and remaining balance for each client or matter.
If a sum is large enough or will be held long enough to earn net income for the client, California’s rules provide for a different type of interest-bearing trust arrangement for that client or third party. Lawyers must consider the amount, expected holding period, available interest rates, administrative costs, and related circumstances when deciding where qualifying trust funds belong.
Who Receives the Interest
The client does not receive the interest generated by a pooled California IOLTA account. The financial institution sends that interest to the State Bar of California’s IOLTA program. The program uses IOLTA revenue to help fund legal services for low-income Californians.
This arrangement exists because small or short-term deposits generally would not produce net interest for each client after the cost of creating and administering separate accounts. Pooling allows the interest to support legal aid while the principal remains credited to the individual client or other owner.
The interest does not reduce the amount recorded on your client ledger. Subject to valid fees, costs, liens, and authorized payments, the firm must account for the principal it received for your benefit.
What Happens When Settlement Money Arrives
A settlement check often includes funds owed to more than one person. Depending on the matter, the total may include the client’s share, the lawyer’s earned fee, repayment of case costs, and amounts owed to medical providers, insurers, lienholders, experts, or co-counsel. For a broader look at how fees and costs typically get sorted out of a settlement, see this overview of what to expect when working with a personal injury lawyer.
The lawyer usually deposits the settlement proceeds into a trust account and waits for the funds to become available. The firm then uses the settlement statement and supporting documents to determine how the money should be divided. The lawyer should notify the client or other entitled person when funds are received and promptly distribute amounts that are no longer disputed and may properly be paid.
Some money may remain in trust after other portions are distributed. For example, the client and a medical provider may disagree about a bill, or a lien amount may still be under negotiation. Rule 1.15 addresses disputed funds and generally requires the disputed portion to remain in trust until the dispute is resolved, while an undisputed portion should not be held back without reason.
How the Law Firm Tracks Your Share
Even though the bank account is pooled, the accounting should remain client-specific. Your ledger should show money received for your matter, each authorized disbursement, and the balance still being held. The firm also maintains a journal for the entire trust account and reconciles those records to the bank.
California trust accounting guidance describes a monthly IOLTA three-way reconciliation. The adjusted bank statement balance is compared with the trust account journal and the combined total of all client ledgers. Agreement helps confirm that the pooled cash has been fully assigned to its owners.
This process can identify missing transactions, checks that have not cleared, deposits recorded twice, bank fees, and amounts posted to the wrong matter. The firm should also review for negative ledgers and unsupported payments because totals can occasionally agree even when a transaction was assigned to the wrong client.
Questions You Can Ask Your Lawyer
You do not need to become a trust accountant to understand how your money is handled. If you are expecting a settlement or have paid an advance for costs, reasonable questions include whether the funds will be held in trust, what must happen before disbursement, which fees or expenses may be deducted, whether any liens or disputed amounts remain, and when you can expect an accounting.
Your engagement agreement and settlement statement are important. Read them carefully, keep copies, and ask about any amount or payee you do not recognize. If the firm asks you to approve a distribution schedule, confirm that your name, matter, gross amount, fees, costs, third-party payments, and net amount are correct.
For a client, the most important protection is that pooled money should never become anonymous money. The law firm must still be able to show exactly what it received, what it paid, and what remains for your matter.
IOLTA Is a Safeguard Rather Than a Delay
Clients sometimes wonder why a lawyer cannot send settlement money immediately after receiving a check. The firm may need to wait for the deposit to clear, confirm the settlement allocation, resolve liens, obtain required approvals, or protect a disputed amount. Those steps can take time, but they help prevent payments from being reversed, duplicated, or sent to the wrong recipient.
A well-managed IOLTA account creates a clear boundary between client property and firm property. It also creates records that allow the firm to explain each receipt and payment. That protects the client, the people legally entitled to part of the funds, and the lawyer responsible for holding them.
Rules vary by jurisdiction, and the details of a particular case depend on the fee agreement, settlement documents, liens, court orders, and applicable law. For questions about your funds, ask the lawyer handling your matter for a matter-specific explanation and accounting.
Authorities & Sources
State Bar of California — IOLTA Program
Disclaimer
This article is provided for general informational and educational purposes only and does not constitute legal or accounting advice. It is not a substitute for advice from a licensed attorney or accountant familiar with the rules of your specific jurisdiction. Trust accounting rules, IOLTA program administration, and related requirements vary by state and can change. Reading this article does not create an attorney-client or advisor-client relationship. For questions about funds held on your behalf, contact the lawyer handling your matter directly.
