Law firms hold other people’s money constantly: retainers not yet earned, settlements not yet disbursed, filing fees not yet paid. The accounting discipline that keeps that money safe, and keeps lawyers licensed, is trust accounting, and the account most of it lives in is an IOLTA.
This guide explains both. It also shows the three-way check routine bar auditors expect, and it lays out how to choose a trust accounting system.
What Is Trust Accounting?
Trust accounting is the tracking and safeguarding of money a law firm holds for clients and third parties.
It rests on one rule with teeth: the money is not the firm’s.
From that rule follow the operating rules every state bar enforces: client funds stay in a separate trust account, never mixed with firm funds; every dollar is tied to a specific client and matter on its own ledger; fees move out of trust only when earned and billed; and the books must show, at any moment, exactly whose money the account holds.
A trust accounting error is not just a bookkeeping problem. It is a license problem. Discipline for trust violations can reach disbarment, and intent is not a defense.
What Is an IOLTA Account?
An IOLTA account (Interest on Lawyers’ Trust Accounts) is the standard client trust account American law firms use: a pooled, interest-bearing account for funds that are too small or too short-term to earn net interest for any one client.
The interest goes to the state’s IOLTA program to fund legal aid. The lawyer never keeps it, and neither does the client. Every state and DC runs an IOLTA program, and most require participation.
If you ask, ‘what is an IOLTA account’ or ‘what is an IOLTA trust account,’ the short answer is that it is the same idea in plain words: IOLTA is a kind of trust account.
When client funds are large enough or held long enough to earn meaningful net interest, they go into a separate interest-bearing trust account where the interest belongs to that client. That choice—pooled IOLTA versus separate account—is the lawyer’s to make in the client’s interest under state rules.
How Do IOLTA Accounts Work?
- Client money arrives—a retainer or settlement—and is deposited into the pooled IOLTA at once. It is entered on that client’s and matter’s ledger the same day.
- The bank sees one balance; the firm’s books see many. The total of all client ledgers must always match the account, and no client’s ledger may go negative, because a negative ledger means one client’s money is being spent for another.
- Fees earned and billed move from IOLTA to the firm’s operating account, and only then become revenue. Unearned funds go back to the client when the matter ends.
- The bank sends the account’s interest to the state IOLTA program automatically. The firm’s only role is opening the account correctly at an approved bank.
- Each month, the firm does a three-way check and archives the report.
Three-Way Check: The Routine That Keeps You Compliant
Three-way check is the heart of trust compliance, and the first thing a bar auditor asks for. Three numbers must agree:
- The bank statement balance, adjusted for deposits and checks that have not cleared.
- The firm’s trust ledger (checkbook) balance from its books.
- The sum of all individual client ledger balances.
If any pair disagrees, something is wrong: a transaction posted to the wrong matter, an uncleared item gone stale, or a disbursement that overdrew a client ledger.
Most states expect the check monthly. Every firm should archive each report, because being unable to produce records is itself a violation. And never force a balance with an adjusting entry: find the error, fix the error, document the fix.
What Is the Best Trust Accounting System for Law Firms?
The best trust accounting system is one where compliance is enforced by the software, not by hoping everyone remembers the rules.
Generic accounting tools cannot do this. They have no client ledgers inside a bank account, no concept of a matter, and no three-way check report.
Evaluate on:
- Client and matter ledgers native to every trust transaction, with automatic prevention of negative client balances
- One-step three-way check with printable, archivable reports
- Integration with billing, so earned fees move from trust to operating in one recorded step, and with the firm’s general ledger
- Check printing, electronic disbursements, and bank feeds with a full audit trail (who, when, which matter)
- Safeguards for the details that trip firms up: service-charge handling, stale uncleared items, credit card retainers routed so fees never touch trust
- Reports a bar auditor can use on arrival: client balance listings, transaction histories, check archives
Tabs3 Trust Accounting has done exactly this work for decades, integrated with Tabs3 Billing and Tabs3 Financials, and is trusted by thousands of firms.
Content disclaimer to carry onto the page: This guide provides general information, not legal advice. Trust accounting and IOLTA requirements vary by jurisdiction; follow your state bar’s rules.