Interest on Lawyers' Trust Accounts (IOLTA) is a system attorneys commonly use to hold client or third-party funds that are nominal in amount or expected to be held for only a short period. In a personal injury case handled by an attorney, settlement proceeds are often delivered to the attorney or made payable to the client and the law firm, although payment procedures vary by insurer, settlement agreement and jurisdiction. When a lawyer receives settlement funds belonging to a client or third party, the lawyer generally must safeguard the money in an appropriate trust account and keep it separate from the firm's operating funds. Funds that can earn net interest for the client may need to be placed in a separate interest-bearing trust account rather than an IOLTA, depending on applicable state rules. Before the client's net recovery is distributed, the attorney may need to address enforceable liens or other valid third-party claims, as well as authorized case expenses and agreed legal fees. Interest generated by IOLTA funds is generally remitted to a jurisdiction's IOLTA program to support civil legal services and other approved purposes.

Waiting for a settlement check is stressful. After months or even years of medical treatment, appointments and negotiations, you want your compensation as quickly as possible. The legal system, though, requires a formal process to handle large sums of money securely.

Understanding how a personal injury attorney's trust account functions helps you see what is happening with your settlement behind the scenes. It brings clarity to the final stage of your case and shows you the ethical rules that govern how your lawyer handles your recovery.

What Is IOLTA?

An IOLTA is a pooled, interest-bearing 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 the individual owner. The American Bar Association's Model Rule 1.15 provides a model for safeguarding property, but lawyers are governed by the binding professional-conduct rules and laws of the jurisdictions in which they practice. Those rules generally require lawyers to keep client- and third-party funds separate from the lawyer's business and personal funds, maintain complete records and provide an accounting. Improper commingling or misuse of trust funds may result in professional discipline, with the consequences depending on the jurisdiction and circumstances.

A personal injury firm may hold qualifying funds for multiple clients in one pooled IOLTA, but it must maintain an individual ledger showing the amount belonging to each client or third party. Whether funds belong in an IOLTA generally depends on their amount, the anticipated holding period, available interest rates and administrative costs. When funds can reasonably earn net interest for the client, applicable rules may require the lawyer to place them in a separate interest-bearing trust account for that client's benefit.

The IOLTA system developed in the United States in the early 1980s. Before then, pooled attorney trust accounts could not earn interest because federal banking law prohibited banks from paying interest on checking accounts. In 1980, Congress authorized NOW accounts, which for the first time let federally insured banks pay interest on certain transaction accounts. State supreme courts, legislatures and other authorized bodies then created IOLTA programs so qualifying pooled funds could generate interest directed to civil legal services and other approved purposes rather than to lawyers or banks.

How Are Settlement Funds Held in an Attorney Trust Account?

Settlement payment procedures vary by case, insurer and jurisdiction. A claimant will ordinarily sign a settlement agreement or release identifying the claims being resolved, but additional documents, court approval or other conditions may be required in some cases. After the required settlement documents and conditions are completed, the insurer or defendant issues payment according to the agreement. The payment may be made by check or electronic transfer and may name the client, the law firm, lienholders or other parties with an interest in the proceeds.

When an attorney receives settlement proceeds that must be safeguarded, the attorney deposits them into the appropriate trust account. If a provider treated you under a letter of protection in a personal injury case, the provider may assert a right to payment from the settlement proceeds under the agreement and applicable law. Funds generally cannot be disbursed until they are available for withdrawal and the attorney determines which amounts belong to the client, the law firm or a third party.

The time required before settlement funds are available varies based on the payment method, the financial institutions involved, applicable banking rules and any verification or hold placed on the deposit. During this period, the lawyer must continue safeguarding the funds in the trust account and may not use the client's portion for firm operating expenses or other unauthorized purposes.

Why Does IOLTA Matter Before Your Settlement Is Paid?

The main purpose of a lawyer trust account is to safeguard money belonging to clients and third parties. Properly identifying, segregating and accounting for settlement proceeds helps establish that the funds are not the law firm's property and protects them from unauthorized use or claims directed solely at the firm. The extent of that protection may depend on proper account designation, accurate records and applicable banking, bankruptcy and state law. Core safeguards include:

• Separation from firm assets: Client and third-party funds are maintained separately from the firm's operating money, helping establish that properly documented trust funds belong to the clients or third parties rather than the firm.
• Individual client ledgers: Lawyers generally keep a detailed ledger for every client or third party and reconcile trust-account statements as required by applicable rules, allowing each person's balance to be tracked accurately.
• Regulatory oversight: State courts, disciplinary authorities, bar agencies or other designated bodies enforce trust-account requirements. Audit, examination, reporting and overdraft-notification procedures vary by jurisdiction.

That accounting helps prevent misuse and preserve settlement proceeds, and it is one of the practical benefits of hiring a personal injury lawyer rather than handling a claim on your own. The interest these accounts generate also serves a public purpose. Because qualifying client funds are generally small in amount or held for a short time, they would not earn enough net interest to justify the cost of setting up and administering a separate account for each person. Pooling qualifying funds from many clients produces a combined balance that can generate meaningful interest. Financial institutions remit that interest to the applicable IOLTA program, which commonly funds civil legal aid and other authorized access-to-justice initiatives.

What Happens Before Settlement Funds Are Disbursed?

Once settlement funds are available, the attorney must determine which amounts belong to the client, the law firm or a third party. The lawyer may need to retain funds subject to an enforceable lien, a valid third-party claim, an agreed fee or an authorized expense. Amounts that are not subject to a legitimate dispute or legal hold generally must be distributed promptly under the professional-conduct rules applicable in the lawyer's jurisdiction. The accounting and disbursement process may include:

• Addressing medical liens and reimbursement claims: Medicare, Medicaid, health plans, medical providers or other entities may assert reimbursement rights against settlement proceeds. Whether a claim is valid and enforceable depends on federal law, state law, plan language, lien requirements and the facts of the case. The attorney may verify, dispute, negotiate or satisfy an enforceable claim as appropriate. Understanding what a medical lien on your settlement covers helps explain why your net payout may differ from the gross settlement.
• Addressing letters of protection: If doctors, physical therapists or other providers agreed to delay collection until the case resolved, the attorney may need to address those balances according to the agreement and applicable law before distributing the affected proceeds.
• Accounting for case expenses: If permitted by the fee agreement and applicable law, the firm may reimburse itself for authorized costs it advanced, such as filing fees, expert charges, accident reconstruction expenses and medical-record fees.
• Deducting earned legal fees: A contingency fee may be transferred from the trust account when it has been earned and the deduction is authorized by the fee agreement and applicable law. If the client disputes part of the fee, the disputed amount generally must remain in trust while the undisputed amounts are distributed.

Lawyers must protect valid third-party interests in settlement funds when required by applicable law or professional-conduct rules. A lawyer generally should not disregard a known, legally enforceable lien or other nonfrivolous claim to specific proceeds. When entitlement to part of the money is disputed, the lawyer ordinarily retains the disputed amount in trust, distributes amounts that are not disputed and works toward a lawful resolution. The remedies and potential liability for an improper distribution vary according to the type of claim and governing law.

Before or at the time of disbursement, the attorney generally provides an accounting or settlement statement showing the amount received and the fees, expenses, lien payments and other deductions. Some firms or jurisdictions may require the client to review or sign the statement, but procedures vary. The time needed to resolve enforceable claims is one reason why a personal injury settlement can take longer than the date the settlement documents are signed. Once the necessary accounting is completed, undisputed funds should be distributed promptly.

Frequently Asked Questions

Why Does the State Receive the Interest From My Settlement Money?

IOLTA treatment generally applies only when the funds are too small in amount or will be held too briefly to generate net interest for the individual client after banking and administrative costs. If the funds can generate net interest for the client, applicable rules may require a separate interest-bearing trust account. In Brown v. Legal Foundation of Washington (2003), the U.S. Supreme Court considered a constitutional challenge to Washington's IOLTA program and concluded that no compensation was due on the record because the clients' funds could not have produced net interest for them outside the program. IOLTA interest is remitted to the applicable jurisdiction's program and is commonly used to support civil legal services and other authorized access-to-justice purposes.

How Long Will My Money Stay in the IOLTA?

The timeline depends on the payment method, the financial institutions involved, and whether any portion of the settlement is subject to an enforceable lien, another third-party claim or a genuine dispute. Funds must remain in an appropriate trust account until they are available for withdrawal and the lawyer determines who is entitled to them. Undisputed amounts generally should be distributed promptly, while only the amount reasonably necessary to address a valid claim or dispute should remain in trust.

What Happens if There Is a Dispute Over the Medical Bills?

If a medical provider, health plan or other party asserts a claim to settlement proceeds, the attorney must determine whether the claim is legally recognized and whether there is a genuine dispute over the amount or entitlement. The amount reasonably subject to the dispute generally remains in the trust account, while funds that are available and not disputed should be distributed promptly. The disputed amount may be resolved by agreement, negotiation, arbitration, mediation, an administrative process, interpleader or a court ruling, depending on the claim and applicable law.

Call Brandon J. Broderick For Legal Help

Waiting for a personal injury settlement is often the final step in a long recovery. You want a legal team that manages your compensation ethically and efficiently. Insurance payment processing and the need to address medical liens or other claims can affect when settlement proceeds are distributed.

At Brandon J. Broderick, Attorney at Law, our team focuses on transparency and client protection. We manage the claims process from the initial investigation through the final disbursement of your funds, working to address outstanding liens and pursue the compensation you may be entitled to receive. If you or a loved one has been injured because of someone else's negligence, reach out today to schedule a free consultation.