Fiduciary Custodianship
The absolute duty to hold client and third-party funds in trust as a guardian, never as an owner.
Ask the IOLTA Assistant
Trust-accounting and IOLTA questions, answered only from official sources with citations. Not legal advice.
Definition
Fiduciary custodianship requires that an attorney strictly safeguard trust funds, recognizing that all money held in an IOLTA belongs exclusively to the client or third party until explicitly earned or disbursed.
Typical Scope
- Advance fee deposits and retainers.
- Settlement proceeds and court awards.
- Third-party escrow funds and real estate deposits.
Operational Rules
- Maintain ownership boundaries
- Treat all funds in the IOLTA as property of others; the firm has no ownership stake until funds are earned.
- Classify IOLTA eligibility
- Funds are generally placed in IOLTA when they are too small or held too briefly to earn net interest for the individual client.
- Prohibit unauthorized borrowing
- Never use trust funds to cover firm expenses, even temporarily with the intent to repay.
Examples
A settlement check includes money owed to the client, firm, and medical lienholder.
Deposit to trust, allocate by ledger, and disburse only after funds are available and entitlements are resolved.
The firm wants to leave operating cash in the trust account as a cushion.
Do not do this unless the amount is specifically permitted for bank charges or similar narrow exceptions.
The firm needs to pay rent before a large client invoice is paid.
Do not withdraw funds from the IOLTA to cover the operational shortfall; wait until the fee is earned and properly transferred.
Review Checklist
Identify whose money it is before recording the deposit.
Assign the transaction to a client or matter ledger.
Confirm whether the funds belong in IOLTA or a separate interest-bearing trust account.
Keep the source document with the trust transaction.
Reconcile bank, trust ledger, and client ledgers on a regular cadence.
Confirm that no firm operating funds are resting in the trust account.
FAQ
What is the basic purpose of a lawyer trust account?
A lawyer trust account keeps client and third-party money separate from the law firm operating account until the funds are earned, payable, or otherwise disbursable.
When are funds usually placed in IOLTA?
Funds are generally placed in IOLTA when they are nominal in amount or expected to be held for a short time, so they would not earn net interest for the individual client.
What records should exist for a trust deposit?
A trust deposit should identify the client or matter, source of funds, amount, date, purpose, account, and supporting document.
Do I actually need a lawyer trust account?
If you hold money that belongs to a client or third party — an unearned retainer (in some states), settlement proceeds, a cost advance, escrow — it generally must be kept in a trust account, separate from firm operating funds, until it is earned or payable. When such funds are nominal or held briefly, they typically go into a pooled IOLTA account.
What are "qualified" or nominal funds, and who decides?
IOLTA is for client funds too small or held too briefly to earn net interest for the individual client after costs. The lawyer generally makes that good-faith judgment; larger or longer-held funds go into a separate interest-bearing account for that client. The exact test is set by each jurisdiction.
How should the account be titled, and how is it insured?
Title it as a trust/IOLTA account in the lawyer or firm name, clearly distinct from operating accounts. Pooled client deposits are generally FDIC-insured on a per-client basis rather than per-account; confirm the specifics and titling requirements on your state’s page.
Can I use IOLTA funds to pay a firm expense if I reimburse it the same day?
Absolutely not. Using trust funds for firm purposes, even for a few hours with the full intent and ability to repay, is strictly classified as misappropriation (theft) and is grounds for immediate disbarment.
What happens to funds if the client dies or cannot be located?
You cannot absorb the funds into the firm's operating account. You must make reasonable, documented efforts to locate the client or their heirs. If they cannot be found after a statutory period (which varies by state), the funds must be remitted to the state’s unclaimed property fund (escheatment).
Who actually owns the money in the IOLTA?
All funds in an IOLTA belong strictly to the client or a third-party stakeholder (such as a medical lienholder or escrow party). The firm has zero ownership interest in the funds until the exact moment a fee is earned and properly invoiced.