Interest on Lawyers Trust Account
A system in which lawyers place certain client deposits in interest-bearing accounts, with the interest then used to fund programs, such as legal service organizations who provide services to clients in need.
Originating in Canada and Australia in the 1960s, interest on lawyers trust account (IOLTA) programs made their first appearance in the United States in Florida in 1981. Since then, all 50 states and the District of Columbia have established IOLTA programs. The concept is straightforward. Lawyers routinely place large client deposits—such as escrow accounts—in interest-bearing accounts, with the interest to be paid to the client. Deposits that would individually be too small or too short-term to generate interest are pooled into IOLTA accounts. The interest generated by these funds is then used to fund a variety of public legal services, usually geared toward those who cannot afford lawyers. Nationwide, IOLTA programs earned more than $200 million in interest in 2002.
Over the years IOLTA programs faced challenges from individuals and lawyers who felt that the interest, however small the amount, belonged to the clients. They cited the Fifth Amendment's prohibition against the taking of private property without just compensation. IOLTA proponents countered that, since the deposits individually would yield no interest, the clients were not actually losing money. The U.S. Supreme Court weighed in on March 26, 2003, when it narrowly decided in favor of IOLTAs (Brown v. Legal Foundation of Washington, U.S. Supreme Court, 01-1325, 2003). The Court found that the Fifth Amendment's Just Compensation Clause did not apply because without the existence of the IOLTA accounts no other depository accounts would exist, and consequently the clients whose money was being held would not have received any interest.
Anderson, Tony. 2003. "U.S. Supreme Court Upholds Use of Interest on Lawyer Trust Account." Wisconsin Law Journal (April 23).
Greenhouse, Linda. 2002."Method of Legal Services Financing is Challenged before Supreme Court." New York Times (December 10).
Law Library - American Law and Legal InformationFree Legal Encyclopedia: Indirect evidence to Internal Revenue Code