Texas IOLTA trust accounting requirements explained

What IOLTA is and why it exists

IOLTA stands for Interest on Lawyers’ Trust Accounts. When you hold client funds that are nominal in amount or held for a short period, pooling them in one interest-bearing account is impractical to allocate per client — the bank fees and accounting cost would exceed the interest each client would earn. Texas resolves this by directing that interest to the Texas Access to Justice Foundation, which funds civil legal aid.

Funds that are large enough or will be held long enough to earn net interest for the client should go in a separate interest-bearing account for that client, with the interest credited to them. The judgment call is yours, made in good faith, considering amount, expected holding period, and bank charges.

The core rule: separate accounts, no commingling

Texas Disciplinary Rule of Professional Conduct 1.14 is the anchor. Funds belonging in whole or in part to a client or third person must be held separately from your own property, in a designated trust or escrow account. Your operating account is for earned fees and firm money. The trust account is for everything else.

The only firm money that belongs in trust is a small amount to cover bank service charges, if your bank requires it. Everything else is a commingling problem waiting to be found.

Rule 1.14 also requires you to keep complete records of trust property for five years after the representation ends, to promptly notify the client when you receive funds they have an interest in, to deliver those funds promptly when due, and to render a full accounting on request.

Retainers, flat fees, and when money becomes yours

An advance fee paid for work not yet performed is the client’s money and belongs in trust. You move it to operating only as you earn it, and you should be able to show the invoice or time entry that justifies each transfer.

A true general retainer — paid solely for availability, earned on receipt — is different and may go to operating, but courts and grievance panels read those agreements narrowly. If your engagement letter is ambiguous, assume the money is the client’s.

Flat fees deserve special care. Whether a flat fee is earned on receipt depends on your agreement and the work actually performed. The safe practice is to deposit to trust and withdraw against defined milestones spelled out in the engagement letter.

Settlement proceeds always land in trust first. You disburse the client’s share, pay liens and providers, and only then transfer your fee and reimbursable expenses — documented on a settlement statement the client signs.

Per-client ledger discipline

One bank account holds many clients’ money, so the account balance alone tells you nothing. What matters is the individual ledger: for each client or matter, every deposit, every disbursement, the date, the payee, the purpose, the check or reference number, and a running balance.

Two rules follow from that, and violating either is where most trust problems begin: no client ledger may ever go negative, and you may never disburse against a deposit that has not cleared. A negative ledger means you spent one client’s money on another’s matter, which is a misappropriation regardless of intent.

• Client name and matter identifier on every entry.
• Date, amount, and direction of every transaction.
• Source of each deposit and payee of each disbursement.
• Purpose in plain language — "advance costs," "expert deposit," "earned fee transfer per invoice 1042."
• Running per-client balance after every entry.

Three-way reconciliation, monthly

Three-way reconciliation is the control that catches everything else. Monthly, you compare three numbers and they must agree exactly: the adjusted bank statement balance, your trust account check register balance, and the total of all individual client ledger balances.

If those three do not match, stop and find the difference before doing anything else. The usual culprits are an unrecorded bank fee, a transposed amount, a disbursement posted to the wrong client, a stale outstanding check, or a transfer to operating that was never posted to the client ledger.

Do the reconciliation the same week every month, keep the signed report, and keep the bank statements and cancelled check images with it. A clean, contemporaneous reconciliation file is the single most persuasive thing you can hand an investigator.

Setting the account up correctly

• Open the account at an IOLTA-eligible financial institution in Texas and complete the Texas Access to Justice Foundation enrollment.
• Title the account clearly as a trust or IOLTA account and have checks and deposit slips printed that way.
• Direct the bank to charge any account fees to your operating account, not to trust.
• Confirm the bank will report overdrafts on the trust account as required.
• Never link the trust account to a debit card, and avoid electronic transfers you cannot document per client.
• Keep signature authority tight, and reconcile even the accounts a bookkeeper touches — the duty is nondelegable.

Common audit and grievance findings

• No individual client ledgers at all, only a bank register.
• Negative client ledger balances caused by disbursing before deposits cleared.
• Earned fees left sitting in trust for months, which is its own commingling problem.
• Firm funds deposited to trust to cover a shortfall instead of correcting the underlying error.
• Reconciliations performed sporadically or never, or performed but never reviewed by the lawyer.
• Unidentified residual balances from old matters that were never traced or escheated.
• Records discarded before the five-year retention period ran.

A monthly routine that keeps you clean

Weekly: post every trust deposit and disbursement to both the register and the client ledger the day it happens. Monthly: reconcile all three balances, review every client ledger for negatives and for stale balances, sweep earned fees to operating with an invoice behind each transfer, and sign and file the reconciliation. Annually: review dormant matters, resolve residual balances, and confirm your records retention.

None of this requires special talent. It requires that the entries happen at the moment of the transaction rather than at the end of the quarter.

How software should help

Trust accounting is exactly the kind of work software should make boring. The system should refuse to let a client ledger go negative, separate trust from operating by design, tie fee transfers to invoices, and produce a three-way reconciliation report on demand rather than as a spreadsheet exercise.

Jusivo, the Lawmox case management suite, handles IOLTA-aware trust ledgers alongside matter records and billing so the reconciliation is a report you run rather than a project you dread. If you want to walk through your current trust setup, reach out and we will look at it with you.