RTB Recap
June 3, 2025
Trust Account Audits: What Lawyers Should Know & How to Prepare
June 10, 2025
California IOLTA Requirements: A Comprehensive Guide for Attorneys
California has strict requirements when it comes to handling client funds, and one small mistake could result in bar discipline, financial penalties, or even disbarment.
To help you stay compliant and avoid trouble, this guide breaks down:
What California IOLTA rules require Common mistakes that put attorneys at risk How to set up and manage a trust account properlyIf you want to ensure your IOLTA account is 100% compliant, keep reading.
What Are California’s IOLTA Requirements?
In California, attorneys who hold client funds for short-term use must deposit those funds into an IOLTA account—a special type of trust account where interest earned is directed to legal aid programs.
Who Needs an IOLTA Account?
- All attorneys handling client funds that are nominal or short-term in nature
- Firms managing settlements, retainers, or escrowed funds
- Solo practitioners and law firms alike—there’s no exception for firm size
Key California IOLTA Rules:
Funds must be deposited into an IOLTA account at an eligible financial institution Attorneys cannot personally collect interest earned on trust accounts No commingling—firm and client money must remain separate All transactions must be documented and reconciled regularly Attorneys must register their IOLTA account annually with the California State BarThe Most Common California IOLTA Mistakes (and How to Avoid Them)
Even experienced attorneys sometimes mismanage their trust accounts, leading to serious consequences. Here’s what to watch out for:
Mistake #1: Failing to Reconcile the Account Monthly
Why It’s a Problem:
- If your trust account isn’t balanced, client funds may be misallocated or missing.
- The State Bar can audit your trust account at any time—if there are discrepancies, you could face penalties.
Solution:
- Perform a three-way reconciliation every month—compare your bank statement, trust ledger, and client ledgers to ensure they match.
- Use legal-specific accounting software to track transactions automatically.
Mistake #2: Withdrawing Money Before It’s Earned
Why It’s a Problem:
- Taking money out of an IOLTA account before services are provided is considered misappropriation—a serious ethics violation.
Solution:
- Bill the client first, then transfer funds only after fees are earned.
- Keep clear records of all transactions and invoices to avoid disputes.
Mistake #3: Not Keeping Proper Documentation
Why It’s a Problem:
- If a client disputes a transaction or you’re audited, you need proof of every deposit, withdrawal, and balance.
Solution:
- Maintain detailed client ledgers, deposit records, and disbursement logs.
- California requires at least five years of trust account record retention—keep both digital and paper copies for security.
How to Set Up and Manage a Trust Account Correctly in California
Following these steps will help you stay compliant and avoid penalties:
Step 1: Open Your IOLTA at an Approved Financial Institution
- Your bank must be on the California State Bar’s approved list of IOLTA providers.
- Make sure your account is titled properly (e.g., “Law Office of [Your Name] IOLTA Trust Account”).
Step 2: Register Your Account with the State Bar
- Under the Client Trust Account Protection Program (CTAPP), attorneys must:
- Register their trust accounts annually
- Complete a self-assessment on trust account management
- Certify compliance with Rule 1.15 of the California Rules of Professional Conduct
Get the complete California trust account checklist here. Access now.Step 3: Maintain Strict Recordkeeping & Compliance
- Track all client funds separately—use individual ledgers for each client.
- Record all deposits, withdrawals, and transfers—attach supporting documents to every transaction.
- Reconcile monthly—compare your trust account records with bank statements to catch mistakes early.
What Happens If You Violate IOLTA Rules?
California takes trust account violations seriously. Attorneys found mishandling client funds can face:
Bar investigations & audits Financial penalties & restitution orders Suspension or disbarmentEven small errors—if left uncorrected—can lead to serious disciplinary action.
Final Thoughts: Take Control of Your Trust Account Compliance
California lawyers must follow strict trust accounting rules to protect client funds and maintain compliance. By implementing proper recordkeeping, avoiding common mistakes, and staying up to date on regulations, you can safeguard your practice.
Need a full step-by-step guide for IOLTA compliance? Access the checklist now.
