Quick Answer: New York attorneys must hold client funds in a trust account, and the type matters: funds too small or held too briefly to earn net interest for the client go into an IOLA account (interest goes to the IOLA Fund), while funds large enough or held long enough to net meaningful interest belong in a separate interest-bearing escrow account for that client’s benefit. Choosing wrong is a fiduciary problem; documenting the choice is an accounting discipline.

The Two-Account Framework

Under New York’s Rule 1.15, client funds may never touch the operating account. From there, New York Judiciary Law §497 and the IOLA program create the fork:

IOLA account: a pooled, interest-bearing trust account for “qualified funds” — amounts that, considering their size and expected holding period, cannot earn net interest for the client after bank charges and administrative cost. The bank remits the interest to the IOLA Fund, which finances civil legal services for low-income New Yorkers. Most day-to-day retainers, filing fee advances, and short-hold settlement funds live here
Separate interest-bearing account: when a specific client’s funds are substantial or will be held long enough that net interest is realistically earnable, the lawyer should hold them in a segregated escrow account with interest credited to the client — commonly seen with large settlements awaiting distribution, down payments in real estate transactions, and estate funds

The judgment call is the lawyer’s to make in good faith, but it should be an actual judgment: amount, expected duration, prevailing rates, and bank charges, noted in the file at the time.

Putting client funds in the wrong account is a rule violation before it is an accounting error

The test is whether the funds are nominal in amount or held for a short period. Get it wrong in one direction and you have taken interest that belonged to the client. Get it wrong in the other and IOLA has lost income it was entitled to. Both are reportable.

We set this up correctly and keep the records that prove it. Call 631-349-1661 or send us the details and we will give you a straight answer.

A Worked Decision

Your firm receives a $250,000 settlement expected to be held roughly five months pending a lien resolution. At a 4% money-market rate, gross interest is about $4,167; even after bank fees, the client would net thousands — that belongs in a segregated interest-bearing escrow titled for the client’s matter. Compare a $7,500 cost advance expected to be spent down over six weeks: potential interest is a few dollars, less than the cost of administering it — qualified funds, IOLA. Same firm, same week, two different accounts, both correct.

The Accounting That Keeps You Compliant

Client-level ledgers: a running ledger per client matter showing every receipt and disbursement, with the trust bank balance always equal to the sum of client ledger balances — no client may ever “borrow” another’s funds, even for a day
Three-way reconciliation monthly: bank balance to trust ledger to the sum of client ledgers. Our step-by-step guide covers the mechanics
Records retention: Rule 1.15 requires trust records — ledgers, bank statements, canceled checks, retainer and closing statements — to be kept for seven years
Authorized signatories only: only admitted attorneys may sign trust checks in New York; bookkeepers and paralegals cannot
Bank selection: IOLA accounts must sit at a participating New York banking institution; dishonored trust checks are reported by the bank to the Lawyers’ Fund for Client Protection — a bounced escrow check starts an inquiry, not just a fee

Common Mistakes

Parking a large, long-hold settlement in the pooled IOLA account — the client’s interest goes to the Fund instead of the client
Opening a separate escrow for trivial amounts and eating the administration cost
No written record of the IOLA-vs-escrow decision for significant deposits
Fee portions left in trust after they are earned (commingling in reverse) or swept out before they are earned
Trust bookkeeping delegated with no attorney-level monthly review — the license on the line is the attorney’s

FAQs

Is IOLA participation optional in New York?

Holding qualified client funds in an IOLA account is the standard, expected treatment — the lawyer’s discretion is in classifying funds as qualified or not, based on amount and expected holding period, not in whether trust obligations apply.

Who pays tax on IOLA interest?

No one you know: interest on IOLA accounts is remitted by the bank to the IOLA Fund. Interest earned in a separate client escrow belongs to the client and is reported under the client’s taxpayer identification number, not the firm’s.

Can I keep a cushion of firm money in the trust account?

Only a nominal amount reasonably necessary to cover bank charges. Anything more is commingling.

What happens if I cannot locate a client with funds remaining?

New York has a specific procedure for unclaimed trust funds — see our guide to unclaimed client funds in New York attorney trust accounts.

How often should trust accounts be reconciled?

Monthly, three ways, with the attorney reviewing and signing off. Quarterly reconciliation is how small discrepancies become disciplinary matters.

Trust Accounting Without the Anxiety

We maintain law firm trust accounting — client ledgers, three-way reconciliations, IOLA and escrow administration — alongside full law firm accounting. Talk to us. Related reading: the law firm chart of accounts.

If your reconciliation will not tie, work through the causes in order — see when your attorney trust account does not balance.

Worth knowing: the active version of New York’s proposed random audit bill was broadened from real estate escrow accounts to escrow trust accounts generally. See what A10145-B would examine.

Keeping the two accounts distinct is a bookkeeping discipline before it is a compliance question. Our approach to law firm bookkeeping treats the monthly three-way reconciliation as the control that keeps the distinction real rather than nominal.

Talk to an accountant who works in your industry

Precision Accounting & Consulting works with contractors, law firms, medical practices and property owners across the country. If something on this page raised a question about your own books, send it over and we will give you a straight answer.