IOLTA: Interest without Principle

December 18, 1997 • Policy Analysis No. 291
By Charles E. Rounds Jr.

IOLTA is the acronym for Interest on Lawyers’ Trust Accounts, which is a program, created by state supreme courts or state legislation, whereby lawyers pool client funds–small sums and large sums held for short periods of time–into a designated interest‐​bearing checking account. The interest that is generated on those pooled funds is then funneled through a judicially created legal foundation to various “public interest” legal firms.

The state of Florida launched the first IOLTA program in 1981. Today, all 50 states and the District of Columbia have IOLTA programs, and those programs generate approximately $100 million per year. While IOLTA’s defenders claim that those millions are earmarked for “charitable purposes,” a growing body of evidence suggests that a substantial portion of the national IOLTA income stream actually underwrites political activity such as lobbying and general legislative advocacy.

IOLTA programs are unethical and unconstitutional. They are unethical because the unauthorized use of clients’ money for any purpose, no matter how noble, is wrong. IOLTA programs are unconstitutional because, when the state asserts control over the equitable interest of client property without consent or just compensation, it violates the Fifth Amendment’s Takings Clause. The Supreme Court should vindicate the property rights of legal clients by declaring IOLTA unconstitutional in the case of Thomas Phillips v. Washington Legal Foundation.

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About the Author
Charles E. Rounds Jr. is a professor at the Suffolk University Law School in Boston.