How to Handle Settlement Funds in Your IOLTA Account

Why Settlement Funds Require Extra Care

Settlement proceeds often represent the largest single deposit an attorney will ever handle for a client. They arrive as a lump sum but must be disbursed to multiple parties — the client, the firm, medical lien holders, co-counsel, and others — often with different timing requirements and withholding rules. A single misstep can result in a bar complaint, a malpractice claim, or both.

Step 1: Deposit the Full Settlement Into Trust

The entire settlement check must be deposited into your IOLTA account immediately upon receipt — before any disbursements are made. Never deposit part of a settlement into trust and part into your operating account in the same transaction. The full amount must clear before any funds are disbursed.

Most state bar rules require you to wait for the check to clear before disbursing. Disbursing against an uncleared check is one of the most common causes of inadvertent shortfalls — especially if the check is later dishonored.

Step 2: Notify the Client and Provide a Settlement Statement

Before disbursing, you must provide the client with a written settlement statement showing:

• The gross settlement amount
• Your attorney fee (and the basis for it)
• Costs advanced by the firm
• Any liens or third-party claims being paid (medical, Medicare, child support)
• The net amount due to the client

The client must approve the settlement statement before any funds leave trust. Keep the signed statement in the matter file permanently.

Step 3: Pay Liens and Third Parties First

If there are medical liens, Medicare/Medicaid claims, or other statutory liens against the settlement, those must be resolved before or simultaneously with disbursement to the client. Disbursing client funds while ignoring a known lien can expose you to personal liability for the lien amount.

Step 4: Transfer Attorney Fees to Operating

Once the settlement clears and the client approves the statement, transfer your earned fees and cost reimbursements from trust to your operating account. Do not leave earned fees in trust longer than necessary — most bar rules treat this as a recordkeeping violation even if no harm results.

Step 5: Disburse the Net Client Amount

Issue the client's check from your trust account for the net amount shown on the settlement statement. The trust account balance for that matter should now be zero (or reflect only any remaining undisbursed costs).

Common Settlement Fund Mistakes

• Disbursing before the check clears — creates a risk of shortfall if the payer's bank returns the item
• Forgetting to disburse earned fees — leaving firm money in trust indefinitely
• Paying a lien from operating — then forgetting to reimburse from trust, creating a commingling issue
• No signed settlement statement — leaves you unprotected if the client later disputes the disbursement
• Missing a lien — Medicare and Medicaid have federal super-priority; ignoring them can result in personal liability

How IOLTATrusts Helps

IOLTATrusts generates a settlement statement PDF from each case automatically, showing the full breakdown of receipts, fees, costs, and disbursements. Every transaction is logged with a payee, memo, and timestamp. The software blocks disbursements that would create a negative client balance, and the complete ledger is available for the client's records with one click.