How to Handle Zombie IOLTA Balances
Oct 06, 2025As professionals managing IOLTA (Interest on Lawyers' Trust Accounts) for law firms, you're no doubt familiar with the challenges of maintaining compliance while safeguarding client funds. One persistent issue that can haunt your books is what I am affectionately calling "zombie balances"—those dormant, unclaimed funds from stale checks, unidentified deposits, or abandoned client money that linger in the account long after they should have been resolved.
These balances aren't just accounting nuisances; they pose ethical, legal, and financial risks if not handled properly. Today, I'll provide guidance on legally returning these stale funds, including the escheatment process to your state's unclaimed property fund, while highlighting key pitfalls to avoid—such as the nightmare scenario of someone cashing an old check after you've already sent the money to the state.
Understanding Zombie Balances in IOLTA
Zombie balances refer to funds that appear "dead" on your ledger—uncashed checks over six months old, small leftover amounts from settlements, or deposits where the owner can't be identified—but they can "resurrect" if claimed later, potentially causing overdrafts or compliance headaches. In IOLTA accounts, these must be treated with extra care because they involve client or third-party property, governed by state bar rules and unclaimed property laws. Ignoring them can lead to audit findings, as seen in North Carolina where 28% of audited lawyers failed to properly designate and escheat such funds.
Steps to Return Stale Funds and Escheat to the State
The process for handling zombie balances varies by state, so always consult your jurisdiction's bar rules, ethics opinions, and unclaimed property statutes (e.g., via your state treasurer's office).
Generally, escheatment—the transfer of unclaimed property to the state—kicks in after a dormancy period, ensuring the funds can be reclaimed by the rightful owner later. Here's a step-by-step guide based on common practices:
- Identify and Classify the Funds: During your required monthly or quarterly trust account reconciliations, review outstanding checks and balances. Flag any uncashed checks older than six months (considered "stale" under Uniform Commercial Code §4-404) or funds dormant for the state's defined period—typically 3-5 years (e.g., 5 years in North Carolina, 3 years for IOLTA in California).
- Classify them as potentially abandoned if there's no owner activity, such as communication or interest indications.
- Perform Due Diligence: Make a good-faith effort to locate the owner. This includes reviewing firm records, personnel notes, and external sources; sending certified mail to the last known address; and searching public databases like your state's unclaimed property site. In states like North Carolina, this "due inquiry" is mandatory for funds over $50, and must occur before escheatment.
- Document all attempts meticulously—emails, calls, and returned mail—to prove compliance during audits.
- Void or Stop Payment on Stale Checks: Before proceeding, issue a stop-payment order on any outstanding checks to prevent future cashing. Replace with a new check if the owner is found, or proceed to escheat the underlying funds. Remember these stop payments have an expiration date. It has been my experience that I have seen a client send the funds to the state only to have the client get the state funds and then later cash the ancient outstanding check. The one you stopped payment on.
- Report and Remit to the State: If the owner can't be located after the dormancy period, file a report with your state's unclaimed property division (often the treasurer or controller's office). Include details like the owner's last known address, amount, and your due diligence efforts. Remit the funds via check or electronic transfer. For example, in Pennsylvania, use a remittance report; in New Jersey, submit an affidavit to the Superior Court Trust Fund Unit for IOLTA funds. Records of the escheatment for at least 7-10 years.
- Handle Special Cases: For unidentified funds, some states allow remittance to IOLTA programs or courts (e.g., Massachusetts proposes after 4 months of efforts) if the amount is small (under $10-50), check if client consent was obtained upfront to retain it, per ethics opinions like North Carolina's.
Throughout, maintain the funds in the IOLTA account until escheated, and ensure confidentiality—report without breaching client privilege by using aggregate or anonymized data where possible.
When the funds are returned to the state, you need to book this in with each client’s amount split on that check. This will hit the sub-liability account and, in essence, set the client's stale trust account balance to zero.
Do you want to join our private group? We have a large collection of videos that you can learn from, and we hold weekly meetings every Friday at 9 am PT/12 pm ET.
We would love to have you join our group.
Stay connected with news and updates!
Join our mailing list to receive the latest blog post and updates on what is happening at the Accountant's Law Lab.
Don't worry. Your information will not be shared.
We hate SPAM. We will never sell your information, for any reason.
