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How to effectively manage your IOLTA Account

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Historical Background
IOLTA (Interest on Lawyers' Trust Accounts Program) allows attorneys to place nominal or short-term client trust funds into an interest-bearing IOLTA account. Traditionally, it was not permissible for these funds to earn interest. However, with a change in banking regulations in the early 1980s, banks may now remit the interest earned to certain nonprofit organizations - IOLTA nonprofit foundations.



Depending upon your state's stance on IOLTA, participation may be comprehensive (mandatory), voluntary, or you may be able to opt out. Two states now have voluntary, 28 have mandatory, and 22 have opt-out programs. If you are unsure of your state's stance on IOLTA, check with your IOLTA foundation.

How is the interest utilized?
Your state's foundation determines how IOLTA program funds may be used. Generally, funds are distributed to legal public-service programs. Some common grants include: programs providing legal assistance to disadvantaged or low-income persons, legal clinics, law school clinical programs, educational programs and brochures, pro bono attorneys, legal education student loans, and programs designed to improve the administration of justice.

Since the first IOLTA program was created in Florida in 1981, state foundations have donated more than $2 billion to designated programs. Each year IOLTA programs generate more than $164 million. If you are involved in one of your state's designated IOLTA grant programs or are included on its list of eligible grantees, you may be eligible for IOLTA monies. See your state foundation for details.

Classifications

Voluntary
In the 2 remaining voluntary states, attorneys must proactively volunteer to participate in the program. Generally, participation in these states is lacking. For this reason, the majority of states utilize either opt-out or comprehensive programs. For example, on May 10, 2004, Oklahoma switched from a voluntary to a comprehensive program. Prior to this, only 24% of OK attorneys particpated in that state's voluntary program, which prompted this change. South Dakota and the Virgin Islands are the 2 remaining voluntary states/territories.

Opt Out
Opt-out programs permit attorneys to decline participation in the IOLTA program. Generally states require that an attorney return an opt-out form with their annual registration forms. If attorneys do not formally opt out in writing by a set date, then they are automatically enrolled in the IOLTA program for that year.

Comprehensive (Mandatory)
28 states now have mandatory IOLTA programs. In these states, attorneys must comply, unless they meet an enumerated exemption to the program.

Common exemptions to participation
Attorneys who do not hold client monies in a commingled non-interest-bearing account are not required to comply. These attorneys include: government employees, those employed in the legal field but who do not hold themselves to be attorneys, and attorneys not in legal private practice. Further, attorneys whose trust accounts are rarely used and contain such small balances that the account loses money because the interest is less than the account maintenance fees may be eligible for exemptions from their foundations.

How to comply - Day-to-day administrative burdens
Minimal administrative or cost burdens are placed on attorneys with IOLTA accounts. These accounts require the same accounting, reporting requirements, and recordkeeping duties as non-interest-bearing commingled client trust accounts.

The initial setup of an IOLTA account is quite easy. Generally, your state foundation will assist you with its creation. After completing foundation paperwork, they will contact your designated bank and facilitate the creation of your account.

Your bank transfers the accumulated interest to the state foundation either monthly or quarterly. You do not have to initiate or participate in this action.

Choosing a financial institution for your IOLTA account
If your bank does not offer these accounts, contact your state's foundation. The foundation will contact the bank and attempt to negotiate the creation of such accounts. If the bank refuses, you may have to open your IOLTA account at a competing institution. A list of participating and qualifying institutions is generally available through your foundation.

Doing a little research into choosing a bank may pay off, allowing more funds to go to IOLTA programs. Some institutions waive administrative and maintenance fees for IOLTA accounts. If these fees are not waived, they are subtracted from the interest earned.

Taxes
There are no tax consequences associated with maintaining an IOLTA account. The IRS has ruled that the interest derived from these accounts is not taxable to the client, firm, or individual attorney because it is not considered gross income. (See Rev. Rul. 81-209). Since the designated financial institution transfers the interest directly to the state's IOLTA foundation, a 501(c)(3) nonprofit organization, there are no tax consequences. The foundation's tax identification number should be used, and the interest should be transferred directly from your financial institution to the foundation. If you receive a 1099 on this interest, contact your foundation immediately.

Unclaimed trust account funds or unidentified balances
If you can no longer locate a client after reasonable efforts, funds should be dealt with according to your state's Unclaimed Property Act. Further, if you have any unidentified balances, you are obligated to utilize reasonable efforts to locate the source of these funds. If these efforts fail, the funds may also be classified as unclaimed property and dealt with accordingly.

Does participation in IOLTA deprive clients of any funds to which they are entitled?
This has been a greatly debated issue. The United States Supreme Court has ruled that clients are not to be deprived.

IOLTA accounts only contain pooled client monies that are nominal in amount or that are expected to be held for a short duration. Traditionally, these monies were grouped and deposited in trust accounts, which did not accumulate interest. With the change in banking laws, these trust accounts can now earn interest only if the money is transferred to a nonprofit. Since the individual client monies are nominal, they would not accumulate any net interest on their own. However, when grouped with other nominal or short-term client monies, interest can now be earned upon the pooled income. Since the client could not expect to earn interest on money placed in an IOLTA account, the client loses nothing.

However, if a client could earn net interest upon his or her money, beyond the cost of opening, administering and closing the account, then this money must be placed in a separate interest-bearing account. The interest becomes the property of the client. This property is taxable to the client and the client's taxpayer identification number must be used when setting up this separate account.

Constitutional Attacks upon IOLTA
In May 2003, the U.S. Supreme Court upheld the constitutionality of IOLTA programs. Opponents of mandatory IOLTA programs argued that IOLTA permitted an unconstitutional taking of client property, violating the 5th Amendment. The court held that this did not constitute a taking of client property because these client funds are so nominal to be incapable of earning any net interest. Thus, the client loses nothing.

Upholding the constitutionality attack on mandatory IOLTA programs has safeguarded the $164 million generated annually for legal public aide and legal education programs.

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