How to Effectively Manage Your IOLTA Account - A Step-by-Step Guide

Summary

Lawyers are responsible for managing their IOLTA (Interest on Lawyers' Trust Accounts) accounts in order to maintain compliance with the rules and regulations set forth by the American Bar Association. IOLTA accounts are used by attorneys to safeguard client funds, hold escrow funds or trust funds, and process transactions involving the account. To ensure that the funds are fully accounted for, IOLTA accounts must be handled with great care and precision.

An IOLTA account is a non-interest bearing escrow account established for the sole purpose of depositing and holding client funds. The funds are managed by an IOLTA-approved escrow officer and held in trust for clients. Any interest earned on the funds is then turned over to a state-approved charitable organization.

It is crucial for attorneys to understand the rules regarding IOLTA accounts in order to properly manage and maintain them. The American Bar Association has stringent rules and guidelines that must be followed when handling IOLTA accounts. The funds must be deposited in an interest-bearing account, separated from the lawyer's own funds, and managed by a qualified and licensed escrow officer.

In addition to fulfilling the duties required of them by the ABA, attorneys must also keep accurate records of all transactions and balances in their IOLTA accounts. All trust funds received must be deposited promptly, and all trust disbursements must be made accurately and timely. A precise accounting must be kept of all transactions, records must be updated regularly, and quarterly or monthly reports must be prepared.

In order to ensure compliance with the rules and regulations set forth by the American Bar Association, attorneys must pay close attention to their IOLTA accounts. They must make sure all deposits are made into the account in a timely manner, all client funds are accounted for, and all trust disbursements are made accurately and in a timely manner. Additionally, attorneys must keep detailed and accurate records of all transactions, balance the accounts regularly, and prepare quarterly or monthly reports. By following these steps and the ABA's rules, attorneys can remain in compliance with the IOLTA guidelines.

Questions Answered In This Article

 

What is an IOLTA Account?

An IOLTA account is an Interest on Lawyers Trust Account, which is a savings or trust account that attorneys can maintain for clients and in which pooled deposits of client funds may be temporarily held. IOLTA accounts are often used for low-interest funds, such as small deposits for attorney's fees, court costs, expenses related to litigation, or will fees. Money in an IOLTA account is kept separate from a lawyer's own money.
 

The Benefits of Creating an IOLTA Account

Attorneys with IOLTA accounts enjoy several benefits, including avoiding the hassle of trust accounting, simplifying small fee collections, and providing clients with better security. Attorney's creating an IOLTA account also receive certain protections from the IOLTA program, such as insurance and access to the program's resources.
 

Establishing an IOLTA Account

In order to establish an IOLTA account, lawyers must first meet the state requirements for IOLTA accounts. These requirements vary from state to state, but typically involve signing up for an IOLTA program, setting up an IOLTA account at a state or federally-insured financial institution, and meeting the criteria set by the state law.
 

Managing an IOLTA Account

The management of an IOLTA account requires attorneys to adhere to their state's IOLTA rules and regulations. Attorneys must maintain detailed records of all deposits, withdrawals, and transfers made to and from their IOLTA accounts. They must also be aware of the rules on interest, including any requirements to pay interest to clients when funds have been left in IOLTA accounts for a certain amount of time.
 

How to Maximize IOLTA Returns

Given the low-interest nature of IOLTA accounts, lawyers must look for ways to maximize their returns. Attorneys should research financial institutions with the highest yields and look for account features that allow them to transfer funds to maximize return. Additionally, attorneys can receive more favorable rates by looking for financial institutions that offer special rates for IOLTA accounts.
With the relatively recent addition of IOLTA, states have placed new accounting, management, and fiduciary responsibilities upon attorneys. Violations of IOLTA rules can result in disciplinary action. This week we'll explore the basic IOLTA landscape, what is necessary for compliance, and some common pitfalls to avoid, as well as common questions and concerns.

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.