CAREER COUNSELOR'S CORNER
1. 800. 973. 1177
Managing Your IOLTA ACCOUNT [Danielle D. Hansen, J.D.] 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 grant programs or are included on its
a commingled non-interest-bearing account
IOLTA (Interest on Lawyers’ Trust Accounts
list of eligible grantees, you may be eligible
are not required to comply. These attorneys
Program) allows attorneys to place nomi-
for IOLTA monies. See your state foundation
include: government employees, those em-
nal or short-term client trust funds into an
for details.
interest-bearing IOLTA account. Traditionally, it was not permissible for these funds
Classifications
not in legal private practice. Further, at-
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.
and contain such small balances that the
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.
The initial setup of an IOLTA account is quite
torneys whose trust accounts are rarely used
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.
ployed in the legal field but who do not hold themselves to be attorneys, and attorneys
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.
How is the interest utilized? Your state’s foundation determines how IOLTA program funds may be used. Generally, funds are distributed to legal publicservice 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 desig-
involved in one of your state’s designated
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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
Comprehensive (Mandatory) 28 states now have mandatory IOLTA programs. In these states, attorneys must comply, unless they meet an enumerated exemption to the program.
nated programs. Each year IOLTA programs generate more than $164 million. If you are
easy. Generally, your state foundation will
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 founda-
Common exemptions to participation Attorneys who do not hold client monies in
tion will contact the bank and attempt to negotiate the creation of such accounts. If
continued on back
CAREER COUNSELOR'S CORNER
1. 800. 973. 1177
the bank refuses, you may have to open your
IOLTA accounts only contain pooled client
IOLTA account at a competing institution. A
monies that are nominal in amount or that
list of participating and qualifying institutions
are expected to be held for a short duration.
is generally available through your founda-
Traditionally, these monies were grouped
tion.
and deposited in trust accounts, which did not accumulate interest. With the change in
Doing a little research into choosing a bank
banking laws, these trust accounts can now
may pay off, allowing more funds to go to
earn interest only if the money is transferred
IOLTA programs. Some institutions waive ad-
to a nonprofit. Since the individual client
ministrative and maintenance fees for IOLTA
monies are nominal, they would not accumu-
accounts. If these fees are not waived, they
late any net interest on their own. How-
are subtracted from the interest earned.
ever, when grouped with other nominal or short-term client monies, interest can now
Taxes
be earned upon the pooled income. Since the
There are no tax consequences associated
client could not expect to earn interest on
with maintaining an IOLTA account. The
money placed in an IOLTA account, the client
IRS has ruled that the interest derived from
loses nothing.
these accounts is not taxable to the client, firm, or individual attorney because it
However, if a client could earn net inter-
is not considered gross income. (See Rev.
est upon his or her money, beyond the cost
Rul. 81-209). Since the designated financial
of opening, administering and closing the
institution transfers the interest directly
account, then this money must be placed in
to the state’s IOLTA foundation, a 501(c)(3)
a separate interest-bearing account. The
nonprofit organization, there are no tax con-
interest becomes the property of the client.
sequences. The foundation’s tax identifica-
This property is taxable to the client and
tion number should be used, and the interest
the client’s taxpayer identification number
should be transferred directly from your
must be used when setting up this separate
financial institution to the foundation. If you
account.
receive a 1099 on this interest, contact your foundation immediately.
Constitutional Attacks upon IOLTA In May 2003, the U.S. Supreme Court upheld
Unclaimed trust account funds or unidenti-
the constitutionality of IOLTA programs.
fied balances
Opponents of mandatory IOLTA programs
If you can no longer locate a client after rea-
argued that IOLTA permitted an unconstitu-
sonable efforts, funds should be dealt with
tional taking of client property, violating the
according to your state’s Unclaimed Property
5th Amendment. The court held that this did
Act. Further, if you have any unidentified bal-
not constitute a taking of client property be-
ances, you are obligated to utilize reasonable
cause these client funds are so nominal to be
efforts to locate the source of these funds. If
incapable of earning any net interest. Thus,
these efforts fail, the funds may also be clas-
the client loses nothing.
sified as unclaimed property and dealt with accordingly.
Upholding the constitutionality attack on mandatory IOLTA programs has safeguarded
Does participation in IOLTA deprive clients of
the $164 million generated annually for legal
any funds to which they are entitled?
public aide and legal education programs.
This has been a greatly debated issue. The United States Supreme Court has ruled that clients are not to be deprived.
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