IOLTA Rules, Guidance & FAQ

iolta account rules

IOLTA accounts are interest-bearing general trust accounts, from which banks forward the interest net of service charges to the State Bar’s IOLTA program. The IOLTA program uses the money to fund law-related charitable causes. ALL general client trust accounts of a North Carolina lawyer or law firm must be IOLTA accounts. Dedicated trust accounts (interest-bearing accounts maintained for the sole benefit of a single client or transaction) should not be established as IOLTA accounts. A financial institution may maintain IOLTA accounts for Illinois lawyers and law firms as long as it qualifies as an eligible institution under Rule 1.15. The requirements for eligibility include agreeing to report client trust account overdrafts to the Attorney Registration & Disciplinary Commission and offering IOLTA accounts that comply with the interest rate comparability provisions of Rule 1.15. These requirements are explained in detail on the Become an Eligible Institutionpage.

What effect does IOLTA have on clients?

IOLTA has no effect on clients. When no interest is earned on funds in attorney trust accounts which are nominal or short-term, no one benefits except the financial institutions. The ABA’s Standing Committee on Ethics and Professional Responsibility, in Formal Opinion 348 (1981) approving attorney participation in state IOLTA programs, found “that the practical effect is to shift a part of the economic benefit from depository institutions to tax-exempt organizations. There is no economic injury to any client. The program creates income where there was none before.”While some lawyers may prefer to inform their clients about the IOLTA program, such notification is not required. State law requires attorneys to place nominal and short-term client trust funds into an IOLTA account.

Attorneys often handle their clients’ money; for example settlement checks, or advance payments for court costs or other expenses. If there is a large sum of money involved or held for a long time, an attorney can hold the client’s funds in an individual account, known as a Client Trust Account, and the interest earned will go to the client. Lawyers are not required to give any notice to clients whose deposits are nominal in amount or to be held for a short period of time. However, the Supreme Court, in its opinion establishing IOLTA, said that “many, if not most, lawyers will, as iolta account a matter of good client relations and courtesy, want to notify their clients of their participation in this program in some manner, and we encourage them to do so.” In considering IOLTA programs in Minnesota and other states, the Internal Revenue Service has ruled that there are no income tax consequences, either to attorneys or to clients whose funds are deposited in pooled accounts. The purpose of the IOLTA program is to enhance the availability of civil legal services to low-income people. Financial institutions play a significant role in the success of the IOLTA program.

Information for Financial Institutions

Financial institutions should not issue IRS 1099 forms to anyone including the attorney, law firm nor the attorney’s client. The South Carolina Supreme Court created the Interest on Lawyer Trust Accounts program to provide funds for law-related public service projects and programs designed to improve the administration of justice.

The rules provide that the interest on the pooled trust accounts paid to the IOLTA program is “net of any transaction costs.” (Rules of Professional Conduct 1.15). Thus, any transaction costs the financial institution may impose for maintaining the account would be deducted by the institution from the interest that was paid over to the IOLTA program. Transaction costs do not include the cost of printing checks or NSF charges. The Minnesota IOLTA Program urges attorneys to familiarize themselves with service charges applied by the financial institution to IOLTA accounts. Interest rates and service charges vary from bank to bank and even among different bank branches. Preferred banks are financial institutions which currently pay competitive interest rates on IOLTA accounts and waive all fees. Participating attorneys can support the IOLTA Program’s mission of making funds available to support legal aid for the indigent by doing business with our preferred banks or encouraging their bank to contact us about becoming a preferred bank.

Tax consequences

The Office of Disciplinary Counsel does require that unearned client fees be handled appropriately, either through your IOLTA account or through a special trust account set up for a particular transaction. You should contact the Office of Disciplinary Counsel if you have specific questions, or you can read Rule 11 of the Rules of the Supreme Court of Hawaii.

There’s no legitimate way to borrow from a trust account, but some attorneys try. It’s often intentional and it’s the quickest way to find yourself in hot water. If you believe that you’ve earned fees from the IOLTA account and the attorney disputes their bill, do you know what to do? Disputed fees should remain in the trust account until the matter is resolved. You would immediately withdraw the amount of $2,000 and leave the other $1,000 in the account until the two of you conclude the billing dispute.

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