An Update on the Safety of IOLTA Funds

Published March 3, 2009

When the banking crisis began in earnest early last fall, we wrote a column that raised concern over the implications of a bank failure upon a lawyer’s responsibility to keep client IOLTA trust funds safe. The concern centered on the fact that every State imposes a fiduciary duty of adequate safekeeping for clients’ funds to prevent misappropriation or negligence. The lawyer is responsible for acts of an agent, which in the case of a client trust account is the bank. If the bank fails, the lawyer, in light of the rules of professional conduct, is responsible. This would particularly have been the case for trust accounts that exceeded the longtime Federal Deposit Insurance Corporation guaranteed limit of $100,000, which in the event of bank failure would have put any amount over the limit at risk.

The worries that this situation involves have diminished, now that Congress (as part of its financial system rescue tactics) has raised the FDIC limit for the first time in 28 years, to $250,000 rather than $100,000. Even more significantly, the FDIC itself has issued a ruling that all amounts in a client’s IOLTA trust account are protected, regardless of the amount. The account must be identified as an IOLTA account and lawyers must maintain their clients’ trust accounts in accordance with generally accepted accounting principles and the trust rules of the jurisdiction for such accounts.

The FDIC’s blanket protection on all IOLTA funds obviously provides some breathing room with regard to the dilemma of lawyer responsibility. However, given that many once unthinkable financial events have happened, lawyers may not want to rely only on the FDIC pronouncement. One way to further ensure that each client’s IOLTA funds are safe is to identify the name of the client in bank records and the amount of dollars held for that client, in effect creating sub-accounts. Another, more direct approach is to maintain a separate trust account for each client whose funds are likely to be held for an extended period of time. The interest on such a separate account will belong to the client; this is not an IOLTA account.

Because this increases trust fund accounting expenses, you may consider providing in the engagement agreement for an administrative charge to cover the cost of trust account administration. The extra piece of mind that it provides for client and lawyer could be well worth it.

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Audience type: Administrators, Associates, Large Law Firms, Small Law Firms, Sole Practitioners