IOLTA Guarantees - Time to Start Worrying?
IOLTA Account FDIC Coverage
In 2008, as part of its financial system rescue, Congress raised the FDIC insurance ceiling on bank accounts to $250,000 from $100,000. The FDIC itself issued a ruling that all amounts in a client's IOLTA trust account would be protected, regardless of size.The account had to be identified as a trust account, lawyers had to maintain their clients' trust accounts in accord with generally accepted accounting principles and jurisdictional rules, and had to identify the amounts held for each client. This "temporary" guarantee was good through December 31, 2010. When Congress passed the Dodd-Frank financial reform act in 2010, it ultimately extended IOLTA insurance through December 31, 2012. But nothing has been done for a further extension, and expiration is looming.
What to Do for Clients with an IOLTA Account
Lawyers should continually monitor the news before the end of 2012 to see what happens to IOLTA account FDIC coverage after December 31. No matter what Congress may or may not do, be sure to identify in bank records the name of the client and the amount of dollars held for that client. An additional step might be 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. Because this increases trust fund accounting expense, consider providing in the engagement agreement for an administrative charge to cover the cost of account administration. The extra assurance for such an arrangement could be worth it.
An Extension for IOLTA Accounts?
How likely is it that the FDIC's IOLTA account guarantee will be extended? One of the few authoritative discussions that could be found in an Internet search says, maybe. Several months ago lawyer Barry Hester with the Bryan Cave law firm did an update that made these key points:
More than half of all no- or low-interest accounts (which include IOLTA accounts) are held in larger banks. Nevertheless, if the guarantees are removed, smaller community banks may be hurt most because of lingering depositor fears about their solvency. It is questionable, Mr. Hester wrote, "Whether legislators will have the stomach to extend the program in an environment where initiatives seen to benefit banks are politically sensitive." The FDIC could extend the program administratively, but likely will not do so unless there is advocacy in Congress.
Stay tuned - things could get very messy.
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