Attorney Client Trust Account and IOLTA

Client Trust Accounts and Interest on Lawyer Trust Accounts (IOLTA)

 A lawyer who handles client funds in a Client Trust Account that are too small in amount or held too briefly to earn interest for the client must participate in the Interest on Lawyers’ Trust Accounts (IOLTA) program. IOLTA accounts can only be kept at approved financial institutions. The interest earned from pooled IOLTA benefits nearly 100 nonprofit legal service organizations throughout California. IOLTA increases access to justice for individuals and families living in poverty and improves our justice system.

California Rule of Court 9.8.5 and State Bar Rules, title 2, division 1, rule 2.5 require licensees to register annually all CTAs, including IOLTA and individual interest-bearing accounts, that were open at any point during the reporting period, complete a self-assessment, and certify compliance with the rules of safekeeping.

California law requires attorneys who handle client funds or funds entrusted by others to hold them in one or more interest-bearing bank accounts labeled as a “Trust Account,” or words of similar import. Client funds that can earn revenue for the client in excess of the costs to hold those accounts must be deposited for the benefit of the client.

Client funds that are nominal in amount or are on deposit for such a short period of time that the funds cannot earn net income (income over costs) for the client, must be deposited or invested by attorneys into pooled IOLTA (Interest on Lawyers’ Trust Accounts) on which the interest or dividends are paid to the State Bar. (Business & Professions Code sections Business and Professions Code section 6091.2, Business and Professions Code sections 6211, 6212 and 6213).

Handling Multiple Client Funds in the Client Trust Account

Separate Clients are Separate Accounts

For instance, Client A’s money has nothing to do with Client B’s money. When the attorney keep client;s money in a common client trust bank account (such as in an IOLTA account), each client’s funds are completely separate from those of all the other clients. In other words, the attorney should NEVER be allowed to use one client’s money to pay either another client’s or for their own obligations.

When you keep your clients’ money in a common client trust bank account, the way to distinguish one client’s money from another’s is to keep a client ledger of each individual client’s funds (as required by rule 1.15(d)(3) and the recordkeeping standards under rule 1.15(e) ). The client ledger tells you how much money you’ve received on behalf of each client, how much money you’ve paid out on behalf of each client, and how much money each client has left in your common client trust bank account. If you are holding money in your common client trust bank account for 10 clients, you have to maintain 10 separate client ledgers. If you keep each client’s ledger properly, you will always know exactly how much of the money in your common client trust bank account belongs to each client. If you don’t, you will lose track of how much money each client has, and when you make payments out of your client trust bank account, you won’t know which client’s money you are using.

If the client’s money can earn income in excess of the costs incurred to hold the account, either because the funds are large enough in amount or are held for a long period of time, then the attorney cannot place the funds in an IOLTA account.

Business and Professions Code Sections 6211-6213

When a client gives you a “nominal” amount of money, or money that you hold for too short a period of time to earn income in excess of the costs to hold the funds for the benefit of the client, you must hold the money in a common client trust bank account, called an “Interest on Lawyers’ Trust Account” (IOLTA account). (See IOLTA Accounts.) That account is set up so that your bank pays the interest or dividends the account earns to the State Bar. By law, the State Bar distributes this money to programs that provide legal services in civil matters to indigent people, as defined by statute. Your responsibilities with respect to IOLTA accounts are governed by Business and Professions Code sections 6211-6213.

Section 6211 Requires all Nominal, Short-Term Trust Funds be Placed in an Aggregated Client Trust Account with Interest Payable to the Approved Indigent Legal Services

See Carroll v. State Bar 166 Cal.App.3d 1193 (Cal. Ct. App. 1985), where the trial court interpreted section 6211, subdivision (b) as permitting lawyers to deposit nominal, short-term trust funds in interest-bearing accounts other than the IOLTA authorized by section 6211, subdivision (a) at the request of the client. (2a) We hold subdivision (b) plainly applies only to monies not nominal in amount or deposited for short term, i.e., to funds which may be segregated to earn net income for the benefit of a client. (1b) Section 6211, subdivision (a) is all inclusive. It states: “An attorney or law firm, which in the course of the practice of law receives or disburses trust funds, shall establish and maintain an interest-bearing demand trust account and shall deposit therein all client deposits that are nominal in amount or are on deposit for a short period of time.”

Under Business and Professions Code section 6212(C), reasonable fees may be deducted from the interest remitted on an IOLTA account. Reasonable service charges include per-check charges, per-deposit charges, monthly fees such as fees in lieu of minimum balance, federal deposit insurance fees, or sweep fees. However, the attorney is responsible for paying account expenses that are incurred in the ordinary course of business, such as charges for check printing, deposit stamps, collection charges, or insufficient fund charges. These fees may only be charged to the lawyer or law firm maintaining the IOLTA account and will not be deducted from the interest remitted on the account.

IOLTA Accounts

When a client gives the attorney or law firm a “nominal” amount of money, or the attorney will be holding a client’s money for a “short period of time,” Business and Professions Code section 6211 states that the attorney must hold the money in a common client trust bank account. The client trust bank account is set up so that the interest the account earns will be paid to the State Bar of California. See Carroll v. State Bar 166 Cal.App.3d 1193 (Cal. Ct. App. 1985), where the court held that California’s mandatory IOTA program does not involve a taking of property without just compensation, as prohibited by the fifth amendment to the United States Constitution.

Since most attorneys at some time hold money for clients that is “nominal in amount” or will be held for a “short period of time,” the chances are attorneys will need to set up a common client trust bank account, which for convenience we’ve referred to as an IOLTA account.

The idea behind the IOLTA statute is that attorneys often hold amounts of money for clients that are so small or will be held for such short periods of time. The interest the money could earn for the client if it were held in a separate interest-bearing account that would be less than the costs involved in earning or accounting for the interest. However, when these amounts of money are held in a common client trust account, they collectively can generate substantial interest. The

IOLTA statute requires that this aggregate interest, which would otherwise benefit only the bank, is used to ensure that indigent Californians have access to legal services.

When someone open an IOLTA account, the bank will code the account with the State Bar’s taxpayer identification number so he or she does not have to worry about paying tax on the interest. The bank automatically transmits the interest to the State Bar, and handles all the reporting requirements. The State Bar must check to be sure that the bank sends the interest, so one must report to the State Bar when he or she opens or closes an IOLTA account.

Opening a Client Trust Account with a Bank 

Rule of Professional Conduct 1.15(a) in part states:

All funds received or held by a lawyer or law firm for the benefit of a client, or other person to whom the lawyer owes a contractual, statutory, or other legal duty, including advances for fees, costs and expenses, shall be deposited in one or more identifiable bank accounts labeled “Trust Account” or words of similar import.

In other words, whenever the lawyer receive or hold money for clients—or any other persons with whom the attorney has a fiduciary relationship—the attorney has to deposit the money into a labeled client trust bank account. Thus, client trust bank accounts are a special kind of bank account. Bankers who have experience with them can help you set up and administer your client trust bank account properly. When opening the account, one should make sure the bankers involved know what a client trust bank account is. If the bankers are unaware of a client trust bank account, then one should ask to work with someone else.

Client Trust Accounts maintained at a Bank: 

• Must be identified as a client trust bank Rule 1.15(a) says that the name of any account where you keep your clients’ money must clearly tell the bank, your clients, your employees, the State Bar, the people you pay out your clients’ funds to and everyone else that it is a client trust bank account. See, Baranowski v. State Bar (1979) 24 Cal.3d 153, 162 [ 154 Cal.Rptr. 752, 593 P.2d 613] where the state bar argued that “client funds” as defined Rule 8-101 unadvanced unearned fees and monies paid to an attorney as security for fees not yet earned must be deposited into a client trust account. Baranowski failed to do this act with the trust bank account. The Supreme court found it was unnecessary because the other misconduct that Baranowski was found culpable of justified the discipline recommendation.

Whatever name you choose,you can avoid all kinds of problems if the name of the account is prominently displayed on all your client trust bank account checks, deposit slips and other documents. Make sure that papers relating to your client trust bank account look different from those relating to your personal account or your general office account. For example, you can have your client trust bank account checks printed on paper that’s a different color than your other checks.

• Must be maintained in Rule 1.15(a) says you are only allowed to keep client funds outside of California under certain circumstances, including a requirement to obtain the written consent of your client. Unless most of your clients are from out-of-state and you routinely get their written consent to keep their funds somewhere else, your common client trust bank account must be maintained in California.

• Should be maintained in a financially stable bank. Consider selecting a bank that is regulated by a federal or state agency and that carries deposit insurance from an agency of the federal government. As your client’s fiduciary, you are responsible for protecting your client Note that FDIC insurance coverage differs depending on the type of account that you use. If you use a non-IOLTA interest bearing trust account, the funds deposited may be subject to a $250,000 per client insurance coverage limit. The per-client limit includes all money the client has on deposit at that bank. In other words, if you are holding $150,000 for a client at a certain bank, and the client has another $150,000 on deposit at the same bank, only $250,000 of the $300,000 the client is holding in the bank may be covered. This is just an example. You should check with your bank or the FDIC to determine any applicable deposit insurance.

Even if all your clients’ money is covered by insurance, by the time the FDIC pays your clients their money, your clients could have, for example, missed a business opportunity. (As we will discuss later, if your bank goes under, you also may have a hard time getting copies of your client trust bank account records.) Like most client trust accounting problems, the answer requires thoughtful consideration of all relevant factors with the basic goal of keeping your client trust accounts in banks that you’re reasonably sure are financially secure.

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