1. What is IOLTA?
2. Do all lawyers have to establish an IOLTA account?
3. What does the Maryland IOLTA program do?
4. Where have these nominal and short-term funds been deposited in the past?
5. How do financial institutions benefit from participating in the IOLTA program?
6. What are the steps that a bank needs to do to participate in the IOLTA program?
7. How can attorneys participate?
8. Does the mandatory IOLTA statute conflict with Chapter 600 of the Maryland Rules on Attorney Trust Accounts?
9. Is there a special title designation for an IOLTA account?
10. What are the tax consequences?
11. Is it necessary to prepare IRS Form 1099 for pooled IOLTA accounts?
12. May financial institutions assess service charges on IOLTA accounts?
13. What procedure should be used to remit funds?
14. What if an account does not earn enough interest to cover the financial institution's service charges?
15. Are IOLTA programs a new idea?
16. Does IOLTA bring in new business?
17. Is additional information available?
    

Answers to Frequently Asked Questions

Q1. What is IOLTA?

A. IOLTA stands for “Interest on Lawyer Trust Accounts.” Attorneys routinely receive client funds to be held in trust for future use. If the amount is large or the funds are to be held for a long period of time, the attorney normally places these monies at interest for the benefit of the client. However, in the cases of amounts that are small or are to be held for a short time, it is impractical to establish separate interest-bearing accounts for individual clients. IOLTA provides for these funds being placed at interest with that interest paid to the Maryland Legal Services Corporation Fund (Maryland Code Title 7, Section 408). -back to top-

Q2. Do all lawyers have to establish an IOLTA account?

A. No. All lawyers must be in compliance with Maryland’s IOLTA law, but compliance does not necessarily require having an IOLTA account. Maryland’s mandatory IOLTA program (Maryland Business Occupations Code, Section 10-303) requires all Maryland attorneys holding qualified client funds (i.e., funds that are nominal in amount or to be held for a short period of time) to participate in the program by establishing an IOLTA account IF the interest earned on the account will exceed service charges on the account. A general guideline is that if the escrow account has an average monthly balance below $3,500 and the interest earned on the account will not exceed service charges the attorney should request a waiver of participation pursuant to Maryland Business Occupations Code, Section 10-303(c) and open a non-IOLTA escrow account. -back to top-

Q3. What does the Maryland IOLTA program do?

A. The purpose of the Maryland IOLTA Program is to channel IOLTA funds to nonprofit legal services providers to help expand civil legal services for the poor. The interest from these formerly unproductive accounts is sent to MLSC to be used for grants to programs which provide civil legal services to the poor throughout the state. -back to top-

Q4. Where have these nominal and short-term funds been deposited in the past?

A. Prior to IOLTA, these funds have been held in non-interest bearing checking accounts separate and apart from all other funds belonging to the attorney. Pursuant to Maryland Rules, Chapter 600, “Attorney Trust Accounts,” and Rule 1.5 of the Maryland Rules of Professional Conduct, trust accounts may never be commingled with lawyer’s personal accounts. The lawyer is a fiduciary for these trust account funds and cannot derive any direct or indirect personal benefit from them. See Ethics Opinion 81-84, MSBA Committee on Ethics. Maryland Business Occupations Code Ann., Section 10-301 et seq. also requires attorneys to establish separate trust accounts and creates civil and criminal penalties for commingling them with a lawyer’s own money. -back to top-

Q5. How do financial institutions benefit from participating in the IOLTA program?

A. The program provides an excellent opportunity for financial institutions to work with the legal profession on worthwhile projects for the benefit of those Marylanders unable to afford legal assistance for critical problems. Participation can be effectively described in bank informational brochures or in annual reports to shareholders to let customers know the financial institution is a partner in raising funds to help assure equal access to justice for the poor. Financial institutions can market their IOLTA participation to attract new attorney and law firm customers. The Maryland IOLTA program and its participants have received positive media coverage, and MLSC will be happy to advise participating financial institutions with public information efforts they may undertake. Financial institutions offering interest rates at a certain level will be included on the MLSC/Maryland State Bar Association Honor Roll with direct links to the financial institutions if desired. -back to top-

Q6. What are the steps that a bank needs to take to participate in the IOLTA program?

A. Any bank that is approved to hold client trust funds by the Attorney Grievance Commission should offer IOLTA to its attorney clients. The financial institution should first read this “Guide to the IOLTA Program for Financial Institutions.” Next, complete the “Letter of Agreement” and mail it to MLSC at 15 Charles Plaza, Suite 102, Baltimore, Maryland 21201. If you have not yet been approved to hold client escrow funds, contact the Attorney Grievance Commission at 1.800.492.1660 to receive instructions about how to apply for approval. -back to top-

Q7. How can attorneys participate?

A. The mechanics of establishing an IOLTA account are simple. All that is required is filling out the Notice of New IOLTA Account IOLTA Enrollment Form and submitting it to an approved IOLTA financial institution, at which time the financial institution will establish an IOLTA account, according to its own procedures, with interest payable to MLSC. -back to top-

Q8. Does the mandatory IOLTA statute conflict with Chapter 600 of the Maryland Rules on Attorney Trust Accounts?

A. No. Chapter 600 of the Maryland Rules, entitled “Attorney Trust Accounts,” permits attorney participation in IOLTA and does not conflict with the statute requiring attorneys to deposit appropriate trust funds in IOLTA accounts. Rule 16-608 states:

Any interest paid on funds deposited in an attorney trust account, after deducting services charges and fees of the financial institution, shall be credited and belong to the client or third person whose funds are on deposit during the period interest is earned, except to the extent that interest is paid to the Maryland Legal Services Corporation Fund as authorized by law (emphasis added). -back to top-

Q9. Is there a special title designation for an IOLTA account?

A. No. An IOLTA account is a pooled client trust account, and as such, is subject to Chapter 600 of the Maryland Rules regulating attorney trust accounts. Maryland Rules of Procedure, Rule 16-606 authorizes only three designations for attorney trust accounts - “Attorney Trust Account,” “Attorney Escrow Account,” or “Client’s Funds Account.” This requirement applies to all IOLTA accounts. It is important, however, that IOLTA accounts be identified in such a way as to be easily recognized by financial institution personnel. -back to top-

10. What are the tax consequences?

A. None. The Internal Revenue Service has ruled that there are no tax consequences to the client, the lawyer, or MLSC. Also, there are no IRS reporting requirements for the lawyer, financial institutions or client since all IOLTA accounts will use the tax identification number of MLSC (Tax I.D. number 521266744). -back to top-

Q11. Is it necessary to prepare IRS Form 1099 for pooled IOLTA accounts?

A. No. Since MLSC is a 501(c)(3) charitable organization, the IRS has advised that a financial institution does not need to report interest income generated by a pooled IOLTA account. In fact, in order to minimize administrative problems, a Form 1099 should not be prepared on these accounts. If for some reason it is necessary to prepare the form, MLSC (Tax I.D. number 521266744) should be shown as the recipient of the interest, and the form should be mailed directly to MLSC. The attorney or law firm’s number should never be used. -back to top-

Q12. May financial institutions assess service charges on IOLTA accounts?

A. Yes. Some financial institutions participating in the IOLTA program assess service charges on IOLTA accounts. If a financial institution elects to do so, MLSC will pay for regular and ongoing customary service charges, but will NOT absorb the costs of special charges such as fees for wire transfers, presentation against insufficient funds, certified checks, overdrafts, deposits of dishonored items, and account reconciliation services. Maryland Rule16-610 (b)(1)(D)(iii). Financial institutions must not deduct these charges from the principal in the IOLTA accounts but may charge the attorneys these fees.

Many participating institutions do not assess any service charges in order to simplify their own bookkeeping process and to maximize the income available for MLSC to distribute to legal services programs serving Maryland’s poor population. We encourage financial institutions to help the IOLTA program further its charitable objectives by waiving or reducing fees for the IOLTA accounts.

If the service charges regularly exceed interest generated on the accounts, attorneys may seek a waiver to convert IOLTA accounts to non-interest bearing accounts (Maryland Business Occupations Code, Section 10-303(c)). Otherwise, MLSC must bear the cost of the maintenance of an IOLTA account under these circumstances. Bearing these costs defeats the purpose of the IOLTA program, which is to generate funding for civil legal services to Maryland’s poor. -back to top-

Q13. What procedure should be used to remit funds?

A. Funds are remitted by check or ACH transfer to the MLSC depository bank lockbox on a monthly or quarterly basis. Send checks to Maryland Legal Services Corporation, P.O. Box 758892, Baltimore, Maryland 21275-8892. MLSC encourages financial institutions to remit via ACH transfer. Please contact MLSC at (410) 576-9494 or (800) 492-1340 for account and routing instructions. The remittance report must be mailed to Maryland Legal Services Corporation, 15 Charles Plaza, Baltimore, MD 21201 or sent by email to rparker@mlsc.org.

A remittance report must be prepared showing the name of the lawyer or firm, the account number, the rate of interest applied, gross interest, any service charges assessed, net interest remitted for the account and and principle balance (see Financial Institution Remittance Statement). With each monthly/quarterly remittance, copies of Notice of New IOLTA Account/IOLTA Enrollment Form should be submitted for each new account. If your financial institution maintains IOLTA accounts for more than one attorney or law firm, a single remittance for all accounts may be made at one time. If you elect to do so, you must ensure that the remittance reports applicable to all of the law firms are forwarded together so that the MLSC staff can determine the exact allocations of the lump sum payment among the firms involved. Please contact MLSC at 410.576.9494 or 1.800.492.1340 for any questions about remitting funds or submitting reports. -back to top-

Q14. What if an account does not earn enough interest to cover the financial institution's service charges?

A. If transaction fees or service charges are assessed, they should be deducted from interest earned. If the aggregate interest earned on an institution’s IOLTA accounts is insufficient to cover aggregate fees imposed during any given statement period, MLSC will be responsible for the difference. Under no circumstances may the principal of a lawyer or law firm’s account be used to pay service charges. -back to top-

Q15. Are IOLTA programs a new idea?

A. No. IOLTA programs were first established in Australia and Canada in the late 1960s and early 1970s to generate funds for legal services to the poor. The first IOLTA program in the United States was established in Florida in 1981. Now, all 50 states, the District of Columbia and the U.S. Virgin Islands have adopted IOLTA programs. -back to top-

Q16. Does IOLTA bring in new business?

A. Yes. Studies have shown that IOLTA participation at favorable rates of interest can bring in new attorney business. Attorneys are excellent sources of referral business, including loans, deposits and trust services. Conversely, in Maryland and elsewhere, attorneys may change financial institutions if their institution declines to participate in IOLTA or pay favorable interest rates on IOLTA accounts. -back to top-

Q17. Is additional information available?

A. Yes. The MLSC staff is happy to provide any additional information to financial institutions, as well as to attorneys and firms who are required to participate. Contact MLSC at 15 Charles Plaza, Suite 102, Baltimore, Maryland 21201. The telephone numbers are: 410.576.9494 or 1.800.492.1340. -back to top-