These questions and answers provide information to banks about establishing and maintaining accounts in the Interest on Lawyer Trust Account Program.
Answers to IOLTA Questions
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 individual 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. In this case, funds are placed in an IOLTA account, with interest earned on the account paid to the Maryland Legal Services Corporation Fund (MLSC), but it bears MLSC’s tax identification number (52-1266744). (Maryland Code, Human Services Article Title 11, Section 404).
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 funds that will not be held for long enough to generate net interest for the individual client) to establish an IOLTA account. Thus, not every lawyer’s trust account will be an IOLTA account.
For example, if the deposit is large enough and/or will be held long enough to generate net interest for the client, the attorney should hold those trust funds in a separate interest-bearing account for the individual client. Also, a lawyer holding IOLTA-eligible funds may request a waiver from participation in the IOLTA program if the bank assesses allowable reasonable fees on the account and the lawyer believes that such fees will consistently exceed interest earned on the account (Maryland Business Occupations Code, Section 10-303(c)). A general guideline is that if the escrow account has an average monthly balance below $3,500 and the bank assesses fees against IOLTA interest, the attorney should request a waiver of participation and instead open a pooled non-interest-bearing escrow account to hold these nominal and short-term funds. Lawyers and law firms — not financial institutions — have the responsibility for deciding which accounts they must have and what is deposited in each.
A. Yes. Participation in IOLTA is voluntary for financial institutions, but a lawyer cannot keep attorney escrow funds in financial institutions unless the financial institution has been approved by the Attorney Grievance Commission to hold such funds pursuant to Maryland Rules of Procedure, Title 19, Chapter 400, governing attorney trust accounts. Banks, credit unions, trust companies, savings banks, or savings and loan associations authorized by law to do business in Maryland, in the District of Columbia, or a state contiguous to Maryland, which are insured by an agency or instrumentality of the federal government may apply to become an “approved financial institution.” (Rule 19-402(g)). The Rule requires, among other things, that participating financial institutions pay IOLTA accounts no less than the highest rate generally available to the financial institution’s own non-IOLTA customers when the IOLTA account meets the same minimum balance or other eligibility requirements. (Rule 19-411(b)(1)(D).
A. A bank must be approved to hold client trust funds by the Attorney Grievance Commission in order to participate in the IOLTA program. If your financial institution has not yet been approved to hold escrow funds, you must submit a completed “Financial Institution Compliance Agreement,” along with the “IOLTA Addendum.” The IOLTA Addendum serves to inform us as to how your financial institution will implement the interest rate provisions of the Rule. It will be carefully reviewed by MLSC along with any additional supporting documentation that may be required, depending on the implementation method you choose. Once MLSC has certified your financial institution’s compliance with IOLTA, it will submit your application to the Maryland Attorney Grievance Commission for approval. Please mail all forms to MLSC at Charles Towers, 15 Charles Plaza, Suite 102, Baltimore, Maryland 21201-3994. Once you are approved, a fully-executed copy of the Financial Institution Compliance Agreement will be mailed to you.
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 that time, the financial institution will establish an IOLTA account, according to its own procedures, with interest payable to MLSC.
A. Maryland Rules of Procedure, Section 19-406 authorizes only three designations for attorney trust accounts – “Attorney Trust Account,” “Attorney Escrow Account,” or “Clients’ 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.
A. Account funds must be subject to withdrawal or transfer upon request and without delay, or as soon as permitted by law. The rate of interest payable on the account shall not be less than the rate paid by the financial institution to its regular depositors with similarly situated accounts. Account service charges assessed against IOLTA interest, if any, must fall within the definition of “allowable reasonable fees” defined in MD Rule 19-411. See the Guide, page 5 for additional details on interest rates and service charges.
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 52-1266744).
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 should be shown as the recipient of the interest (Tax I.D. number 52-1266744), and the form should be mailed directly to MLSC. The attorney or law firm’s Tax I.D. number should never be used.
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. Maryland’s program, created in 1982, was the fourth IOLTA program in the nation. Now, all 50 states, the District of Columbia and the U.S. Virgin Islands have adopted IOLTA programs.
A. Yes. Attorneys holding IOLTA-eligible funds are required to establish IOLTA accounts and will seek banks offering this product. Also, experience has shown that financial institution participation in Maryland’s IOLTA Honor Roll program attracts new attorney business. Attorneys are excellent sources of referral business, including loans, deposits and trust services.
A. The IOLTA Honor Roll is a joint program of MLSC and the Maryland State Bar Association to encourage financial institutions to pay premium rates on IOLTA accounts. A financial institution is not required to join the Honor Roll, but such participation is strongly encouraged to assist in IOLTA’s charitable purposes (Honor Roll requirements and enrollment form). Honor Roll members are actively promoted to attorney members in a variety of mediums and forums, and participation is an excellent way for financial institutions to attract new attorney and law firm clients. Additionally, MLSC will provide a Community Reinvestment Act (CRA) statement verifying your participation in this important program, and provide other public recognition and promotion as appropriate.
A. Yes. More information along with downloadable forms are available at on this site. Also, the MLSC staff is happy to provide any additional information to financial institutions, as well as to attorneys and firms. Contact MLSC at Charles Towers, 15 Charles Plaza, Suite 102, Baltimore, Maryland 21201-3994. The telephone numbers are: 410-576-9494 or 800-492-1340. Inquiries may also be sent by email to iolta [at] mlsc.org.