These questions and answers provide general IOLTA information.
Answers to General IOLTA Questions
A. 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 customarily places these moneys at interest for the benefit of the client. However, in the case 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 IOLTA, attorneys place these nominal and short-term funds into a commingled interest-bearing account. Financial institutions send the interest generated on IOLTA accounts to the Maryland Legal Services Corporation Fund (Maryland Code Title 7, Section 408) for grants to programs which provide civil legal services to the poor.
A. They have been held in non-interest-bearing checking accounts separate and apart from all other funds belonging to the lawyer. Pursuant to Maryland Rules, Title 19 “Attorneys”, Chapter 300 “Maryland Attorneys’ Rules of Professional Conduct” and Chapter 400, “Attorney Trust Accounts,” trust accounts may never be commingled with the 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.
A. Lawyers continue to exercise their discretion in determining whether a given client’s trust deposit is of sufficient size or will be held for sufficient duration to justify the cost of being individually invested for a client. The IOLTA program does not impose any new decisional burden upon attorneys.
Funds are placed in an IOLTA account only when they are nominal in amount, or being held for a short period of time. If the funds are not placed in an IOLTA account, they shall be otherwise deposited or invested, separate from the attorney’s own accounts, as directed by the client or determined by the attorney.
A Maryland State Bar Association study estimated that it would cost at least $50 to create and administer a separate client interest-bearing account. Therefore, $50 serves as a benchmark for the lawyer to place the client funds into an IOLTA account when “the interest that it would earn: (1) would not exceed $50; or (2) would exceed $50, but would not cover the cost of administering an interest bearing account on which interest is payable to the client or beneficial owner.” MD. Bus. Occ. Code Ann. §10-303.
A. Most lawyers will see no change in their banking relationships. Virtually all Maryland banks and savings and loan institutions that offer commercial accounts to their attorney customers provide IOLTA.
A. IOLTA has no effect on clients. When no interest is earned on funds in attorney trust accounts which are nominal or short-term, no one benefits except the financial institutions. The ABA’s Standing Committee on Ethics and Professional Responsibility, in Formal Opinion 348 (1981) approving attorney participation in state IOLTA programs, found:
“That the practical effect is to shift a part of the economic benefit from depository institutions to tax-exempt organizations. There is no economic injury to any client. The program creates income where there was none before.”
A. The Internal Revenue Service approved IOLTA in Revenue Ruling 81-209. There are no tax consequences for either the lawyer or the client if IRS requirements are met. The IRS stated that the IOLTA program must apply to the nominal and short-term funds of all clients of a participating lawyer. If an individual could elect not to participate in the program, an “assignment of income” problem would arise and taxable income result. Under the IOLTA requirement of Maryland law, no tax liability or tax benefits are created by the program for you or your client. Since MLSC is the recipient of the interest, your financial institution is instructed to use the MLSC federal ID number on your IOLTA account.
A. While some lawyers may prefer to inform their clients about the IOLTA program, such notification is not required. State law requires attorneys to place nominal and short-term client trust funds into an IOLTA.
A. No. Chapter 400 of Title 19 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 19-409 states:
Any interest paid on funds deposited in an attorney trust account, after deducting service 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 the interest is earned, except to the extent that interest is paid to the Maryland Legal Services Corporation as authorized by law (emphasis added).
A. No. Maryland Business Occupations Code Ann., Section 10-303 (c) permits the Administrative Office of the Courts, in consultation with the Maryland Legal Services Corporation, to excuse an attorney or law firm from participating “that demonstrates that it will cost the Maryland Legal Services Corporation Fund more in service charges to open and maintain an attorney trust account for the purposes of the Maryland Legal Services Corporation Fund than will be generated in interest by the attorney trust account.”
While the charges vary between participating financial institutions, in most instances an attorney who does not maintain an average monthly balance of at least $3,500 in a trust account will not be required to participate. The Annual IOLTA Compliance form permits attorneys to request a waiver from the IOLTA requirement by affirming that their combined trust account balance does not exceed an average monthly balance of at least $3,500 (see Compliance Question 4). In addition, an IOLTA account may be terminated by the attorney if the balance drops below $3,500 and is reasonably expected to remain so.
A. No. The burden for attorneys of accounting for client funds remains the same; separate attorney trust accounts are already mandated by statute and rule. No income to clients or attorneys would be created, as confirmed by Internal Revenue Service rulings. The IOLTA statute simply requires that some attorney trust accounts be redesignated as IOLTA accounts, with a simple notice and sign-up procedure taking about ten minutes.
Your bank automatically sends the interest directly to the Maryland Legal Services Corporation. Your client escrow account statements will remain the same. Upon request, MLSC will provide you with an annual informational statement of the interest your account generated for legal services.
A. The Maryland Court of Appeals adopted Maryland Rule 19-409, effective January 1, 2002, requiring all Maryland-admitted attorneys to report annually on their compliance with the IOLTA program. The Maryland Court of Appeals will issue the Annual IOLTA Compliance Report, which consists of a simple, one-page form, to be completed and returned as directed on the form by every Maryland attorney. The Compliance form may be printed from this website and mailed to the address provided on the form or completed online at the judiciary website at www.mdcourts.gov. There are no additional reports or administrative requirements mandated by Maryland’s IOLTA program.
A. MLSC will pay for regular and ongoing customary service charges relating to the operation of the IOLTA account, but will not absorb the costs of special charges covered in Maryland Rule 19-411(b)(1)(D), which states that financial institutions shall “not deduct from interest on the (IOLTA) account that otherwise would be payable to the Maryland Legal Services Corporation any fees for wire transfers, presentations against insufficient funds, certified checks, overdrafts, deposits for dishonored items, and account reconciliation services.” Financial institutions must not deduct these charges from the principal in the IOLTA accounts but may charge the attorneys these fees.
Attorneys should convert IOLTA accounts to non-interest bearing accounts if their financial institution’s service charges regularly exceed interest generated on the accounts (Maryland Business Occupations Code, Section 10-303(c)). 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.
Q13. What is the Maryland Affordable Housing Trust (MAHT) program, and how does it affect IOLTA?
A. During the 1992 Session, the Maryland General Assembly enacted a new program, modeled on IOLTA, to help fund affordable housing in Maryland. The Maryland Affordable Housing Trust (MAHT) statute requires real estate title companies to place their small or short-term client trust funds which are held in escrow into an MAHT account generating interest for affordable housing. MAHT is administered by the Maryland Department of Housing and Community Development.
In some instances, attorneys who maintain private real estate law practices and operate a title company may have a choice whether to place a client escrow deposit into their IOLTA or MAHT account. Whenever possible, MLSC encourages attorneys to deposit all eligible trust funds into their IOLTA to help provide critically needed legal services to Maryland’s poor, in keeping with an attorney’s obligations under Rule 6.1 of the Maryland Rules of Professional Conduct.
A. The process of establishing an IOLTA account is simple, and once it is done no further time or effort on your part is required. Fill out the Notice of New IOLTA Account form and submit it to an approved IOLTA financial institution. That is all you have to do! MLSC and your financial institution will do the rest.