IOLTA for Lawyers

A: Lawyers 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. 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: 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.”

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 account.

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: No. Maryland Business Occupations Code Ann., Section 10-303 (c) permits the Administrative Office of the Courts, in consultation with MLSC, to excuse an attorney or law firm from participating if it “demonstrates that it will cost the MLSC Fund more in service charges to open and maintain an attorney trust account for the purposes of the MLSC 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. 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 re-designated as IOLTA accounts, with a simple notice and sign-up procedure taking about ten minutes.

Your bank automatically sends the interest directly to MLSC. 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. IOLTA compliance reporting must be completed online through the Attorney Information System (AIS). You must first register with AIS in order to complete the online reports. 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.

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 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 title companies 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 low-income Marylanders, in keeping with an attorney’s obligations under Rule 6.1 of the Maryland Rules of Professional Conduct.

A: Under Commercial Law Article §§17-310 through 17-312 and Maryland Rule 19-414, unclaimed funds are to be sent to the Unclaimed Property Fund at the Maryland Comptroller's Office. Contact 410-767-1700 or UPHOLDER@marylandtaxes.gov for more information. Also see Maryland Rule 19-414 for definitions and duties. 

A: No. Financial institutions that are members of the IOLTA Honor Roll help support legal aid to Maryland’s low-income population by paying premium rates on IOLTA accounts. While we strongly encourage attorneys to use Honor Roll financial institutions and help support the provision of critically needed legal aid to those Marylanders unable to afford such services, you are not required to do so.

A: The FDIC treats IOLTA accounts as Fiduciary accounts, meaning that, as long as certain requirements (including the account name indicating it is an IOLTA/trust account and other record-keeping) are met, the account is insured per client up to the standard FDIC limit of $250,000. Please see https://www.fdic.gov/deposit/diguidebankers/documents/fiduciary-accounts.pdf for more information. Please note that, since the $250,000 limit is an aggregate, if a particular client also has a personal account at the financial institution where you hold your IOLTA account, their personal account will count toward that individual client’s $250,000 limit.