IOLTA for Financial Institutions

A. No. All lawyers must comply with Maryland’s IOLTA law, but compliance does not necessarily require having an IOLTA account. Maryland’s mandatory IOLTA program 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. 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 interest 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 Letter of Agreement with IOLTA Addendum. The IOLTA Addendum informs us 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. Once you are approved, a fully executed copy of the Financial Institution Compliance Agreement will be sent to you.

A: The mechanics of establishing an IOLTA account are simple. All that is required is filling out the New IOLTA Account Enrollment for Attorneys 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. The financial institution will submit a copy of the enrollment form to MLSC with its next remittance report.

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 (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 ID number 52-1266744), and the form should be mailed directly to MLSC. The attorney or law firm’s tax ID number should never be used.

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 members are actively promoted to attorneys in a variety of ways, 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 statement verifying your participation in this important program and provide other public recognition and promotion as appropriate. Learn more about the Honor Roll.