Practice Management

What Happens to Your IOLTA Account If Your Bank Fails?

Right now there are plenty of lawyers across the nation who are jittery about their client trust funds. With the banking industry looking for another bail-out, and a couple of failures dotting the national landscape, my peers from other state bars are receiving the same steady trickle of queries I am regarding what is insured and what is not. It’s not as simple as it seems, though. A lot has to do with what account your client may have at the same financial institution, what the name on the account is, and what the balance on the account is. In addition, your record-keeping practices can have a positive or highly negative impact on whether all of your IOLTA funds are lumped together as one total, or whether the insurable total is applicable to each individual client’s funds.

Following is some information you may find handy to help you determine whether you need to take additional action, seek information from your clients, or just relax. One thing seems sure — you will probably need to change your intake procedures to ascertain whether clients with cash assets have any accounts at the same financial institution which houses your IOLTA account.

FDIC INSURANCE

For the purpose of FDIC insurance, IOLTA accounts are fiduciary accounts. As such, EACH CLIENT is insured as if the funds were deposited directly by the principal (the client), provided certain requirements are met. Generally, this means each client will be insured up to $100,000 if they have no other deposits held in the same name at that institution. This, obviously, makes a huge difference for the vast majority of IOLTA accounts and is important to point out to nervous attorneys. Visit the FDIC website, which specifically identifies IOLTA accounts for this treatment and provides the other (fairly straightforward) requirements to obtain the increased insurance levels.

BANK SAFETY

The fact that FDIC insurance applies to each client is good. However, there are still a large number of IOLTA accounts that contain individual client funds that exceed $100,000. When possible, the easiest way to increase FDIC insurance is to spread the funds across multiple banks. And in all cases, bank selection is key. A good resource available to determine the safety and soundness of any institution in the country is Veribanc, a bank rating company. Veribanc rates every institution in the US on a quarterly basis using proven metrics with a solid track record over 25 years.

CDARS

CDARS® is the Certificate of Deposit Account Registry Service®. And it’s the most convenient way to enjoy full FDIC insurance on deposits of up to $50 million. With CDARS, you sign one agreement with a participating local bank or other financial institution of your choice, earn one interest rate, and receive one regular statement. More information may be obtained at their web site. I’m not sure that a CDARS account can be an IOLTA account. But when you need to have a very large sum held in trust for one client, PA Rules indicate that you would not put that into IOLTA anyway — in that instance the client should earn the interest by having the money deposited into a separate interest-bearing trust account.

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Full post as published by Law Practice Management on November 21, 2008 (boomark / email).