Changes to Deposit Insurance Coverage for IOLTAs
With Congress failing to take action to extend unlimited coverage, as of Jan. 1, 2013, FDIC insurance available to IOLTA accounts is limited to the standard amount of $250,000 per owner of the funds (client), per financial institution, assuming that the account is properly designated as a trust account and proper accounting of each client’s funds is maintained.
Since November 2008, a series of temporary federal laws have operated to provide unlimited FDIC deposit insurance coverage for most IOLTA accounts. For the past two years, IOLTA and non-interest-bearing accounts enjoyed unlimited FDIC insurance coverage under Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. That provision was effective for two years with a sunset date of Dec. 31, 2012.
Now, funds deposited in IOLTAs are no longer insured under the Dodd-Frank Deposit provision. However, because IOLTAs are fiduciary accounts, they generally qualify for “pass-through” coverage (the insurance coverage passes through the fiduciary-depositor to the client-owner’s funds) on a per-client basis. FDIC regulations provide that deposit accounts owned by one party but held in a fiduciary capacity by another party are eligible for pass-through deposit insurance coverage if:
To meet the FDIC requirements, a lawyer should ensure that:
If an IOLTA does qualify for pass-through coverage as a fiduciary account, then each separate client for whom a law firm holds funds in an IOLTA may be insured up to $250,000. For example, if a law firm maintains an IOLTA with $250,000 attributable to Client A, $150,000 to Client B, and $75,000 to Client C, the account would be fully insured if the IOLTA meets the requirements for pass-through coverage. However, if the clients have other funds at the same institution, those funds would be added to their respective shares of the funds in the IOLTA for insurance coverage purposes, with the aggregate balance insured up to $250,000. For example, if a law firm maintains an IOLTA with $150,000 attributable to Client A, and Client A has $200,000 deposited in a certificate of deposit at the same FDIC-insured depository institution, then Client A’s funds would only be insured for up to $250,000 and uninsured for the remaining balance of $100,000.
The Washington Rules of Professional Conduct (RPC) and Rules for Enforcement of Lawyer Conduct (ELC) require a lawyer to hold client or third party funds in a trust account at an FDIC or National Credit Union Administration (NCUA) insured institution. Usually, such funds are held in a pooled interest-bearing trust account known as an IOLTA account, with interest paid to the Legal Foundation of Washington. If the client or third-person funds will produce a positive net return, the funds must be placed in a separate interest-bearing individual trust account (or pooled interest-bearing trust account) with interest paid to the particular client, unless the client or third person requests that the funds be deposited in an IOLTA account.
While the RPCs and ELCs require all client or third-person funds be held in an FDIC insured account, the rule does not specifically require all funds in the account be within the FDIC insurance limits. The rules do require, however, that when selecting a bank or other institution for trust account purposes, a lawyer must do so “in the exercise of ordinary prudence.” Lawyers should also note credit unions have unique issues regarding insurability. In some cases, NCUA rules may require that the individual clients for whom the lawyer is holding funds in trust belong to the credit union in order to qualify for the insurance coverage. Lawyers should consider discussing insurance coverage matters with a credit union representative.
Even though applicable ethics rules do not require that all of a client’s funds on deposit in a trust account be insured within the $250,000 FDIC insurance-coverage limits, as a matter of due diligence a lawyer should consider taking precautions, for example:
If you have questions, please contact the WSBA Professional Responsibility Counsel via the Ethics Line, 206.727.8284 or the WSBA Audit Manager, 206.727.8242.
Useful links on the Washington Rules of Professional Conduct, managing client trust accounts, and FDIC insurance coverage:
If you have questions about these changes, please contact:
WSBA Ethics Line
WSBA Audit Manager
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