Starting on Jan. 1, lawyers need to take extra steps to protect clients’ money in their Interest on Lawyers Trust Accounts (IOLTA). Lawyers holding more than $250,000 for a client in such an account need to research the bank to ensure it won’t fail or consider depositing the cash in multiple IOLTA accounts at separate banks.
For the past two years, the Federal Deposit Insurance Corp. (FDIC) has insured an unlimited amount of money in IOLTA accounts, but starting in the New Year, the FDIC will only insure up to $250,000 per client per bank, says Betty Balli Torres, executive director of the Texas Access to Justice Foundation, the administrator of the IOLTA program in Texas.
“You have a fiduciary duty to take care of the client’s money. Now, you have to look at — if you have an excess of that 250 — what it is you are going to do to protect the client’s money?” says Balli Torres, who served as president of the National Association of IOLTA Programs in 2011 and helped lobby Congress for the unlimited FDIC coverage.
She explains that the Dodd-Frank Wall Street Reform and Consumer Protection Act included a provision that allowed unlimited FDIC protection for IOLTA accounts, but the provision expires Dec. 31. The accounts are now subject to the same $250,000 insurance cap as other types of bank accounts.
For example, if a lawyer held $300,000 in an IOLTA account for a client and the bank failed, the federal government would only insure up to the $250,000 cap, and the client would lose $50,000.
“What lawyers will do is make sure the bank is in good position to minimize any damage,” she says. If the lawyer deposits $300,000, he may not be concerned if he knows it’s a good bank and he knows he’ll withdraw the money shortly thereafter, she says.
Another option is to keep multiple IOLTA accounts at separate banks: Deposit $249,000 in one account, and deposit the rest at another bank, says Balli Torres.
“For many firms, they are already set up that way in the past,” she says.
She notes that, before passage of the Dodd-Frank Act, the FDIC only insured $100,000, but the act increased the cap to $250,000.
“More money is protected is the bottom line,” Balli Torres says. “We had hoped a bill would pass that would keep it unlimited, but it doesn’t look like it’s going to happen. So, now, we are in a position we want to educate lawyers to let them know this is happening.”
-- Angela Morris