IOLTA Trust Accounts
- What
is the Interest on Lawyer Trust Accounts (IOLTA) Program?
- Who
decides where IOLTA money goes?
- Why
is the program needed?
- Does the program operate successfully elsewhere?
- Is the program voluntary?
- How
can financial institutions help in the IOLTA program?
- Will
financial institutions have to offer IOLTA accounts free of charge?
- What if a financial institution wants to participate in the IOLTA
program, but none of its attorney depositors have yet enrolled?
- How
often must interest be paid?
- What
reporting requirements are there?
- What are the tax consequences of participation in the program?
- How can a financial institution ensure that the interest is not
included in the gross income of the attorney or client?
- Is
it necessary to prepare an IRS Form 1099?
- What
benefits are there for a financial institution to participate in
IOLTA?
Q: What is the Interest on Lawyer Trust Accounts (IOLTA) Program?
A: Attorneys routinely hold funds in trust for clients to pay
costs related to legal services like court filings, depositions
and business transactions. If these funds are large in amount or
held for a long period of time, the attorney customarily deposits
these monies in an interest-bearing account for the benefit of
the client. However, for those deposits which are nominal or short-term,
it is impractical to open a single account and collect interest
for an individual client. Instead, such funds are typically placed
in an aggregate account, and no interest is collected on it.
In an IOLTA program, interest from collective, short-term trust
accounts is paid to a non-profit foundation for programs like providing
legal services
to the poor. To the extent that interest on any single client’s deposit
could be made available for the benefit of that client, the program does not
alter long-standing trust account practices within the legal profession which
acknowledge the fiduciary option.
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Q: Who decides where IOLTA money goes?
A: The Wyoming
State Bar Foundation’s board of directors
grants these funds to projects which qualify under guidelines set
by the Wyoming Supreme Court. Those guidelines specify that the
money must be granted to three types of charitable programs: 1)
providing legal services to the poor who would otherwise be unable
to obtain legal assistance; 2) providing public education projects
which promote a knowledge and awareness of the law; and 3) providing
projects to improve the administration of justice. The rules also
provide that income may be used to provide for reasonable costs
of administration of the Wyoming IOLTA program.
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Q: Why is the program needed? A: Many
of Wyoming’s needy citizens do not receive civil
legal assistance due to inadequate government funding for legal
aide to the poor and lack of resources to meet those deficiencies
with volunteer pro bono panels. Congress has also substantially
reduced funds for student loans and administration of justice projects.
Participation in the IOLTA program presents an excellent opportunity
for additional public service by Wyoming’s legal and financial
communities.
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Q: Does the program operate successfully elsewhere? A: Wyoming was one of the last states to adopt the IOLTA program,
although the concept has enjoyed years of success in a number of
British and Canadian jurisdictions. Similar plans have now been
established in 50 other states. In the first three years over $13
million was raised in the U.S. through these programs. Since 1989,
the Wyoming State Bar Foundation has awarded over $700,000 to agencies
and programs in Wyoming which directly benefit Wyoming citizens.
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Q: Is the program voluntary? A: Yes, it is voluntary.
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Q: How can financial institutions help in the IOLTA program? A: First, financial
institutions must decide to participate in the Wyoming IOLTA
program. Second, financial institutions can waive
minimum balance requirements for these account since the funds
will be used only for public purposes. The financial institutions
that assess fees in other estates have set nominal amounts, usually
to pay for the cost of the cashier’s check.
There are no legal barriers to banks or savings and loans offering the program.
The program was established by the Wyoming Supreme Court. It has been approved
by the Federal Reserve Boards, the Federal Deposit Insurance Corporation and
the Federal Home Loan Bank Board. The IRS has also ruled that the Wyoming State
Bar Foundation may receive and distribute these funds as a 501 (c) (3) nonprofit
corporation.
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Q: Will financial institutions have to offer IOLTA accounts free
of charge? A: No. Financial institutions participating in the IOLTA program
may assess a reasonable charge for the costs of additional accounting
procedures and remitting interest to the Wyoming State Bar Foundation.
These charges should be deducted from each remittance and should
be itemized on the IOLTA remittance report form. In no instance
should the principal of an attorney’s IOLTA account be
used to pay service fees or other charges. If the account does
not earn enough interest to cover the service charges, you should
bill the Wyoming State Bar Foundation. By not assessing such
charges, however, an institution can eliminate additional bookkeeping
for its staff and increase the total amount available for charitable
purposes.
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Q: What if a financial institution wants to participate in the
IOLTA program, but none of its attorney depositors have yet enrolled? A: The financial institution should contact the Wyoming State
Bar Foundation. The financial institution will be listed in all
publications and press releases as a participating member of the
IOLTA program.
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Q: How often must interest be paid? A: Interest
should be calculated on the average monthly balance in the account
or as
otherwise computed in accordance with your
institution’s standard accounting practice. Interest on the
account must be paid at least quarterly to the Wyoming State Bar
Foundation by the financial institution.
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Q: What reporting requirements are there? A: Financial
institutions are responsible for transmitting interest income
information
to the Bar Foundation. The information may be
provided by one of two methods. You may submit a copy of the account’s
routine statement, or you may complete an interest remittance report.
A copy of the interest remittance report will be included with
each lawyer’s enrollment form for the financial institution’s
use. Either method should include the name of the participating
lawyer or law firm for whom the remittance is sent, the account
number, the amount of interest generated on the accounts, and the
amount deducted for any fees.
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Q: What are the tax consequences of participation in the program? A: There are none to the client or the attorney. The Wyoming State
Bar Foundation which receives the interest from participating trust
accounts is exempt from federal income tax.
The Internal Revenue Service has stated in numerous Revenue Rulings that the
interest earned on nominal and short-term client advances which is paid over
to a bar foundation pursuant to a court-established interest on trust accounts
program is not included in the gross income of any client. Tax counsel for
IOLTA foundations have also interpreted these ruling to apply to every IOLTA
program.
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Q: How can a financial institution ensure that the interest is
not included in the gross income of the attorney or client? A: When IOLTA
accounts are opened or converted, the name of the account should
be listed
on your internal records as “Wyoming
State Bar Foundation IOLTA Trust Account of (lawyer or law firm).” The
Internal Revenue Service matches this TIN with the payee, and it
does this by checking if the first four letter of the payee’s
name matches the TIN. Therefore, your records should reflect the
Foundation as payee for reporting purposes. This requirement does
not carry over to printed checks, and you should not issue new
checks to accounts existing prior to IOLTA enrollment solely to
print the name of the Wyoming State Bar Foundation on the face
of the check. It is sufficient that financial institution records
show the Bar Foundation as payee.
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Q: Is it necessary to prepare an IRS Form 1099? A: No. Since the Wyoming State Bar Foundation is a 501 (c) (3)
charitable organization, you do not need to report interest income
on IRS Form 1099. Section 6049 of the Internal Revenue Code specially
exempts 501 (c) (3) corporations from income tax. In fact, a Form
1099 should not be prepared unless it is more convenient for your
institution to do so. In that case, it should be mailed to the
Bar Foundation.
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Q: What benefits are there for a financial institution to participate
in IOLTA? A: The
program provides an excellent opportunity for financial institutions
to work with the legal profession in an interprofessional
endeavor which provides services for the benefit of your community.
Participation can be effectively described in informational brochures
or in annual reports to shareholders to let customers know your
financial institution is a partner is raising funds to help assure
legal access to our judicial system for the poor and other law-related
programs. IOLTA participation can and should be described in
annual Community Reinvestment Act statements. Some financial
institutions are aggressively marketing their IOLTA participation
and using is as an opportunity to develop new customers. IOLTA
participation has resulted in positive coverage by local and
statewide media and legal periodicals.
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