What is IOLTA?
"Interest on Lawyers' Trust Accounts," or IOLTA, is a program mandated by the Supreme Judicial Court. It requires lawyers and law firms to establish interest-bearing accounts for client deposits which are nominal in amount or expected to be short-term. First approved as a voluntary program in 1985, the SJC adopted a comprehensive IOLTA program in 1989 requiring all eligible lawyers to participate.
How does it work?
Under the Supreme Judicial Court's Interest on Lawyers' Trust Accounts (IOLTA) program, lawyers holding funds on behalf of a client must place the funds either in an account which pays interest to the client or in an IOLTA account. An IOLTA account may be selected if the funds are relatively modest, or will be held by the lawyer for only a short time. In either of these situations, the interest that might be earned for the client would be less than the cost of establishing and maintaining an account for the benefit of the client.
Although each IOLTA deposit earns a very small amount of interest, the pooled IOLTA accounts accumulate enough interest to make a substantial contribution to improving the administration of justice and to providing civil legal services to individuals who cannot afford to hire a lawyer. In fiscal year 1999, interest on IOLTA accounts totaled more than $10.6 million.
The IOLTA program is administered by the Massachusetts IOLTA Committee, appointed by the Justices of the SJC. The committee distributes all IOLTA interest to three charitable entities: the Boston Bar Foundation, the Massachusetts Bar Foundation, and the Massachusetts Legal Assistance Corporation. These three entities use the IOLTA funds to make grants to local civil legal services programs that employ staff attorneys, paralegals, volunteer lawyers, law students, and community advocates to represent clients in family, housing, consumer, employment, education, disability, and similar legal matters. Grants to improve the administration of justice include such efforts as alternative dispute resolution projects and legal clinics.
Where does the money go?
Interest earned from IOLTA accounts is used to support law-related public service programs. Specifically, IOLTA income helps fund improvements in the administration of justice and delivery of legal service to low-income clients. IOLTA funds are received by the IOLTA Committee and then distributed among three charitable entities: The Boston Bar Foundation, The Massachusetts Bar Foundation, and The Massachusetts Legal Assistance Corporation. These entities distribute the funds they receive to fund legal aid offices, organizations, and projects.
The Boston Bar Foundation is governed by a board of trustees composed of fifteen members.
The Massachusetts Bar Foundation also is governed by a fifteen-member board of trustees. Both bar foundations have along tradition of supporting a variety of public service activities. They have directed the IOLTA funds they receive toward such activities as alternative dispute resolution projects, lawyer referral programs and legal clinics, the development of educational and informational brochures for special needs populations, as well as direct support of legal services programs throughout the Commonwealth.
The Massachusetts Legal Assistance Corporations was established in 1983 by the Legislature to provide funds for civil legal assistance to poor people throughout Massachusetts. It is governed by an eleven member board of directors approved by the SJC and distributes, in addition to IOLTA funds, state appropriated funds to legal service providers.
Is this program unique to Massachusetts?
Not at all. The first IOLTA program in America was established in Florida in 1981. Since then, all 50 states and the District of Columbia have adopted IOLTA programs.
Can lawyers continue to invest client fund monies on behalf of clients?
Absolutely. Whenever possible, lawyers should continue to invest client funds. The only change IOLTA makes is to require that those funds which cannot be invested on behalf of clients be placed in interest-bearing accounts, with the interest paid to the IOLTA Committee which distributes it to the three charitable entities. Large short-term deposits or modest amounts to be held for a significant period of time will continue to be invested in interest-bearing accounts for the client's benefit. The decision as to which account to use rests, as always, in the sound discretion of the lawyer.
Does IOLTA place any added administrative burdens on lawyers?
Enrollment in IOLTA consists of instructing your financial institution to open a NOW account, or other interest-bearing checking account. Lawyers and law firms are responsible for complying with any of their institution's minimum balance and fee requirements. Many banks have waived fees on IOLTA accounts. Please contact the IOLTA Committee for a list of financial institutions in your area that waive service fees. All interest record-keeping is done by the financial institution. The lawyer or law firm receives a periodic report from the financial institution summarizing the amount of interest generated and paid to the charity.
What guidelines do we follow in dealing with client funds accounts?
All client funds received must be segregated from lawyer funds, except funds to comply with any minimum balance requirements or bank charges. Whenever appropriate, sums large enough to generate net income to individual clients should be placed in interest-bearing accounts benefiting the client unless the client specifically directs otherwise.
What obligations do financial institutions have regarding IOLTA?
Once an IOLTA account has been opened, the financial institution is responsible for transmitting interest income to the IOLTA Committee at least quarterly, along with a statement showing the name of the lawyers or law firm that deposited the funds. Additionally, a report outlining the amount paid to the IOLTA Committee, the rate of interest applied and the method by which it was computed will be transmitted to the lawyer or law firm, and to the IOLTA Committee.
What do I do if my bank does not offer IOLTA accounts?
The vast majority of Massachusetts banks do offer IOLTA accounts to their customers. Many, in fact, have recognized the important public purpose served by the IOLTA program and have waived fees on these accounts. If your bank is unwilling to provide you with an IOLTA account and it is not practical for you to use another bank for this purpose, please contact the IOLTA Committee, which will work with your bank to attempt to resolve the problem.
Must all lawyers establish IOLTA accounts?
There are two major categories for exemptions: First, the program excludes lawyers who do not hold clients' funds because they are government employees, are employed in a legal field but do not hold themselves out as lawyers, are employed in a non-legal field, are out of state lawyers, or do not engage in the private practice of law. Second, excluded from the Court's order are accounts in the name of an attorney in a lending bank used exclusively for depositing and disbursing funds in connection with that bank's loan transactions. Otherwise, the Court's rule require all Massachusetts lawyers and law firms to maintain an IOLTA account. Call the IOLTA Committee if you are unsure of whether you are exempt at (617) 723-9093.
Who pays taxes on the interest earned on IOLTA accounts?
No one will pay any taxes on this money. The IRS has ruled that the interest generated on these accounts is not taxable to the lawyer, law firm, or client. Any lawyers who receives a 1099 for interest earned on the IOLTA account should contact the IOLTA Committee immediately to reconcile the problem. Financial institutions are instructed to report the income to the IRS as received by the IOLTA Committee. Since the IOLTA Committee is a non-profit organization, they will not pay tax on your interest.
Must clients receive notice of our enrollment in the IOLTA program?
No notice is required. Nor do clients have any decision to make as to the destination of funds which cannot be placed at interest for them. However, discussions with clients will continue to include matters traditionally raised in a lawyer's determination of whether a client's deposit justifies placement in and interest-bearing account. There is no prohibition against a lawyer or firm advising all clients of the existence or purposes of IOLTA.