Crisis Averted! - IOLTA Accounts Now Fully Covered
Published on November 24, 2008
On Friday the FDIC issued a final rule which now classifies IOLTA accounts as non-interest bearing accounts for the purposes of the Transaction Account Guarantee Program. So, why is this important to Alabama lawyers?
Recently, a few very smart lawyers who had taken the time to think about it realized that under the interim rules the FDIC originally issued, the confluence of the banking crisis and Rule 1.15 of the Alabama Rules of Professional Conduct, requiring IOLTA accounts, had put them between the proverbial rock and hard place.
The interim FDIC rule excluded IOLTA accounts from the unlimited FDIC guarantee available to “non-interest bearing transaction accounts,” leaving Alabama lawyers with a dilemma: follow the requirements of Rule 1.15 of the Alabama Rules of Professional Conduct and place short term funds over the FDIC insurance amount of $250,000 in their IOLTA account and risk a huge loss to the client should the bank fail before the funds pass through the account, or violate the ethics rule and place large sums in a non-interest bearing account where the money would be fully guaranteed? Fortunately, lawyers no longer need to make such a no-win choice.
After reviewing comments received from the ABA, numerous state bar associations and the Alabama Law Foundation, the FDIC issued its final rule which classifies IOLTA accounts as “non-interest bearing” accounts for purposes of the Transaction Account Guarantee Program. What this means is that if the financial institution in which you maintain your IOLTA account is participating in the program, funds in your IOLTA account are now guaranteed in full.
So here’s what you need to know:
- The current insurance limit on FDIC insured accounts if $250,000.
- That limit returns to $100,000 on December 31, 2009, unless the rule is amended between now and then.
- If your financial institution participates in the Transaction Account Guarantee Program, your IOLTA account is “guaranteed” (not insured – this is the guarantee of the full faith and credit of the U.S. government) in full.
- In order for the funds of each individual client to be insured or guaranteed, you must have accurate records reflecting that the IOLTA account is a fiduciary account and how much is held in trust for each client. Poor trust accounting records can cause the loss of insurance, so make sure your records are in order.
- Financial institutions must disclose whether or not they are participating in the Temporary Liquidity Guarantee program.
Ellen Freedman has an informative post about FDIC insurance and trust accounts at her blog Law Practice Management.