Frequently Asked Questions
for Financial Institutions
Rule 3 of the Trust Accounts and Blanket Bonds Rules
detail the Interest On Lawyers Trust Accounts (IOLTA) Program.
Q. What is the Interest on
Lawyers Trust Accounts (IOLTA) Program?
A. Attorneys routinely receive funds to be placed in
trust for future use. Those deposits, which are nominal or
short-term, often make it impractical for the attorney or financial
institution to establish separate interest-bearing accounts
that would result in any interest accruing to individual clients.
The Interest on Lawyers Trust Accounts
program allows attorneys to invest small or short-term deposits
to generate money through
the use of a NOW or Super NOW checking account. The interest
from these NOW accounts is channeled to the Nebraska Lawyers
Trust Account Foundation (NLTAF) for distribution to Legal
Aid of Nebraska.
Q. Why is the program needed?
A. Many of Nebraska’s citizens cannot afford to
pay a lawyer for needed legal assistance. The money generated
for this program is used to provide free legal aid to those
who cannot afford to pay for it. Participation in the IOLTA
program presents an excellent opportunity for additional public
service by Nebraska’s financial and legal communities.
Q. How does the bank benefit from
participating in the IOLTA program?
A. Financial institutions may cite their participation
in IOLTA in their CRA reports. This IOLTA participation may
be viewed as a “community service” by indirectly
providing the means to legal assistance for indigent people
of the community. Financial institutions may also attract new
deposits by offering IOLTA accounts. Some institutions specifically
note their IOLTA participation and the amount of interest turned
over to the program in annual reports to their shareholders.
Q. Is the IOLTA program authorized
by boards regulating financial institutions?
A. Yes. The Federal Reserve System, relying upon an
opinion of the Nebraska Attorney General, has determined that
participation by attorneys and law firms in the IOLTA program
conforms to Section 303 of the Consumer Checking Account Equity
Act of 1980 [Title III of P.L. 96-221 (12 U.S.C. § 1832(a)].
NLTAF, a 501(c)(3) organization, is the sole beneficiary of
the interest generated from these special accounts. The letter
of the Federal Reserve System dated April 9, 1985, is available
Q. Must the IOLTA account be with
a bank or savings and loan association which is FDIC insured
and authorized to do business in Nebraska?
A. Yes. “Financial Institution" includes
any state or federally chartered bank, savings bank, savings
and loan association, or building and loan association insured
by the Federal Deposit Insurance Corporation. The Nebraska
Rules of Professional Conduct [Rule 1.15(a)] provides, in part,
that a lawyer shall hold property of clients or third persons
that is in a lawyer’s possession in connection with a
representation separate from the lawyer’s own property.
Funds shall be kept in a separate account maintained in the
state where the lawyer’s office is located.
Q. What are the reporting requirements
and how often must interest be paid?
A. Financial institutions are responsible for transmitting
interest income reports to NLTAF each month. A copy of the
report must also be submitted to the participating attorney
or law firm. This report will include: name of the participating
lawyer/law firm, account number, any service charge or fee
deducted, amount of interest remitted to the Foundation, rate
of interest paid and average account balance.
Interest on the
account should be paid by the tenth (10th) working day of
each month. Interest not remitted monthly is required to be paid
at least quarterly
to NLTAF. Interest should be calculated on an average monthly balance in the
account, or computed in accordance with an institution’s standard accounting
Q. Can the rate of interest paid
on an “IOLTA” NOW account be different from other
A. No. The interest rate paid on an IOLTA account must
be the same or higher as that paid on similar accounts.
Q. What if an account does not
earn enough interest to cover the financial institution’s
A. IOLTA’s regulations provide that charges or
fees which exceed interest earned in any remitted period will
be paid by NLTAF. In no instance should the principal of
an attorney’s IOLTA account be used to pay service fees
or other charges.
Q. Will financial institutions
be required to offer IOLTA accounts free of charge?
A. No. Financial institutions participating in the
IOLTA program will be compensated for administrative costs
associated with IOLTA accounts by deducting customary charges
and fees from the interest earned on those accounts. Reasonable
service charges are, of course, permitted for the preparation
and issuance of the statements required.
Q. What other procedures are required of participating
A. Many financial institutions designate an individual to administer
the IOLTA accounts. Financial institutions are requested to advise
NLTAF if a new “IOLTA Contact” is designated. Financial
institutions are required to report trust account overdrafts to the
Office of the Counsel for Discipline of the Nebraska Supreme Court.
Q. Can lawyers continue to invest trust
fund monies on behalf of clients if they participate in the program?
A. Yes. Funds which are large in amount or are to be held
for a long period of time are customarily deposited in a separate interest-bearing
specific client trust account.
Q. What is the rule regulating withdrawal
and transfer of funds from an IOLTA account?
A. Under the rule, attorneys are able to establish NOW and Super NOW
checking accounts for short-term or nominal deposits. Refer to bank
signature cards for the terms and conditions of withdrawals regarding
these types of accounts.
Q. What are the tax consequences of participation
in the program?
A. NLTAF, which receives the interest from participating trust
accounts, is exempt from federal income tax. Several states, including
Nebraska, have relied on Revenue Ruling 81-209, issued by the Internal
Revenue Service, stating that interest earned on nominal or short-term
client advances, which is paid over to a bar foundation pursuant
to a court-established interest on lawyers trust account program,
is not included in the gross income of that client.
Q. Is it necessary to prepare IRS Form 1099?
A. No. Since the Nebraska Lawyers Trust Account Foundation is a
501(c)(3) charitable organization, the financial institution does
not need to report interest income on IRS form 1099. Section 6049
of the Internal Revenue Code specifically exempts 501(c)(3) organizations
from the preparation of Form 1099. In fact, a Form 1099 should
not be prepared; to do so may create severe administrative problems
dealing with backup withholding.
Q. Does a W-9 Backup Withholding Certificate
need to be filled out?
A. Yes. IOLTA
trust accounts are not subject to backup withholding. Contact the
NLTAF office to obtain the tax identification number.
Q. How can financial institutions help in
the IOLTA program?
A. Financial institutions currently participating in the IOLTA
program have done an excellent job of administering the program.
These institutions have served their respective communities by
waiving service charges and minimum balance requirements and by
promptly remitting interest. Minimum balance requirements will
not be a problem for most law firms.