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 upon request.

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 practices.

Q. Can the rate of interest paid on an “IOLTA” NOW account be different from other NOW accounts?
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 service charges?
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 financial institutions?
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?
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.