Choosing a financial institution for your trust account is important. Factors to consider include how much federal deposit insurance is offered by the financial institution, whether the financial institution is eligible to participate in the IOLTA program administered by the Texas Access to Justice Foundation, fees, locations, and convenience.
Federal Deposit Insurance
Rule 4 of the Rules Governing the Operation of the Texas Access to Justice Foundation requires lawyers to deposit trust funds into a federally insured checking account or investment product, such as an interest-bearing account at an investment firm like Morgan Stanley.[1] The federal government insures bank accounts through the Federal Deposit Insurance Corporation (FDIC). Investment firms insure interest-bearing accounts through government securities, not the FDIC.
All funds in IOLTA accounts at Insured Depository Institutions are insured under the FDIC. As of January 1, 2013, the standard FDIC insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category.[2] Because the FDIC considers IOLTA and other lawyer and law firm trust accounts as fiduciary accounts, the per depositor coverage means that funds of individual clients and third persons in a trust account will be fully insured up to the $250,000 maximum, which includes any funds in the same ownership category, like a checking or savings account, that a client or third person also has on deposit at the same insured depository institution.[3] The FDIC has more information online at: www.fdic.gov/deposit/deposits/changes.html.
FDIC insurance coverage is important when dealing with large sums of money for clients. A lawyer should determine if the client has other funds on deposit at the same bank where the trust account is established and the type of accounts that the client has, because the depositor’s other accounts and the trust account may be cumulative for purposes of FDIC insurance.[4] For example, if the client had a personal checking account, personal savings account, and business checking account at the bank where the trust account is held, the funds in those accounts would be added to the amount held in trust for the client to determine if the total exceeds the $250,000 FDIC insurance limit. If so, a lawyer may wish to consider placing that client’s funds in two or more separate trust accounts at different banks for the entire amount to be insured.[5] However, if the client has funds at the bank in another ownership category, such as a certificate of deposit, or has an account at the bank that does not qualify for FDIC insurance, those funds would not count toward the $250,000 limit.[6] Additional information on FDIC limits can be found on the FDIC website.[7]
Eligible Financial Institutions for IOLTA Accounts
The Texas Access to Justice Foundation determines which financial institutions are eligible to hold IOLTA accounts.[8] A lawyer may establish an IOLTA account at any eligible financial institution. Some eligible financial institutions, referred to as Prime Partners, have agreed to pay, net allowable reasonable fees, a higher interest rate on IOLTA accounts at the higher of 1) 75.00% or more of the Fed Funds Target Rate or 2) a minimum of 1.00% on IOLTA accounts. The higher interest earned on IOLTA accounts at Prime Partner banks increases funds available to provide legal services to low-income Texans in civil matters. The Texas Access to Justice Foundation lists approved financial institutions at:
www.teajf.org/financial_institutions/docs/Eligible_Banks_List_Master.pdf.
Out-of-State Trust Accounts
A lawyer is required by Rule 1.14 (a) to maintain all trust accounts in the “state where the lawyer’s office is situated, or elsewhere with the consent of the client or third person.” While a lawyer may obtain the client or third party’s consent to use a bank in another state, a lawyer cannot ask the client or third person to consent to commingling or keeping funds in a non-trust type account, such as a joint checking account.[9]
[1] For further information about permissible investment products which comply with Rules Governing the Operation of the Texas Access to Justice Foundation, §4, contact: Texas Access to Justice Foundation at (800) 252-3401 (Texas calls only), or (512) 320-0099 (for calls from outside of Texas), or www.teajf.org.
[2] See Deposit Insurance FAQs on the Federal Deposit Insurance Corporation’s website at www.fdic.gov/resources/deposit-insurance/faq/#:~:text=Q%3A%20How%20much%20deposit%20insurance,insured%20bank%2C%20per%20ownership%20category.
[3] Id.
[4] Id.
[5] Id.; Patricia A. Sallen & Shauna R. Miller, Client Trust Accounts and the Financial Crisis, 71 Tex. B.J. 906-08 (2008).
[6] Id.
[7] For additional information on FDIC limits, visit www.fdic.gov/resources/deposit-insurance/faq/#:~:text=The%20standard%20deposit%20insurance%20coverage,held%20at%20the%20same%20bank. For additional information on FDIC ownership categories, visit www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/.
[8] Rules Governing the Operation of the Texas Access to Justice Foundation, §7.
[9] See supra note 3; Brown, 980 S.W.2d at 679-80.