The terms “IOLTA account” and “trust account” are not synonymous. An IOLTA account is simply a type of trust account. All IOLTA accounts are trust accounts, but not all trust accounts are IOLTA accounts.
When placing funds in a trust account, the lawyer must first determine whether the trust account should be set up as an individual interest-bearing trust account or an IOLTA trust account. The difference between the two types of trust accounts relates to who receives the interest earned on the principal funds. All interest earned, just like the principal funds, belongs to the beneficiary of the trust account.[1] A lawyer may not keep any interest earned.
Individual Interest-Bearing Trust Accounts
An individual interest-bearing trust account is set up to benefit the person to whom the funds belong, which is usually the client. The general rule is that funds should be placed in an individual interest-bearing trust account when they can reasonably earn interest for the beneficiary.[2] If the funds cannot reasonably earn interest for the beneficiary, the funds go into an IOLTA trust account.[3]
When opening an individual interest-bearing trust account, it is important that the lawyer use the beneficiary's social security number or EIN. For IRS reporting purposes, the lawyer should not use his own tax ID number on this type of account.
IOLTA Trust Accounts
Rule 1.14 makes clear that funds belonging to clients and third parties must be held in trust. However, in some situations, it could be very burdensome for a lawyer to hold funds for each person in separate individual interest-bearing trust accounts. A lawyer could place the funds of multiple beneficiaries in one trust account but interest and account expense calculations for each beneficiary would be difficult and time-consuming, especially if funds were regularly deposited and withdrawn for each beneficiary.[4] Use of an IOLTA-type trust account alleviates these problems.
An IOLTA trust account operates to pool the separate beneficiaries’ funds in one account. A lawyer should use an IOLTA account when the beneficiary’s funds are nominal or only expected to be held for a short period of time.[5] These types of funds cannot reasonably earn interest for the client, so the interest earned on IOLTA accounts is paid to the Texas Access to Justice Foundation for the provision of legal services to the indigent in civil matters.
|
Nominal in Amount or IOLTA Account Short Period of Time |
This practice has been upheld as permissible[6] and is required under Article XI of the State Bar Rules.[7]
The IOLTA Rule
Article XI of the State Bar Rules requires attorneys to put client funds that are nominal in amount or reasonably anticipated to be held for a short period of time in an IOLTA trust account because these funds cannot reasonably earn interest for the client.[8]
Compliance with the IOLTA Rules
Lawyers who use an IOLTA account are subject to additional requirements under the IOLTA rules,[9] which include:
(See Appendix 5 for form.)
Errors in Placement of Funds
If a lawyer makes an error and places funds into an IOLTA trust account when they should have been placed in an individual interest-bearing trust account, the lawyer should contact the Texas Access to Justice Foundation. The Texas Access to Justice Foundation has procedures to refund the interest received, so that the interest can be paid to an individual beneficiary. The Texas Access to Justice Foundation website has information, forms, and Frequently Asked Questions related to IOLTA accounts.[13]
[1] See Tex. Comm. on Prof’l Ethics, Op. 404, 45 Tex. B.J. 1132 (1982).
[2] Id.; Tex. Comm. on Prof’l Ethics, Op. 421, 48 Tex. B.J. 208 (1985).
[3] See Tex. Comm. on Prof’l Ethics, Op. 421, 48 Tex. B.J. 208 (1985); Rules Governing the Operation of the Texas Access to Justice Foundation, §4.
[4] See Tex. Comm. on Prof’l Ethics, Op. 421, 48 Tex. B.J. 208 (1985).
[5] Tex. State Bar R. art. XI, §5; Rules Governing the Operation of the Texas Access to Justice Foundation, §4.
[6] See Tex. Comm. on Prof’l Ethics, Op. 421, 48 Tex. B.J. 208 (1985). See also Brown v. Legal Foundation of Washington, 538 U.S. 216 (2003), regarding a similar IOLTA program in Washington State.
[7] Tex. State Bar R. art. XI, § 5 (as amended December 2022).
[8] Id. See also www.teajf.org/attorneys/do_you_need_an_iolta_account.aspx.
[9] See generally Tex. State Bar R. art. XI; Rules Governing the Operation of the Texas Access to Justice Foundation.
[10] Find form at www.teajf.org/attorneys/docs/iolta_notice_form.pdf.
[11] Rules Governing the Operation of the Texas Access to Justice Foundation, §23.
[12] Rules Governing the Operation of the Texas Access to Justice Foundation, § 5.
[13] See www.teajf.org/index.aspx.