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4000 - Advisory Opinions


Interest on lawyer trust accounts

FDIC--98--2

June 16, 1998

Gladys C. Gallagher, Counsel

This is in response to your letter requesting that we reaffirm our previous opinions issued with respect to the IOLTA programs in other states, and FDIC Opinion Letter No. 92--30 concerning deposit insurance coverage of such accounts.

The IOLTA programs have been established under State law and require attorneys who hold customer funds on deposit to place the funds in interest-bearing accounts. The interest on the funds is paid to an entity (generally the State bar association) that is exempt from tax pursuant to section 501(c)(3) of the Internal Revenue Code; the interest so paid is used for certain charitable purposes specified by State law.

The FDIC staff has said on several occasions that funds held in interest-bearing accounts pursuant to IOLTA programs (IOLTA deposits) may be held in NOW accounts in insured nonmember banks. I understand you have copies of these letters. My understanding is that an IOLTA deposit may be held in a NOW account if, under State law as formally interpreted by the State Attorney General, the interest on the IOLTA deposit must be paid to an entity that qualifies as a nonprofit organization under 501(c)(3) of the Internal Revenue Code.

You have enclosed copies of the Indiana Foundation's Articles of Incorporation and Internal Revenue Service exempt organization determination letter. You also enclosed an opinion issued by the Attorney General of the State of Indiana that concludes that the Foundation would hold the entire beneficial interest in the earnings of the IOLTA Accounts.

In my view, based on the information you have provided, funds held by lawyers under the Indiana IOLTA program would be eligible to be maintained in NOW or similar type accounts.

Deposit Insurance Coverage of IOLTAs

You also wish to ascertain that deposit insurance coverage is available for IOLTA accounts.

Section 330.4 of the FDIC's regulations require that the deposit account records of an insured depository institution expressly disclose, by way of specific references, the existence of any fiduciary relationship including, but not limited to, relationships involving a trustee, agent, nominee, guardian, executor or custodian, pursuant to which funds in an account are deposited and on which a claim for insurance coverage is based. These records must also disclose the existence of a relationship which might provide a basis for additional insurance, and the details of the relationship and the interests of other parties in the account must be ascertainable either from the account records of the records of the insured depository institution or from records maintained, in good faith and in the regular course of business, by the depositor or by some person or entity that has undertaken to maintain such records for the depositor. See 12 C.F.R. sections 330.4(b)(1) and 330.4(b)(2).

An IOLTA account must therefore disclose that the funds in the account are held by the nominal account holder (the lawyer) on behalf of others. If this disclosure requirement is met, the FDIC then will be able to ascertain the interests of other parties in the IOLTA account from the records of the insured depository institution or from the records of the lawyer (or someone hired by the lawyer to perform this task). If this record keeping requirement is satisfied, funds attributable to each client will be insured to the client in whatever right and capacity that client owns the funds. For example, if an IOLTA account contains funds that belong to an individual, those funds will be insured up to $100,000 as individual funds. These funds will be aggregated and insured to the statutory limit with any other funds which the client may hold individually at the same insured depository institution. The accrued interest which is attributable to the tax-exempt entity will also be recognized as a separately insured interest if the disclosure and record keeping requirements are met.

Please feel free to call me at (202) 898-3833 if you have any further questions.


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