April 29, 2022
Virginia Has a New IOLTA Rule and Participation Is Easy
The Legal Services Corporation of Virginia has created a series of questions and answers to assist lawyers with understanding Virginia's new IOLTA Rule. According to the LSCV, participation will be simple and free for those lawyers in private practice who are affected by the ruling.
On March 16, 2022, the Supreme Court of Virginia amended Part Six, Section IV, Paragraph 20 of the Rules of Court concerning the maintenance of lawyer trust accounts to be effective July 1, 2022.
The Legal Services Corporation of Virginia (LSCV) funds and oversees the delivery of civil legal services to the poor in Virginia by nine regional Legal Aid programs and a statewide support center, the Virginia Poverty Law Center. Legal aid programs operate out of 35 offices that serve every city and county in Virginia. The IOLTA (Interest on Lawyers Trust Accounts) is an important source of funding for Legal Aid and is remitted to LSCV which has administered Virginia’s IOLTA program since 1995. Prior to enactment of this amendment to the Rule, participation in IOLTA had been voluntary in Virginia.
WHAT DOES THE AMENDED IOLTA RULE DO?
Effective July 1, 2022, with compliance beginning on July 1, 2023, Virginia attorneys who currently maintain pooled non-interest-bearing trust accounts will need to convert those accounts to IOLTA. Those who already participate in IOLTA need do nothing.
WHY WAS THE IOLTA PROGRAM CREATED?
In authorizing this program, the Supreme Court of Virginia was responding to the demonstrated need for increased access to civil legal representation by legal aid programs for the more than 800,000 Virginians whose incomes fall below the poverty level.
TO WHOM ARE THE IOLTA FUNDS DISTRIBUTED?
The Legal Services Corporation of Virginia distributes the funds to legal aid programs to provide civil legal assistance to low-income Virginians.
ARE THE FUNDS IN IOLTA ACCOUNTS FDIC INSURED?
Yes. The FDIC provides unlimited insurance coverage for funds in IOLTA accounts up to $250,000 per client whose funds are held in the pooled trust account.
DO OTHER STATES REQUIRE ATTORNEYS MAINTAINING POOLED NON-INTEREST-BEARING TRUST ACCOUNTS TO PARTICIPATE IN THE IOLTA PROGRAM?
Yes. Forty-six states and the District of Columbia require IOLTA participation.
ARE ALL VIRGINIA ATTORNEYS REQUIRED TO MAINTAIN IOLTA ACCOUNTS?
No. Even with the amended Rule, many Virginia attorneys will be exempt because they are not engaged in the private practice of law or their private practice of law does not require them to hold client funds in trust.
WILL THE AMENDED RULE AFFECT ATTORNEYS WHO ALREADY MAINTAIN IOLTA ACCOUNTS?
No. Nor will it impact Virginia attorneys who already maintain IOLTA accounts in neighboring jurisdictions such as Maryland or D.C. Only attorneys who are not presently participating in IOLTA and hold client funds in pooled, non-interest-bearing trust accounts will be required to comply with the Rule.
WHERE DO I DEPOSIT CLIENT TRUST FUNDS THAT ARE NOT NOMINAL IN AMOUNT OR THAT WILL BE HELD FOR A LONG PERIOD OF TIME?
Client trust funds that do not meet the “nominal” or “short term” requirements of an IOLTA account should be deposited in a separate client trust account to earn interest for the benefit of the individual client. The attorney must exercise her/his independent judgment in assessing whether opening a separate interest-bearing account on behalf of a particular client will provide income for the client after considering the amount of interest that will be earned versus the costs of maintaining the separate account including the fees and charges that might be associated with it and the administrative cost to the lawyer or law firm. In exercising her/his independent judgment in this decision, the lawyer or law firm that does so in good faith cannot be disciplined for doing so, and the lawyer who deposits funds of a client in an IOLTA account in accordance with Paragraph 20(B) shall not be required to seek permission from such client or to compute or report to such client any payment to LSCV of interest dividends by the banking institution.
HOW DO LAWYERS WHO PRACTICE IN A FIRM SETTING COMPLY?
While each lawyer is required to comply with the IOLTA Rule, lawyers who practice in a firm may meet those requirements using a shared, law firm IOLTA account(s). Each lawyer at a firm is not required to maintain a separate account solely for his or her own clients.
WILL ATTORNEYS HAVE TO PAY FEES TO CONVERT THEIR NON-INTEREST-BEARING ACCOUNTS TO IOLTA?
No.
DO I HAVE TO PAY TO MAINTAIN THE IOLTA ACCOUNT?
No. It is important to know that over 90% of IOLTA participating banks in Virginia waive all fees on IOLTA accounts in recognition of their charitable nature. For the very few banks that do charge fees, LSCV covers reasonable service charges assessed on trust accounts because of the IOLTA program. Financial institutions may charge reasonable handling fees for the maintenance and remittance of IOLTA funds. Service charges and handling fees for IOLTA accounts are deductible solely from the interest earned. The principal of the account cannot be used to offset service charges or handling fees imposed on an IOLTA account. Since these accounts contain client funds held in trust by attorneys, any invasion of the principal or the interest earnings of other named accounts would be improper. Some charges and/or fees are not assessable against the IOLTA account interest dividends. These are fees that the lawyer or law firm can pass on to the client such as wire transfers. Other fees/charges assessed by the bank are not paid for by the IOLTA program even if not passable to the client, such as charges for overdrafts and insufficient fund notices.
DOES THE IOLTA PROGRAM PAY FOR THE CHECKS, DEPOSIT SLIPS, AND OTHER RELATED ACCOUNT ANALYSIS FEES ON THE CLIENT TRUST ACCOUNTS?
No. The only fees allowed to be deducted from interest earnings are reasonable monthly service charges assessed by the bank. Other fees and charges, such as check printing charges, funds transfers, etc., are considered ordinary business expenses of the attorney or law firm.
CAN OR SHOULD MY REAL ESTATE SETTLEMENT AGENT ACCOUNT OR OTHER REAL ESTATE CLIENT TRUST ACCOUNT OR TITLE COMPANY CLIENT TRUST ACCOUNTS PARTICIPATE IN THE IOLTA PROGRAM UNDER THE APPLICABLE REGULATIONS?
Yes. The VSB Attorney Settlement Agent regulations only forbid the interest generated on your real estate trust account from inuring to the benefit of the lawyer, settlement agent, or client. It does not forbid interest being generated on the account that is paid to a third-party beneficiary, i.e., the IOLTA program. If the real estate trust account is a pooled account and currently non-interest bearing, it must be converted to an IOLTA account.
CAN I DEPOSIT LAW FIRM FUNDS INTO MY IOLTA ACCOUNT TO COVER ANTICIPATED SERVICE CHARGES, FEES OR MINIMUM BALANCE REQUIREMENTS SET BY MY BANK FOR MY IOLTA ACCOUNT?
Yes. Minimum balance requirements have become more common in recent years, and you are complying with ethical requirements if you need to add your own funds to the account just to cover those balance requirements or fees imposed by the financial institution. See Rule 1.15(a)(3)(i) of the Virginia Rules of Professional Conduct.
MAY A POOLED TRUST ACCOUNT BE MAINTAINED THAT IS NOT ENROLLED IN IOLTA?
No. A lawyer or law firm engaged in the private practice of law that receives IOLTA-eligible client funds (those that cannot earn income for the benefit of the individual client in excess of the costs incurred to secure and distribute that income to the client) must use a pooled IOLTA account.
WHEN I OPEN AN IOLTA ACCOUNT OR CONVERT MY NON-INTEREST-BEARING TRUST ACCOUNT, DO I HAVE ADDITIONAL ACCOUNTING OR OTHER ADMINISTRATIVE RESPONSIBILITIES THAT MAKE IT MORE BURDENSOME?
No. Maintaining an IOLTA account rather than a non-interest-bearing trust account adds no additional accounting or administrative burdens to the attorney or law firm. Feel free to call us at LSCV (804-782-9438) with specific questions.
WHAT ARE THE TAX CONSEQUENCES OF MY PARTICIPATION IN IOLTA?
None. There are no tax consequences to the client, attorney, or law firm. LSCV receives the interest earned on IOLTA trust accounts as a third-party beneficiary and is exempt from federal income tax. The Internal Revenue Service has ruled, with respect to the Virginia IOLTA program, that interest earned on client trust funds that is remitted to LSCV pursuant to a court-sanctioned interest on trust accounts program, is not attributable as income to the attorney or the client. Attorneys have no tax withholding or reporting responsibilities as to the interest earned on IOLTA accounts
DOES THE NEW RULE REQUIRE ATTORNEYS TO GET THEIR CLIENTS’ PERMISSION TO HOLD THEIR FUNDS IN AN IOLTA ACCOUNT?
No. Just like the current IOLTA Rule, the new Rule specifically does not require client permission or any change in client retainer agreements.
WHO SHALL BE RESPONSIBLE FOR MONITORING ATTORNEY COMPLIANCE WITH THE NEW RULE?
The VSB and LSCV are developing a process to address non-compliance administratively. LSCV will try to resolve issues of non-compliance directly with the lawyer before referring them to the VSB for possible penalties pursuant to Part Six, Section IV, Paragraph 19 of the Rules of Court.
CAN AN ATTORNEY BE ETHICALLY DISCIPLINED FOR A GOOD FAITH DECISION TO DEPOSIT CLIENT FUNDS IN AN IOLTA ACCOUNT?
No. Both the current and new Rule specifically state that the determination of whether the funds of a client or third party can earn income in excess of fees and costs, rests with the sound judgment of the attorney or law firm and no lawyer will be charged with an ethical impropriety or breach of professional conduct based on the good faith exercise of such judgment.
WHAT SPECIFICALLY ARE THE STEPS I NEED TO TAKE TO CONVERT MY CURRENT NON-INTEREST-BEARING TRUST ACCOUNT TO IOLTA?
The process to establish an IOLTA account is very simple and straightforward. The Request to Establish an IOLTA Account form is available on the LSCV website, www.lscv.org/IOLTA , and it takes about three minutes to complete. You use the same form whether you are opening a new account or simply converting your present account to IOLTA. Simply follow these steps when filling out the form:
- Provide the name and address of the financial institution where the IOLTA account is being established.
- Provide your name/your firm’s name and address.
- Indicate whether you are establishing a new IOLTA account or converting an existing non-interest-bearing account into an IOLTA account. Provide the account number in either instance. NOTE: If your bank will convert an existing non-interest-bearing trust account to IOLTA just your verbal request, it will not be necessary to complete the form.
- Sign and date the form.
- Submit it to your bank. (The bank will send the completed form to LSCV).
If you have any questions about setting up or converting to an IOLTA account or want information about which banks pay the best rates and waive fees for IOLTA accounts, please call LSCV at 804-782-9438 and ask for the IOLTA Coordinator.
See more information about trust accounts and a list of approved banks.