California law requires attorneys who handle client funds or funds entrusted by others to hold them in one or more interest-bearing bank accounts labeled as a “Trust Account,” or words of similar import. Client funds that can earn revenue for the client in excess of the costs to hold those accounts must be deposited for the benefit of the client.
Client funds that are nominal in amount or are on deposit for such a short period of time that the funds cannot earn net income (income over costs) for the client must be deposited or invested by attorneys into pooled IOLTA (Interest on Lawyers’ Trust Accounts) on which the interest or dividends are paid to the State Bar. (Business and Professions Code section 6091.2, Business and Professions Code sections 6211, 6212 and 6213)
The list of “eligible” financial institutions is posted on the State Bar’s website.
When your new account is established, log on to My State Bar Profile and go to “Report my IOLTA status” to electronically update your IOLTA record.
If you want to open an account with an institution that is not on the list of eligible financial institutions, please refer the representative to the California IOLTA Program at BankingCompliance@calbar.ca.gov in order for them to become eligible.
Tax consequences
There are no tax consequences to the attorney or the client for the interest or dividend remitted to the State Bar from an IOLTA account that bears the State Bar’s taxpayer identification number. Because the State Bar is tax exempt, it is not necessary for the financial institution to complete IRS Form 1099 for interest or dividends on IOLTA accounts.
Note: The State Bar’s federal taxpayer identification number is only for the interest or dividends paid to the State Bar, not for the principal of settlement or other funds placed in the trust account.
Notifying the State Bar
Report any changes to your IOLTA account within 30 days. An IOLTA account that has been opened or closed must be updated in My State Bar Profile. After logging in, go to “Report my IOLTA status.”
Fees and charges
Monthly fees such as fees in lieu of minimum balance, federal deposit insurance fees, per-check and per-deposit charges, and sweep fees may be charged by the bank against interest earned. It is the responsibility of the attorney to pay business expenses incurred in the ordinary course of business, such as charges for check printing, deposit stamps, insufficient fund charges, collection charges, wire transfer fees, and fees for cash management. If the bank does not waive monthly and other fees in excess of interest or dividends earned on an account, those expenses may be charged to the attorney. In the event that fees routinely exceed interest earned and are charged by the bank to the attorney, an attorney may apply to the Legal Services Trust Fund Program to convert the IOLTA account to a noninterest bearing trust checking account. In that case, the State Bar’s taxpayer identification number will be removed from the account, and the attorney will be responsible for all fees and charges incurred to maintain the account.
Monitoring the IOLTA account
Terms and conditions of IOLTA accounts are determined by the bank and are not the responsibility of the California IOLTA Program. An attorney’s obligation to comply with account terms and conditions and to monitor accounts for irregularities are the same for an IOLTA account as for the attorney’s non-IOLTA accounts. Attorneys do not have any obligation to monitor a financial institution’s compliance with IOLTA-eligibility requirements or to ensure that appropriate interest or dividends are paid to the State Bar on IOLTA accounts. The California IOLTA Program will monitor statutory compliance and will notify the attorney if a financial institution is not complying with IOLTA requirements.
Determining eligible funds
Your bank or financial institution can help you evaluate whether or not it is possible to earn income for the client, taking into consideration the amount of interest an individual client's funds must generate to be practical in light of the costs involved in earning and accounting for the interest. Factors that must be considered in making this determination are stated in the Rules of the State Bar of California, Title 2, Division 5, Rule 2.110(A). The State Bar will not bring disciplinary charges against a member for determining in good faith whether or not to place funds in an IOLTA account. [State Bar Rule 2.110(B)]
Additional information
Download the Handbook on Client Trust Accounting for California Attorneys. The handbook is a practical guide created to help attorneys comply with the record-keeping standards for client trust accounts, including IOLTA. The handbook includes the standards and statutes relating to trust accounting, a step-by-step description of how to maintain a client trust account and sample forms. For general requirements regarding trust accounts and recordkeeping standards, see Rule of Professional Conduct 1.15.
Questions about Rule 1.15 or other questions about ethics may be directed to the Ethics Hotline at 1-800-2ETHICS (1-800-238-4427).
