Q. What is the Arkansas IOLTA Foundation? What does it have to do with my client's money?
A. The Supreme Court of Arkansas created the Arkansas IOLTA program in 1984, In Re IOLTA, 283 Ark. 252, 675 S.W.2d 335 (1984), to provide funds for legal services to the poor, projects that improve the administration of justice and legal education. Under the program, interest is paid on nominal or short-term trust deposits held in a lawyer's or law firm's client trust account, with the interest remitted directly by the financial institution to the Arkansas IOLTA Foundation.
In October of 1994, the Arkansas Supreme Court modified Arkansas Model Rule of Professional Conduct Rule 1.15 of to make the previously voluntary IOLTA program mandatory for lawyers who handle qualifying funds.
Q. Does Arkansas Model Rule of Professional Conduct 1.15 apply to all lawyers who are licensed in Arkansas?
A. Yes. However, some lawyers will be exempt from maintaining a client trust account by virtue of the nature of their practice, the type of position or public office they hold, or because their law office is physically located in another state.
Q. Who must maintain a client trust account?
A. Arkansas lawyers and law firms receiving, maintaining, or disbursing client funds.
Q. What duties do I have with respect to retention of client funds?
A. The Arkansas Model Rules of Professional Conduct require an attorney to hold clients' funds in an account separate from the attorney's firm operating account. Rule 1.15 requires that all funds be held at interest, with the interest payable either to the client or to the IOLTA Foundation. To comply with their ethical obligation, attorneys must place clients' funds (such as proceeds from settlements, filing fees, retainers, etc.) in the lawyer's client trust account until distribution. For client deposits that are large enough or to be held for a long enough period of time to warrant the cost of administering an individual account, lawyers are obligated to set up a separate interest-bearing account for the benefit of the individual client. Generally, however, the deposits are not large enough or held long enough to generate interest that would offset the costs of maintaining a separate account. Consequently, attorneys routinely pool clients' funds in a single client trust account. Neither the attorney nor the client can receive interest, so the interest is paid to the AIF to support law-related, charitable and educational activities.
Q. May I place my clients' funds in an interest-bearing account and keep the interest?
A. No. Such practice is unethical. A lawyer cannot derive any benefit from clients' property.
Q. Does participation in the program deprive my clients of their money ?
A. No. The program does not use interest money from all client trust deposits - only those that are nominal in amount or to be held for a short period of time. No client is deprived of any practicable income opportunity. If these deposits were placed in separate, interest bearing accounts, the administrative costs to the law firm and the service charges of the financial institution - coupled with the resulting tax liability to the client - would more than offset any income earned.
Q. Can lawyers still deposit individual client's funds into separate interest-accounts for the benefit of the client?
A. Absolutely. Lawyers should continue to establish separate, interest-bearing accounts for individual client's funds where the sum is large enough or when the time of the deposit is of sufficient duration to justify the cost of opening, closing and administering the account. Any interest accrued then becomes the property of the client.
Factors to consider include the amount of interest which the funds would earn during the period they are expected to be deposited and the predicted cost of establishing and administering a separate account for the funds (including the cost of the law firm's services).
Q. Where should a lawyer draw the line between which funds can be deposited in a separate account for an individual client and which funds should be deposited in the firm's IOLTA account?
A. This is - and always has been - solely a matter of the lawyer's sound discretion. It is up to the lawyer to determine whether the amount of interest an account will generate justifies the expense of opening and maintaining a separate account for the client.
Q. Are banks required to offer IOLTA accounts?
A. No. But Arkansas banks have shown a strong desire to serve the lawyers in their community. The vast majority of banks not only offer IOLTA accounts, they also waive all service charges and fees on them. This support and generosity enables the Foundation to pay out more money in grants.
Q. What if my bank refuses to open an IOLTA account for my practice?
A. Should a lawyer's bank refuse to offer an IOLTA account, then the attorney will need to move his or her trust account to a bank that does offer IOLTA accounts. The Foundation can provide a list of banks in your area that offer IOLTA accounts.
Q. Do different financial institutions have different fee schedules and interest rates for IOLTA accounts?
A. Yes. Interest rates and service charges vary from bank to bank and even among different bank branches. The IOLTA staff can tell you which financial institutions have the combination of fees and interest rates that will allow more of the interest earned to go to law-related public service projects.
Q. What if my client trust account is rarely used and typically has a small balance.
A. Every lawyer is required to establish his or her client trust account as an IOLTA account. However, if the account loses money because the interest earned is less than reasonable fees and charges, then the Foundation Board may, either in response to a request or on its own, exempt the lawyer from maintaining an IOLTA account. This exemption will be subject to periodic review.
Q. How much of my time and money does maintaining an IOLTA account involve?
A. Very little time and no money. The mechanics of establishing an IOLTA account are simple and, once it is done, no further time or effort by the attorney is required unless the attorney changes banks. After the lawyer completes the one-page form, the IOLTA staff handles all the paperwork with the bank.
Any changes or fees associated specifically with having an IOLTA account are paid by the IOLTA Foundation. Lawyers pay for check printing and fees not specifically related to having an IOLTA account, such as wire transfers and check overdraft charges.
Q. Do I have to notify my clients that their funds will be placed in an IOLTA account?
A. The Arkansas Supreme Court requires that clients be given an opportunity to know about IOLTA To that end, the Foundation supplies each law firm with an attractive notice that must be posted in a conspicuous place in your law office.
Q. What are the tax consequences of IOLTA accounts?
A. There are none. According to the Internal Revenue Service, interest income that is earned on pooled accounts containing clients' nominal or short-term funds held by lawyers and paid over to the Foundation pursuant to an order of the Arkansas Supreme Court is not includable in the gross income of either the clients or the lawyers. (Rev. Rul. 81-209). The interest belongs to and is paid directly to the Foundation, a nonprofit corporation, so there are no tax consequences. The Foundation's tax identification number is used, and the interest is paid by the financial institution directly to the Foundation.
Q. Banking laws do not permit corporations or partnerships to set up NOW accounts, so how can my firm participate?
A. The Arkansas IOLTA Foundation is eligible to maintain NOW accounts because it is a IRC section 501(c)(3) nonprofit corporation. Since the interest on an IOLTA account is paid to the Foundation for charitable and educational purposes, the Federal Reserve has ruled that any law firm can have a NOW account as long as it is an IOLTA account.
Q. What do I have to do to comply with Rule 1.15?
A. Simply contact the Foundation for the proper form to set up your IOLTA account. Use the account in the manner required by Rule 1.15 and return your executed IOLTA compliance statement along with your annual fees to maintain your Arkansas law license.
Q. How is the program enforced?
A. Arkansas lawyers must certify annually to the Clerk of the Arkansas Supreme Court that they have compiled with Rule 1.15. If a lawyer or law firm has not complied with Rule 1.15, the lawyer will be referred to the Supreme Court Committee on Professional Conduct for investigation.
Q. How does the Arkansas IOLTA Foundation use the interest?
A. The Foundation disburses the funds to organizations that meet its mission: To increase access to justice by funding programs that target un- or under-served, low income populations, and by encouraging projects that improve the administration of justice.
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