An Overview of IOLTA in Sixteen Questions
- What does IOLTA stand for?
- What is an IOLTA?
- Clients give lawyers money to hold?
- Can’t the lawyer just hold the money in her own account?
- So the lawyer has to keep the client’s money separate?
- That’s a lot of money.
- Because the financial institutions are the ones actually holding the money?
- So how does interest from a client trust account get to the Foundation?
- Who administers this whole thing?
- Have there been any problems with this program?
- When did Vermont’s IOLTA program start?
- What’s the point?
- How much money does the IOLTA program in Vermont raise?
- That raises an interesting question, what role do financial institutions play in IOLTA?
- It makes a difference, then, where you bank?
- What role will IOLTA play in the future?
What does IOLTA stand for?
IOLTA is an acronym for Interest on Lawyers Trust Accounts.
What is an IOLTA?
An IOLTA account is specially designated by a financial institution as an interest bearing account where client funds are held. When a lawyer begins her practice in Vermont one of the first things she must do is open an IOLTA account with a local financial institution (bank, credit union, etc.). Only client funds can go into an IOLTA account.
Clients give lawyers money to hold?
All the time. Lawyers routinely hold money in trust for their clients to be paid out in the future for such things as to buy a house, pay a judgment, or put a payment in escrow. This money still belongs to the clients, and the lawyers must treat it that way.
Can’t the lawyer just hold the money in her own account?
No. That’s what is called co-mingling, and it is strictly forbidden. In fact, if the lawyer dips into the client funds—even to just borrow the cost of a cup of coffee—it is a violation of the rules of professional conduct and grounds for disbarment.
So the lawyer has to keep the client’s money separate?
Right, from the lawyer’s money, but she can mix all her client funds together. So a lawyer’s IOLTA fund might have a million dollars in it, representing the funds for a dozen or more clients.
That’s a lot of money.
And therein lies the genius of IOLTA, client accounts turnover constantly. Funds for a house purchase may only sit in an IOLTA account for a few hours, settlement funds, for a few days, but every second that money sits in an IOLTA account, it is earning interest from the financial institution hosting the account.
Because the financial institutions are the ones actually holding the money?
Yes. The financial institutions get the use of the money, and they pay for that privilege in the form of interest.
So how does interest from a client trust account get to the Foundation?
That’s the big question. Get ready for the long version.
Prior to the 1960s, lawyers faced a dilemma when it came to client trust accounts. Who got the interest? Lawyers could not claim it. Clients, particularly if their funds were held for a short period of time or were relatively small, could not be paid the fractions of a cent that their money had earned. In many cases, the amount, even if payable, was so small that it would have cost more to calculate it. For many lawyers, the hassle was so much that they used non-interest bearing accounts for their client funds.
In the late 1960s courts and bar associations in Australia and Canada came up with the idea of taking this interest and pooling it together to provide legal services to the poor and to fund other charitable causes. The idea caught on and eventually spread to the United States where it was pursued at the state level by bar associations and the courts.
Today all 50 states, the District of Columbia, and U.S. Virgin Islands operate IOLTA programs. Forty of these jurisdictions require all lawyers to participate. Ten give lawyers the ability to opt out of the program, and two make IOLTA voluntary. Vermont is a mandatory IOLTA state.
Who administers this whole thing?
The financial institution hosting the account oversees the IOLTA accounts and calculates the amounts of interest due, but the money from such accounts (and a financial institution may have a hundred or more IOLTA accounts) are paid on a regular basis to a charitable organization designated by the Courts to receive such funds.
In Vermont, it is the Vermont Bar Foundation. From there, the Foundation distributes the money on an annual basis as grants to various legal service organizations that serve low-income, poverty, and other worthy populations.
Have there been any problems with this program?
Not really. IOLTA initially met with some resistance from a few groups. But the question has been largely resolved with a series of Court decisions validating the legitimacy of IOLTA.
Moreover, no one can debate the effectiveness of the IOLTA program. Over time, it has become a major source of funding for civil legal services in the United States. In Vermont, IOLTA supplies the vast majority of Foundation funding, which in turn provides the primary, private support for most low-income legal programs in the state.
When did Vermont’s IOLTA program start?
Vermont’s IOLTA program began, with approval from the Vermont Supreme Court, as a voluntary program in 1984. Since March 1, 1990, IOLTA has been mandatory for all Vermont lawyers and law firms. From the beginning, the funds have gone to the Vermont Bar Foundation for distribution.
What’s the point?
Legal services are not cheap, but they are necessary. For low-income Vermonters and other at-risk populations, the need for a lawyer is often as acute as it is impossible to afford. Providers such as Legal Aid and the South Royalton Law Clinic were created to meet this need, but they are in constant need of funding. Prior to IOLTA, these agencies struggled to make their annual budget. While IOLTA has not been a magic bullet, it has answered a good deal of this need and has proved to be a durable source of money.
Moreover, IOLTA funds have helped the Foundation set up programs such as the Loan Repayment Assistance Program, which helps lawyers who practicing in an area that benefits the public to repay their student loans. This has become a huge issue as law school debt has vastly outpaced wages in this area.
How much money does the IOLTA program in Vermont raise?
Numbers vary from year to year and are dependent on a number of factors (the economy, the real estate market, interest rates, and legal activity). At its highest point, Vermont could count on nearly $1.3 million annually in IOLTA revenue. As the economy has dipped so have IOLTA returns. Since 2008, IOLTA numbers have slowly but steadily sunk to below $1 million. Other states have been hit much harder. This has led to the Vermont Bar Foundation and other IOLTA fund managers to look to other funding sources to supplement and stabilize its grant budget that the various grantee organizations have come to rely upon.
That raises an interesting question, what role do financial institutions play in IOLTA?
The most important part. We depend on our financial institutional partners to offer generous interest rates on IOLTA accounts. We have been lucky in Vermont to have a number of community minded financial institutions willing to offer interest rates on IOLTA accounts that were in excess of the rates set by the Federal Reserve. We always want to recognize these Honor Roll partners in any way we can. Without them, there would be no meaningful IOLTA.
It makes a difference, then, where you bank?
Without a doubt, the institutions on the honor roll offer the most generous interest rates in the state. If all of the attorneys in Vermont moved their IOLTA accounts to one of the institutions on the honor roll, we would see a significant rise in IOLTA funds. We always tell attorneys to be aware of where you have your IOLTA fund. It is not a big thing, but it can make a world of difference in the amount of available IOLTA funds.
What role will IOLTA play in the future?
IOLTA is and will continue to be the Foundation’s primary source of funding. We will continue to rely upon lawyers in this state continuing to hold client funds and financial institutions offering generous interest rates. Our bylaws specifically state that we are to administer IOLTA funds, and that is what we do. If you want to know more about IOLTA, you should really visit the National Association of IOLTA Programs or the ABA Commission on IOLTA.