I. INTRODUCTION
The Nebraska Supreme Court adopted rules regarding the Interest on Lawyer Trust Accounts (IOLTA) program. The IOLTA program allows interest from lawyers’ trust accounts to be channeled to the Nebraska Lawyers Trust Account Foundation (NLTAF) for distribution to Nebraska Legal Services’ programs.
Under a revised rule, effective January 1, 1993, the previous voluntary IOLTA program was converted to an opt-out program. Under this revised program, every lawyer’s trust account will need to be converted to an interest-bearing account, unless the lawyer or law firm filed a notice of declination with the Chief Justice of the Nebraska Supreme Court on or before February 15, 1993. Under the Supreme Court rules, the decision to “opt-out” of the program must be renewed by February 15 of each year or the lawyer’s trust account will be automatically enrolled in the program.
An informational brochure from the NLTAF regarding the IOLTA program provides background information regarding the manner in which the IOLTA accounts must be administered. A copy of the brochure follows this article.
II. TRUST ACCOUNT CERTIFICATION
Also following this article is a “Trust Account Certification” which is completed by all lawyers who did not “opt-out” of the IOLTA program prior to the February 15, 1993, deadline. Of particular note for financial institutions are the provisions contained within the “Authorization to Financial Institutions” section of the certification.
Pursuant to the terms of this certification, a financial institution is authorized to immediately and without further documentation, convert the lawyer’s trust account to an interest-bearing IOLTA account.
TRUST ACCOUNT CERTIFICATION
I certify, under oath, that (Check appropriate box and sign)
[ ] I am familiar with the provisions of Disciplinary Rule 9-102 and the Nebraska Supreme Court Rule requiring that all lawyers holding funds of clients or third persons must maintain a separate trust account for such funds. I will participate in the Interest On Lawyers Trust Accounts (IOLTA) Program. As a condition of licensing, I certify the following information and grant the following authorization:
or
[ ] I am familiar with the provisions of the Nebraska Supreme Court Rule concerning Trust Accounts and Disciplinary Rule 9-102 requiring that all lawyers holding funds of clients or third persons must maintain a separate account (commonly known as a trust account), but am exempt from the provisions of that rule because I handle no client or third party funds.
Authorization to Financial Institutions
IOLTA Participation: I acknowledge that the aforementioned Nebraska Supreme Court Rule requires every lawyer maintaining a trust account to participate in the Interest on Lawyers Trust Account Program unless a written Notice of Declination is submitted to the Supreme Court by February 15 of the year to which the Notice of Declination will apply. I hereby authorize any financial institution in which I maintain a trust account for client funds to automatically, and without further documentation, convert my trust account described below to an interest bearing IOLTA account subject to the provisions of Nebraska Supreme Court Rule.
In summary, the financial institution is specifically authorized and directed to remit the interest earned, less customary service fees or charges, to the Nebraska Lawyers Trust Account Foundation. The Taxpayer Identification Number certification (IRS Form W-9 and 1099 information returns), if required, will show the Nebraska Lawyers Trust Account Foundation Taxpayer I.D. No. 36-3357241, as the recipient of interest.
PLEASE COMPLETE
BANK NAME & ADDRESS NAME ON ACCOUNT ACCOUNT NO.
Name: Signature:
Firm Name: Date:
Bar No.:
ATTORNEY: PLEASE RETURN WHITE AND YELLOW COPIES TO
Nebraska Lawyers Trust Account Foundation ♦ P.O. Box 95103 ♦ Lincoln, NE 68509 ♦ Attn: IOLTA
In December 1992, Disciplinary Rule 9-102 regarding the INTEREST ON LAWYERS TRUST ACCOUNTS (IOLTA) was amended by the Nebraska Supreme Court. The amended rule changes the Voluntary IOLTA program to an Opt-out program. This brochure has been created to answer any questions regarding the program.
Q Will operating procedures change for financial institutions currently participating in IOLTA?
A. No.
Q. What is the Interest on Lawyers Trust Accounts (IOLTA) Program?
A. Attorneys routinely receive funds to be placed in trust for future use. Those deposits, which are nominal or short-term often make it impractical for the attorney or financial institution to establish separate interest-bearing accounts that would result in any interest accruing to individual clients. In the past, Nebraska attorneys merely had the option of placing these nominal or short-term trust deposits in unsegregated non-interest-bearing checking accounts.
The Interest on Lawyers Trust Accounts program allows attorneys to invest small or short-term deposits to generate money through the use of a NOW or Super NOW checking account. The interest from these NOW accounts is channeled to the Nebraska Lawyers Trust Account Foundation (NLTAF) for distribution to the Nebraska Legal Services’ programs.
Q. Why is the program needed?
A. Many of Nebraska’s citizens cannot afford to pay a lawyer for needed legal assistance. The money generated for this program is used to provide free legal aid to those who cannot afford to pay for it. Participation in the IOLTA program presents an excellent opportunity for additional public service by Nebraska’s financial and legal communities.
Q. How does the bank benefit from participating in the IOLTA program?
A. Financial institutions may cite their participation in IOLTA in their CRA reports. This IOLTA participation may be viewed as a “community service” by indirectly providing the means to legal assistance for indigent people of the community. As a consequence of the amended rule, financial institutions may attract new depositors by offering IOLTA accounts. Some institutions specifically note their IOLTA participation and the amount of interest turned over to the program in annual reports to their shareholders.
Q. Is the IOLTA program authorized by boards regulating financial institutions?
A. Yes, The Federal Reserve System, relying upon an opinion of the Nebraska Attorney General holding that NLTAF, a 501(c) (3) organization, is the sole beneficiary of the interest generated from these special accounts, has determined that participation by attorneys, law firms, partnership and associations in the IOLTA program conforms to Section 303 of the Consumer Checking Account Equity Act of 1980 [Title III of P.L.96-221] (12 U.S.C. § 1832(a)). The letter of the Federal Reserve System April 9, 1985, is available upon request.
Q. Must the IOLTA account be with a bank or savings and loan association, which is FDIC insured and authorized to do business in Nebraska?
A. Yes. Credit unions, brokerage houses and other bank competitors are NOT eligible for these accounts and are not FDIC insured. Membership rules and regulations governing credit unions make these institutions unsuitable to handle such accounts. In addition, the public perceives a risk in the absence of Federal Deposit Insurance on brokerage accounts. The Code of Professional Responsibility provides that all trust accounts holding funds connected to the practice of law in Nebraska must be maintained in Nebraska.
Q. What are the reporting requirements and how often must interest be paid?
A. Financial institutions are responsible for transmitting interest income reports to NLTAF each month. A copy of the report must also be submitted to the participating attorney or law firm. This report will include: name of the participating lawyer/law firm, account number, any service charge or fee deducted, amount of interest remitted to the Foundation, rate of interest paid and average account balance.
Interest on the account should be paid by the tenth (10th) working day of each month. Interest not remitted monthly is required to be paid at least quarterly to NLTAF. Interest should be calculated on an average monthly balance in the account, or computed in accordance with an institution’s standard accounting practices.
Q. Can the rate of interest paid on an “IOLTA” NOW account be different from other NOW accounts?
A. No. The interest rate paid on an IOLTA account must be the same or higher as that paid on similar accounts.
Q. What if an account does not earn enough interest to cover the financial institution’s service charges?
A. IOLTA’s regulations provide that charges or fees which exceed interest earned in any remitting period will be paid by NLTAF. In no instance should the principal of an attorney’s IOLTA account be used to pay service fees or other charges.
Q. Will financial institutions be required to offer IOLTA accounts free of charge?
A. No. Financial institutions participating in the IOLTA program will be compensated for administrative costs associated with IOLTA accounts by deducting customary charges and fees from the interest earned on those accounts. Reasonable service charges are, of course, permitted for the preparation and issuance of the statements required
Q. What other procedures are required of participating financial institutions?
A. Many financial institutions designate an individual to administer the IOLTA accounts. Financial institutions are requested to advise NLTAF if a new “IOLTA Contact” is designated.
Q. Can lawyers continue to invest trust fund monies on behalf of clients if they participate in the program?
A. Yes. Funds which are large in amount or are to be held for a long period of time are customarily deposited in a separate interest-bearing account on behalf of the client.
Q. What is the rule regulating withdrawal and transfer of funds from an IOLTA account:
A. Under the rule, attorneys are able to establish NOW and Super NOW checking accounts for short-term or nominal deposits. Refer to bank signature cards for the terms and conditions of withdrawals regarding these types of accounts.
Q. What are the tax consequences of participation in the program.
A. NLTAF, which receives the interest from participating trust accounts, is exempt from federal income tax. Several states, including Nebraska, have relied on Revenue Ruling 81-209, issued by the Internal Revenue Service, stating that interest earned on nominal or short-term client advances, which is paid over to a bar foundation pursuant to a court-established interest on lawyers trust account program, is not included in the gross income of any client.
Q. Is it necessary to prepare IRS Form 1099?
A. No. Since the Nebraska Lawyers Trust Account Foundation is a § 501(c)(3) charitable organization, the financial institution does not need to report interest income on IRS Form 1099. Section 6049 of the Internal Revenue Code specifically exempts 501(c)(3) organizations from the preparation of Form 1099. In fact, a Form 1099 should not be prepared, to do so may create severe administrative problems dealing with back-up withholding.
Q. Does a W-9 Backup Withholding Certificate need to be filled out?
A. Yes. The NLTAF tax identification number is 36-3357241. IOLTA trust accounts are not subject to backup withholding.
Q. How can financial institutions help in the IOLTA program?
A. Financial institutions currently participating in the IOLTA program have done an excellent job of administering the program. These institutions have served their respective communities by waiving service charges and minimum balance requirements and by promptly remitting interest. Minimum balance requirements will not be a problem for most law firms.
More information may be obtained by contacting:
Doris J. Huffman
Executive Director
Nebraska Lawyers Trust Account Foundation
Roman L. Hruska Law Center
P.O. Box 95103
Lincoln, Nebraska 68509
(402) 475-1042
(From NEBRASKA LAWYERS TRUST ACCOUNT FOUNDATION ----Financial Institutions brochure)