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WHAT IS THE BASIC CONCEPT OF IOLTA?
Very often, the amount of money that a lawyer handles for a single
client is either nominal in amount or to be held only for a short
time. It would not be feasible to establish separate interest-bearing
accounts for these client funds. The cost of administering separate
accounts, including the lawyer's time and bank charges, would be
greater than the amount of interest that would be generated. In
the past, client funds would be held by each attorney in a common
trust checking account on which the depository bank paid no interest.
In accordance with the program adopted by the NJ Supreme Court,
the interest earned on this common account is now forwarded directly
by the financial institution to the IOLTA Fund without any direct
involvement by the attorney once the IOLTA Trust account has been
established.
The lawyer retains the right to determine in any specific case
whether to place client funds in a separate interest-bearing account
for the benefit of the client or not to earn interest, in which
case the funds must be deposited in the IOLTA trust account. As
a guideline, the Supreme Court indicates that if less than $150
in interest is expected, the funds may be placed in an IOLTA account.
Many attorneys interpret this $150 as the exclusive litmus test
for appropriateness of deposits in an IOLTA account. This guide
is intended as an aid to attorneys when no other indication is available
as to what to do with potential trust account interest. It is not
intended as the exclusive litmus test. Ultimately the propriety
of IOLTA deposits is a matter for the attorney's professional judgement,
based upon the factors specified in Rule 1:28-A.
WHERE DOES THE MONEY GO?
Pursuant to the Court Rule, after meeting expenses, at least 75%
of net revenue is awarded to Legal Services of New Jersey, Inc.
and through sub-grants to its local member Legal Services programs
to support the delivery of civil legal services to New Jersey's
poorest residents. In addition, 12.5% of net revenue is awarded
to the New Jersey State Bar Foundation to be used for purposes as
stated in the Rule. The remaining 12.5% of net revenue is allocated
by the IOLTA Board of Trustees to grants supporting civil legal
assistance to income-eligible persons, improvements to the administration
of justice, and law-related education. The money can be used for
no other purposes. Day-to-day management of the Fund is handled
by a small administrative staff reporting to the Board of Trustees.
ARE ALL ATTORNEYS REQUIRED TO PARTICIPATE?
Yes, provided they are in private practice in New Jersey and subject
to the provisions of Rule 1:21-6 (i.e., must maintain an attorney
trust account.)
HOW DOES THE PROGRAM AFFECT AN ATTORNEY'S
TRUST FUND PRACTICES?
The program does not change current trust fund practices. Lawyers
must still use their own good-faith judgement to determine whether
a given trust deposit is of sufficient size or duration to justify
placement in a separate, interest-bearing account, with interest
payable to the client. In the New Jersey IOLTA program, you retain
full discretion in this area, and make fiduciary decisions based
upon standard criteria.
HOW DOES IOLTA AFFECT MY CLIENTS?
Interest for the IOLTA program is generated only on those funds
that would not have been substantial enough or held long enough
to produce interest in excess of bank charges and administrative
costs. Trust account funds which are sufficient to return income
to the client may still be put in separate interest-bearing accounts
by the lawyer using the client's Tax I.D. number or Social Security
number.
HOW DOES THE IOLTA PROGRAM AFFECT FINANCIAL
INSTITUTIONS?
Financial institutions are not mandated by the IOLTA rule to participate.
Approval to hold attorney trust funds is automatic provided the
financial
institution files an agreement with the Supreme Court to report
overdrafts to the Office of Attorney Ethics and to cooperate with
the IOLTA program. If an institution chooses not to participate,
then attorneys with trust accounts at that financial institution
would have to transfer those accounts to institutions that do participate
in the IOLTA program. Virtually every community has a financial
institution that offers IOLTA accounts.
ARE THERE ANY TAX CONSEQUENCES FOR THE CLIENT
OR FOR THE ATTORNEY?
There are no tax consequences for the client or the attorney because
of IOLTA participation. New Jersey has an Internal Revenue Service
ruling stating that interest earned on IOLTA trust accounts and
remitted by the Bank to the IOLTA Fund are not taxable to the client
or to the attorney. The attorney is not required to prepare or file
IRS 1099 forms, and neither the client nor the attorney is named
as a recipient on any 1099 form. The ruling provides that the IOLTA
Fund is exempt from Federal income tax.
WHO PAYS SERVICE CHARGES AND FEES FOR IOLTA
ACCOUNTS?
Normal bank service charges are paid from the interest earned by
the IOLTA accounts. Check printing charges, wire transfer fees,
cashier's checks, and overdraft costs are not considered normal
service charges by IOLTA and are not paid by IOLTA. Each account
holder should make arrangements with the financial institution regarding
these costs. The account principal is not charged by IOLTA involvement,
nor is the attorney billed for IOLTA produced expenses.
WHAT IF I ONLY USE MY TRUST ACCOUNT INFREQUENTLY?
A "low-balance" account category has been established
to accommodate those attorneys who make infrequent deposits to their
trust accounts. Usually, trust accounts of new sole practitioners
(and usually those of part-time and occasional practitioners) fall
into IOLTA's "low balance" category. These trust accounts
remain non-interest bearing. The IOLTA Fund trustees reserve the
right to exempt from active IOLTA participation those trust accounts
with small balances that will cost the IOLTA fund more in service
charges than will be generated in interest by the account.
HAVE OTHER STATES AND ORGANIZATIONS ENDORSED
IOLTA?
IOLTA programs are currently operating in fifty states, the District
of Columbia, Canada, Australia and elsewhere. There are twenty-seven
states with mandatory programs including New Jersey, Connecticut,
Maryland, New York, and Pennsylvania.
HOW DO I COMPLY WITH THE RULE?
There are three ways for an attorney or law firm to comply with
IOLTA requirements: create a new non-interest bearing trust account,
convert an existing non-interest bearing trust account and/or register
all attorney trust accounts annually with the Fund. The banks and
the IOLTA staff are responsible for administrative and reporting
functions.
Registration forms will be mailed to you or your firm in December.
Complete them and return them to us by February 1. If you are just
starting a practice, or have changed firms or your bank, then you
must supply your new trust account information as soon as you can.
Questions may be directed to:
Ellen D. Ferrise, Executive Director
IOLTA Fund of the Bar of New Jersey
New Jersey Law Center
One Constitution Square
New Brunswick, NJ 08901-1500
732-247-8222
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