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trust accounts faq

 

 

 

WHAT IS THE IOLTA RULE?

The IOLTA Fund of the Bar of New Jersey was created by the Supreme Court of New Jersey in 1988 by enactment of Rule 1:28-A, the IOLTA Rule. The purpose of the Fund is to provide funding for civil legal services to the poor, projects to improve the administration of justice, and education of lay persons in law-related areas. Rule 1:28-A sets forth the circumstances under which income is remitted directly to the IOLTA Fund.

Originally, participation in the IOLTA program was optional, but effective January 1, 1993, the Supreme Court amended the Rule to require attorney participation.

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, or multiple parties or clients pool advance payments against the costs of litigation in a single fund. 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 judgment, 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 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 ACCOUNT PRACTICES?

The program does not alter trust fund practices. Lawyers must use their own good-faith judgment 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 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. The IOLTA Fund of the Bar of New Jersey has an Internal Revenue Service ruling stating that interest earned on IOLTA trust accounts and remitted by the Bank 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 also 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, cash management services 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.

CAN AN IOLTA ACCOUNT BE ON “ACCOUNT ANALYSIS?”

No.

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 forty-two 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.

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