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FDIC Insurance for IOLTA Accounts
IOLTA accounts have more FDIC insurance protection than typical bank accounts because they have “pass-through” coverage as a fiduciary account which means that their FDIC insurance coverage is not limited to the $250,000 that would normally apply to the law firm as an account holder of a deposit account. Instead, the FDIC insurance limit applies to each client or third party that has funds held inside the IOLTA account waiting to be disbursed.
If a bank fails and FDIC insurance limits are enforced, separate coverage applies for each bank customer’s combined balances in their deposit accounts at the failed bank in each of the “ownership” categories in which the customer is holding deposit accounts (such as $250,000 for individual accounts, $500,000 for joint accounts, etc.). However, as mentioned above, the FDIC considers IOLTA accounts to be pass-through fiduciary accounts for FDIC insurance purposes which means that in the event of a bank failure, the FDIC would request records maintained in the ordinary course of business by the bank customer (the law firm using the IOLTA account) to see which clients or third parties are owed funds from the IOLTA account and are entitled to corresponding FDIC insurance protection. The following examples illustrate how FDIC insurance would work in the context of an IOLTA account maintained at a failed bank:
Example 1. The law firm of John Doe & Associates has $1,000,000 in its IOLTA account at Acme Bank which is owed to four different clients, each of whom are entitled to $250,000 (and none of the clients have their own accounts at Acme Bank). In this scenario all $1,000,000 in the IOLTA account would be fully covered by FDIC insurance.
Example 2. John Doe & Associates has $100,000 in its IOLTA account at Acme Bank that is owed to Client A, and Client A also has a personal checking account at Acme Bank with a balance of $175,000. The FDIC will only pay Client A $250,000 for the combined $275,000 that they had at Acme Bank because the $100,000 owed to them from their attorney’s IOLTA account plus the $175,000 in Client A’s personal checking account are combined under the individual / single owner coverage category for Client A at the failed Acme Bank.
Example 3. John Doe & Associates received a legal settlement of $200,000 owed to Client B in their IOLTA account at Acme Bank. Client B also has $400,000 in a Certificate of Deposit held jointly with their spouse and is also the beneficiary of a $240,000 payable on death (POD) savings account opened by their uncle, both of which are also at Acme Bank. In this scenario, each ownership category’s limit is separately applied, so all of Client B’s funds will be covered by FDIC insurance and they will benefit from $840,000 in coverage as the $200,000 in their attorney’s IOLTA account will fall under the $250,000 limit for their individual / single owner accounts, the $400,000 will be covered by the $500,000 limit for joint accounts, and the $240,000 in the POD account will count toward the $250,000 limit for revocable trust accounts.
It is important to remember that under Rule 1.15 of the Pennsylvania Rules of Professional Conduct, it is the responsibility of the lawyer to identify IOLTA accounts as IOLTA accounts, and also the responsibility of the lawyer to maintain complete records regarding the funds, including ownership thereof.
Guidance: FDIC Insurance & IOLTA Accounts – When is it Enough Protection
Additional information regarding the Federal Deposit Insurance Corporation and deposit insurance can be found at www.fdic.gov.