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Do I Need an IOLTA in Massachusetts and How Do I Open One? [Startup Guide]

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Not all attorneys need to have an Interest on Lawyers’ Trust Account (IOLTA) in Massachusetts.  Rather, an IOLTA is needed if an attorney who has an office in Massachusetts is holding trust funds that are nominal in amount or will be held for a short time.  See Mass. R. Prof. Conduct 1.15(e)(6).  These funds, when deposited collectively to a “pooled” IOLTA account, can earn appreciable interest for the benefit of the IOLTA Program.  You can learn more about the IOLTA Program in this LCL Webinar for Busy Lawyers featuring Jenna Miara, Executive Director of the Massachusetts IOLTA Committee.  

The term “trust funds” is used to describe trust property in the form of funds.  See Mass. R. Prof. Conduct 1.15(a)(1).  Trust property is the “property of clients or third persons that is in a lawyer’s possession in connection with a representation and includes property held in any fiduciary capacity in connection with a representation, whether as trustee, agent, escrow agent, guardian, executor, or otherwise.”  Id.  Trust property, including trust funds, must be appropriately safeguarded, see Mass. R. Prof. C. 1.15(b)(4), and segregated from the attorney’s own property. See Mass. R. Prof. C. 1.15(b).  Furthermore, trust funds “shall be held in a trust account.”  See Mass. R. Prof. C. 1.15(b).  A trust account is an “account in a financial institution in which trust funds are deposited.”  Mass. R. Prof. C. 1.15(a)(2).   

Some examples of trust funds are: 

  • Client retainers (these are advanced legal fees not yet earned by the attorney), see Mass. R. Prof. C. 1.15(b)(3) 
  • Expenses paid in advance, see id. 
  • Settlement checks, awards, and other payments to a client 
  • Any other client funds such as alimony payments passed along through the lawyer 
  • Funds to which the client and the attorney may be entitled, see Mass. R. Prof. C. 1.15(b)(2) 
  • Funds that may be owed to a third-party claim, see id. 
  • Real estate conveyancing monies  

See generally, Managing Clients’ Funds and Avoiding Ethical Problems, from the Massachusetts IOLTA Committee.   

There is no bright line for determining whether funds are nominal in nature or if they will be held for a short time pursuant to Mass. R. Prof. C. 1.15(e)(6).  The Rule requires that attorneys use some measure of judgment when making determinations about whether funds should be deposited in an IOLTA.  For instance, the fiduciary funds may be nominal in amount or may be held for a very short time and will not earn any interest. Still, lawyers are always required to keep client funds separate from their own. Typically, this involves weighing the pros and cons as to whether the trust funds should be deposited into an IOLTA or in a separate individual trust account “with interest payable as directed by the client or third person on whose behalf the trust property is held.”  Id.  Some considerations include, but are not limited to:  

  • How long will you be holding the trust funds?   
  • Are the trust funds so large that they will generate significant interest?1   
  • Evaluate the bank’s minimum balance requirements, fees, and interest rates to determine whether maintaining a separate account would be practical or beneficial. 
  • Are the administrative costs of opening and maintaining a separate account worth the interest the funds might generate?  Consider “reasonable imputed overhead costs, and the estimated cost of preparing any tax or other reports required.”2 

In close cases, the attorney should consult the client, who can agree to hold the funds in an IOLTA or not, depending on the variables.   

Flat fees and “classic retainers”3 need not be placed in an IOLTA as they are considered earned.  However, if an attorney chooses to place these fees into an IOLTA, then the attorney is subject to all the provisions of Mass. R. Prof. C. 1.15.  See, e.g., Mass. R. Prof. C. 1.15, Comment [2A].  If these types of fees are placed in the attorney’s operating account and there is a subsequent fee dispute, then the disputed portion of the fee must be placed in an IOLTA or other trust account.  See generally Mass. R. Prof. C. 1.15(b)(2)(ii). 

If you open an IOLTA, you must also open a business or operating account for funds that are not held in trust or in the attorney’s fiduciary capacity.  See Mass. R. Prof. C. 1.15(f)(2).  The purpose behind this requirement is to avoid the comingling of funds, which, as noted above, are prohibited under Mass. R. Prof. C. 1.15.   

Also, if you open an IOLTA and this account remains inactive for two and a half years, then the financial institution will send you a notification about said inactivity.  See Mass. R. Prof. C. 1.15(h)(5).  For purposes of the rule, inactivity is measured from either:  

  • The date of the last transaction in the IOLTA, or  
  • The date the attorney told the financial institution to keep the IOLTA open, pursuant to subparagraph (h)(7) of Rule 1.15, whichever is later 

See id.  Additionally, “automatic interest accrual and disbursement of interest to the IOLTA Committee” does not constitute activity in the IOLTA.  See id.  The financial institution’s notification gives you six months to cure the inactivity.  If the inactivity continues during these six months, then the financial institution will notify the Board of Bar Overseers (BBO) of the inactivity, which by then would be a three-year period of inactivity.  The financial institution will send you a copy of the notification that was sent to the BBO.  See Mass. R. Prof. C. 1.15(h)(5).  After this, you are subject to the requirements under subparagraph (h)(7) of Rule 1.15.  One of these requirements is to justify to the BBO and the financial institution that there is a valid reason for keeping the IOLTA open.4   

The inactivity notification requirement under Mass. R. Prof. C. 1.15 was created as a means to address unclaimed or unidentified trust funds in IOLTAs.  These types of funds are beyond the scope of this guide.  For purposes of this guide, you should understand the inactivity notification requirement and its related process so that you can determine whether an IOLTA account is truly necessary for your practice.   

Get educated about IOLTAs:  At a minimum, you should: 

  • Read the IOLTA Committee’s guide Managing Clients’ Funds and Avoiding Ethical Problems, supra. 
  • Read Mass. R. Prof. C. 1.15 and its comments. 

Of course, this list of educational resources is not exhaustive.  You will learn from these resources what records you need to create and how to maintain them.   

 

How do I open an IOLTA?  The following step-by-step process is based on Mass. R. Prof. C. 1.15, online resources from the IOLTA Committee, and S.J.C. Rule 4:02, § (1). 

How to Open an IOLTA Account Guide. To read the guide, download the pdf.

 

The Board of Bar Overseer’s (BBO) Registration Department handles annual registration statements and changes/supplements.  Changes related to IOLTAs are submitted via the BBO’s online registration system at massbbo.org.  After logging into the system and reaching the IOLTA page, attorneys are able to update or make changes to the IOLTA section in the annual registration statement. 

Please note that the process for opening an individual, interest-bearing trust account requires a different form from the IOLTA Committee, which is entitled Attorney’s Notice to Financial Institution to Establish Individual Non-IOLTA Trust Account.  This form is located on the IOLTA Committee’s website.  This type of account does not need to be registered with the IOLTA Committee.  The account name must also include words such as “trust account,” see Mass. R. Prof. C. 1.15(e)(2), and, of course, the name of the beneficiary.  Also, these accounts are regulated under Mass. R. Prof. C. 1.15. 

After opening the IOLTA, make sure that you keep all records related to opening the account.  See Mass. R. Prof. C. 1.15(f)(1)A.   

Endnotes 
  1. The Ethics of Charging and Collecting Fees, Nancy Kaufman & Constance Vecchione, Nov. 2015.
  2. IOLTA Guidelines, Massachusetts IOLTA Committee, July 2009.
  3. A “classic retainer” is used by clients who want to secure an attorney’s commitment to represent them exclusively and not to represent adverse parties. A classic retainer is paid to secure the attorney’s availability rather than for specific legal services and, therefore, is considered earned. “Retainers may be considered as earned when paid when the attorney makes clear to the client that the attorney will have to forego other work to take on the case and the total fee is reasonable.” The Ethics of Charging and Collecting Fees, supra. 
  4. Mass. R. Prof. C. 1.15(h)(7) also states: “If, within one year from the date the financial institution sent the inactivity notification to the Board, the lawyer neither closes the IOLTA account nor notifies the financial institution that the IOLTA account will remain open, the financial institution shall distribute the balance of the IOLTA account to the IOLTA Committee and close the IOLTA account.” 
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