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Regarding Federal Deposit Insurance and Large Client Balances in the Trust Account

The situation of client deposits exceeding the FDIC insurance limit also occurred before the advent of unlimited insurance coverage a few years ago. The key things to remember are that you owe your clients a high duty of care, but you are not an insurer. Also, it is perfectly fine to discuss the deposit insurance issue with the clients and let them help formulate a strategy. Finally, the deposit insurance limits apply per client, so long as your account is labeled a trust account and you have records showing the exact interest of each client in the account. With those considerations in mind, here are some thoughts:

  1. Choose a strong bank to do business with. It is a good idea to monitor the bank watch lists to ensure your bank is not on the list, for example.
  2. For deposits that will be around for an extended period of time, you will want to split the funds over two or more banks to get coverage for the amount in its entirety.
  3. If a deposit is not going to be around long enough to make splitting it up over several banks practical, just get the money in and out as soon as possible. Speed is your friend, in this situation. Electronic or wire deposits and transmittals are best for this purpose.
  4. If you routinely have deposits in excess of the insurance limit, you might want to talk with your banker regarding commercial deposit insurance. This is an expense that could be passed along to the clients, so long as you address it in your fee or engagement agreement.
  5. Remember that some clients will have their own deposits at the same bank where your trust account is located, so it is imperative to discuss the insurance issue with them to ascertain if their personal deposits will affect coverage for what you have in the trust account.
Requirement for Trust Account in Iowa

The jurisdiction of the work governs whether the funds arise from practice in Iowa. E.g., if the matter you are handling would be litigated in a forum in Iowa, the matter arises from Iowa practice and any client funds received would need to be placed in an Iowa trust account.

The practice of depositing funds received from clients for matters arising from practice in Iowa in a trust account located outside Iowa violates Iowa Court Rule 45.1, which provides in pertinent part:

Funds a lawyer receives from clients or third persons for matters arising out of the practice of law in Iowa shall be deposited in one or more identifiable interest-bearing trust accounts located in Iowa.

No exception or accommodation is included in the rule for attorneys who already maintain a trust account in another jurisdiction. The requirement of physical location of the account in Iowa helps ensure that interest payable under the Interest on Lawyer Trust Account (IOLTA) program will be properly paid to the Iowa Lawyer Trust Account Commission. In addition, physical placement of such accounts in Iowa ensures that the depository institution will be subject to the jurisdiction of Iowa courts and amenable to Iowa process and the audit processes of the Client Security Commission.

If you actually have not received any client funds for matters arising from the practice of law in Iowa, there is no need at this time to establish a trust account in Iowa. However, a trust account in Iowa must be established and used at the time you do receive client funds for matters arising from the practice of law in Iowa. Our trust account auditors do periodically perform audits to ensure compliance with this rule.

Monthly Reconciliations Required

Monthly reconciliations of the main trust account ledger, client subaccount ledgers, and adjusted bank statement, the so-called “three-way reconciliation,” are required by Iowa Court Rule 45.2(3)(a)(9). The experience of the Client Security Commission is that failure to perform trial balances and reconciliations of client subaccounts on a monthly basis is a key contributor to loss of accountability for client monies.

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