Client funds that can earn net interest must be placed in an interest-bearing trust account for the benefit of the client. Oregon RPC 1.15-2(c).  Here are the logistics:

Type of Account

Typically, an interest-bearing account would be established for a particular client or matter.  However, the rules also permit a “pooled” account provided there is a subaccounting allowing for computation of interest earned for each client.  Oregon RPC 1.15(2)(c)(2).

FDIC Coverage

Whether pooled, separate, or in a traditional IOLTA account where the interest is paid to the Oregon Law Foundation (OLF), client funds are subject to FDIC insurance limits.  The client’s insurance is applied to the aggregate of the client’s funds in the institution.  For example:

Client has $100,000 in a lawyer trust account at Bank A.  Client also has a personal account at Bank A with a balance of $200,000.  The client’s FDIC insurance is capped at $250,000, leaving $50,000 uninsured.

If you are holding substantial sums in trust for clients, it may be necessary to open more than one trust account.  It is also prudent to remind clients of the aggregate FDIC insurance limits.  See Sylvia Stevens, “Trust Accounts and the FDIC: Protecting Client Funds in Uncertain Times,” Oregon State Bar Bulletin.  [Note: At the time this article was written, FDIC coverage was capped at $100,000.  It is currently $250,000 per depositor.]

Can a Client Waive the Right to an Interest-Bearing Account?

Absolutely.  OSB Formal Opinion 2005-117 makes this clear.  However, when interest is waived, the client is, in essence, making a charitable donation to the OLF. Because charitable donations have tax consequences, OSB Formal Opinion 2005-117 lays out two possible paths:

If You DO NOT Give Tax Advice:

1. Inform the client there may be tax implications to waiving interest.
2. Tell the client to seek independent tax advice before proceeding.
3. Suggestion: confirm the client’s decision in writing.

If You DO GIVE Tax Advice:

1. Inform the client there may be tax implications to waiving interest.
2. Give the client the necessary tax advice.
3. Get informed consent in writing. [The opinion states that lawyers who give tax advice may have a self-interest conflict under Oregon RPC 1.7(a)(2) which triggers the need for informed consent pursuant to Oregon RPC 1.7(b).]

What Should You Do?

If you determine that a client’s funds can net interest:

1. Let your client know how much income they can expect to receive less the expenses you are permitted to deduct under Oregon RPC 1.15-2(d).
2. Inform the client that she may also waive the right to interest and keep the funds in your IOLTA account.
3. Inform the client that you cannot advise her on the tax implications of waiving interest.
4. Recommend the client seek independent tax advice before proceeding.
5. Talk to the client about any FDIC insurance issues that may apply.
6. Ask the client to confirm her decision in writing (a reply to your email is sufficient).

Logistics of Setting Up a Separate Interest-Bearing Account

A separate interest-bearing account should be identified as “Lawyer Trust Account for [Client Name].”  Use your social security number or Federal ID number to set up the account.  You, the lawyer, should be the authorized signatory. ORPC 1.15(2)(c)(1).

Interest on this account will be reported under your name on a Form 1099-INT issued by the bank. YOU, the lawyer, must in turn issue a Form 1099-INT to the client to reflect the pass-through of interest.  See Tips, Traps, and Resources: “1099 Reporting Penalties,” In Brief (September 2015).

All Rights Reserved 2016 Beverly Michaelis