Q. Who must maintain a client trust account?
A. Colorado lawyers and law firms receiving, maintaining, or disbursing client funds in Colorado.
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Q. What does the rule require of lawyers and law firms who handle client funds?
A. Rule 1.15 of the Colorado Rules of Professional Conduct requires all client funds to be held in an interest-bearing account, with the interest payable either to the client or to the Colorado Lawyer Trust Account Foundation (COLTAF).
COLTAF accounts are for client funds that are nominal in amount or are expected to be held for a short period of time with the intent that such funds not earn interest in the excess of the reasonably estimated cost of establishing, maintaining and accounting for trust accounts for the benefit of such clients. For these funds, the lawyer or law firm maintains a pooled interest-bearing account and instructs the financial institution to pay the interest on this account to COLTAF.
For client funds that are large enough or are expected to be held for a long enough period of time to warrant the cost of establishing, maintaining, and accounting for the interest, lawyers are expected to set up separate interest-bearing accounts for the benefit of such clients.
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Q. How does COLTAF use the interest?
A. COLTAF, a non-profit corporation, uses the interest to improve access to civil justice in Colorado by making grants to organizations that meet one or more of its four purposes:
1. To assist in providing legal services to the disadvantaged;
2. To improve the delivery of legal services;
3. To promote knowledge and awareness of law in the community; and
4. To improve the administration of justice.
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Q. How does a lawyer or law firm determine which client funds should be deposited in a pooled COLTAF account and which should be invested on behalf of individual clients?
A. The determination of whether a particular client's funds are so nominal or are expected to be held for such a short period of time that it is not practical to earn or account for income on the individual deposits, and thus should be deposited in the pooled interest-bearing trust account with interest payable to COLTAF, rests in the good faith judgment of the lawyer or law firm.
Among the factors to consider are: the amount of interest which the funds would likely earn during the period they are expected to be deposited, the reasonably estimated cost of establishing, maintaining and accounting for a separate trust account for the client (including without limitation administrative costs of the lawyer or law firm, bank service charges, and costs of preparing tax reports of such income to the client); the nature of the transaction(s) involved; and the likelihood of delay in the relevant proceedings.
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Q. May a lawyer or law firm establish a pooled interest-bearing trust account and pay the interest to the clients?
A. Yes. A lawyer or law firm may set up a pooled interest-bearing trust account, and then either the financial institution or the lawyer provides for computation of interest earned on each client's funds, the payment of that interest to each client, and the necessary record keeping and filing of paperwork with the I.R.S.
Banking regulations are restrictive on NOW accounts, and the lawyer or law firm may not be able to use that type of account for certain trust accounts where the clients receive the interest. Savings accounts or money market accounts are alternatives.
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Q. May a lawyer place client trust funds in an interest-bearing account and keep the interest?
A. No. Such practice is unethical. The lawyer cannot derive any personal benefit from client funds.
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Q. What effect does COLTAF participation have on clients?
A. COLTAF has no effect on clients. When no interest is earned on funds in lawyer trust accounts which are nominal or short-term, no one benefits except the financial institution. The ABA's Standing Committee on Ethics and Professional Responsibility in Formal Opinion 348 (1981) approving lawyer participation in programs like COLTAF found:
"The practical effect is to shift a part of the economic benefit from depository institutions to tax-exempt organizations. There is no economic injury to any client. The program creates income where there was none before."
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Q. How are COLTAF accounts established?
A. The lawyer or law firm submits to the financial institution a COLTAF enrollment form, which authorizes the account to be interest-bearing for the benefit of COLTAF. The enrollment form may be obtained by calling the COLTAF office at 303-863-9544. Many financial institutions also have enrollment forms available.
All COLTAF trust accounts must be designated, as well as deposit slips and checks drawn thereon, as a "COLTAF Trust Account".
Normally, financial institutions and their staff will be fully informed about establishing COLTAF accounts. However, if they have any questions about establishing an account, they may contact the COLTAF office at 303-863-9544.
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Q. Do all financial institutions participate in COLTAF?
A. A COLTAF account must be maintained only in financial institutions approved by Attorney Regulation Counsel. A financial institution will be approved only if it agrees to provide written overdraft notification to Attorney Regulation Counsel. A list of approved financial institutions is published annually.
Each financial institution approved by Attorney Regulation Counsel must cooperate with the COLTAF program and must offer a COLTAF account to any lawyer who wishes to open one.
If you would like more information about participating financial institutions or the institution's policies regarding COLTAF accounts, please call the COLTAF office at 303-863-9544.
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Q. What if there are no banks in my community that participate in the COLTAF program?
A. Almost all banks in Colorado participate in the COLTAF program. If you practice in a community in which no financial institution participates in the COLTAF program, you will not be required to participate in COLTAF.
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Q. When does a lawyer need to establish a COLTAF account?
A. A COLTAF account should be established when the lawyer receives client funds that should be deposited in such an account.
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Q. What if the financial institution charges fees on COLTAF accounts?
A. Charges or fees associated specifically with maintaining a COLTAF account will be paid by COLTAF. Lawyers or law firms are responsible for check-printing costs and any fees not specifically related to maintaining a COLTAF account, such as wire transfers and check overdraft charges.
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Q. Do different financial institutions have different fee schedules and interest rates for COLTAF accounts?
A. Yes. The charges by financial institutions to COLTAF range from no charge to over $10 per month. Interest rates also vary from one financial institution to another. COLTAF's Leadership Banks are those that waive monthly service charges and pay flat or weighted interest rates of 2.25% or above, thus maximizing the resources available for civil justice purposes.
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Q. Are lawyers required to notify clients of participation in COLTAF?
A. Lawyers have no duty to notify clients of participation in COLTAF. Although keeping the client informed about the program is laudatory, in situations where a COLTAF account is appropriate, the client's funds, as a practical matter, will not earn interest for the benefit of the individual client. Therefore, the lawyer has no ethical responsibility to advise the client that the interest earned will be used towards funding law-related public service projects. (ABA Formal Opinion 348).
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Q. What are the tax consequences of participation in COLTAF?
A. There are none to the lawyer or the client. According to the Internal Revenue Service, interest income that is earned on pooled accounts containing clients' nominal and short-term funds held by lawyers and paid over to COLTAF pursuant to an order of the Colorado Supreme Court is not included in the gross incomes of either the clients or lawyers. (Rev. Rul. 81-209 amplified). The interest belongs to and is paid directly to COLTAF, a non-profit corporation, so there are no tax consequences. COLTAF's tax identification number is used, and the interest is paid directly by the financial institution to COLTAF.
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Q. Banking laws do not permit corporations or partnerships to set up NOW accounts, so how can our firm participate?
A. COLTAF is eligible to maintain NOW accounts because it is a section 501 (c)(3) non-profit corporation. Because the interest on a COLTAF trust account is paid to COLTAF, the Federal Reserve has ruled that any law firm participating in COLTAF may maintain a NOW account.
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Q. What about lawyers who are licensed in Colorado, but who maintain their offices (and their trust accounts) in another jurisdiction?
A. They are not subject to the Colorado rule which provides that the accounts be maintained in the state in which the law office is situated.
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Q. How is the program enforced?
A. Colorado lawyers are required to certify that they have complied with Rule 1.15 or provide a justifiable reason for non-compliance on their annual attorney registration statement. The Supreme Court has asked that COLTAF assist it in determining whether lawyers or law firms have complied with the mandatory program. If a lawyer or law firm has not complied with the mandatory program where it is feasible to do so, that lawyer may be subject to disciplinary proceedings.
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